symbols for structured finance products. The Commission did not propose
requiring that specific rating symbols be used to distinguish credit
ratings for structured finance products, instead proposing that an
NRSRO would be permitted to choose the appropriate symbol or
identifier.\111\
---------------------------------------------------------------------------

    \110\ As discussed above, the Commission is proposing in this
release that a different proposed rule be codified as Rule 17g-7 in
the CFR. The Rule 17g-7 being proposed in this Release would require
an NRSRO to make publicly available a consolidated report containing
information about relative percent of revenues of the NRSRO
attributable to persons paying the NRSRO for the issuance or
maintenance of a credit rating.
    \111\ See June 2008 Proposing Release.
---------------------------------------------------------------------------

    The Commission proposed Rule 17g-7 in the June 2008 Proposing
Release to address concerns that certain investors assumed the risk
characteristics for structured finance products, particularly highly
rated instruments, were the same as for other types of similarly rated
instruments, as well as concerns that some investors may not have
performed adequate internal risk analysis on structured finance
products before purchasing them.\112\ The goal of the proposal was to
spur investors to perform more rigorous internal risk analysis on such
products so that they would not overly rely on NRSRO credit ratings in
making investment decisions. At the time, the Commission noted that a
potential ancillary benefit of the rule would be that it could cause
certain investors to seek to better understand the risks of structured
finance products that are not necessarily addressed in credit ratings,
such as market and liquidity risk.\113\
---------------------------------------------------------------------------

    \112\ See June 2008 Proposing Release, 73 FR at 36235.
    \113\ Id.
---------------------------------------------------------------------------

    In the June 2008 Proposing Release, the Commission expressed its
preliminarily belief that requiring an NRSRO to publish a report along
with each publication of a credit rating for a structured finance
product likely would provide certain investors with useful information
about structured finance products and spur investors to perform more
rigorous internal risk analysis on structured finance products.\114\
Alternatively, the Commission noted, the use of distinct symbology
would alert investors that a structured finance product was being rated
and, therefore,

raise the question of how it differs from other types of debt
instruments.\115\
---------------------------------------------------------------------------

    \114\ Id.
    \115\ Id.
---------------------------------------------------------------------------

    The Commission generally requested comment on all aspects of the
proposed new rule as well as on several specific questions.\116\ A
total of 40 commenters responded to this request.\117\ Sixteen
commenters expressed opposition to the proposed rule as a whole,\118\
while six commenters expressed either full or conditional support for
both parts of the proposed amendment.\119\ Eleven commenters argued in
favor of adopting paragraph (a) alone, thereby requiring the
publication of a report to accompany structured finance ratings and
eliminating the paragraph (b) option of using a distinct
symbology.\120\ Twenty-nine commenters expressed their opposition to
adopting paragraph (b).\121\
---------------------------------------------------------------------------

    \116\ See June 2008 Proposing Release, 73 FR at 36236.
    \117\ Letter dated June 10, 2008 from Deborah A. Cunningham and
Boyce I. Greer, Co-Chairs Company, Co-Chairs, SIFMA Credit Rating
Agency Task Force (``First SIFMA Symbology Letter''); letter dated
June 19, 2008 from Rupert Schoder, Financial Engineer, Socit Gnrale,
France (``SGF Symbology Letter''); letter dated July 14, 2008 from
Robert Dobilas, President, CEO, Realpoint LLC (``Realpoint Symbology
Letter''); letter dated July 21, 2008 from Dottie Cunningham, Chief
Executive Officer, Commercial Mortgage Securities Association
(``CMSA Symbology Letter''); letter dated July 21, 2008 from Bruce
Goldstein, SunTrust Robinson Humphrey (``STRH Symbology Letter'');
letter dated July 21, 2008 from Raymond E. Petersen, President,
Inland Mortgage Capital Corporation (``Inland Symbology Letter'');
letter dated July 21, 2008 from Leonard W. Cotton, Vice Chairman,
Centerline Capital Group (``Centerline Symbology Letter''); letter
dated July 22, 2008 from Kevin Kohler, VP--Levered Finance, Capmark
Investments LP (``Capmark Symbology Letter''); letter dated July 22,
2008 from Mary A. Downing, Director--Surveillance and Due Diligence,
Hillenbrand Partners (``Hillenbrand Symbology Letter''); letter
dated July 23, 2008 from Kent Wideman, Group Managing Director,
Policy & Rating Committee and Mary Keogh, Managing Director, Policy
& Regulatory Affairs, DBRS (``DBRS Symbology Letter''); letter dated
July 24, 2008 from Takefumi Emori, Managing Director, Japan Credit
Rating Agency, Ltd. (``JCR Symbology Letter''); letter dated July
24, 2008 from Amy Borrus, Deputy Director, Council of Institutional
Investors (``Council Symbology Letter''); letter dated July 24, 2008
from Vickie A. Tillman, Executive Vice President, Standard & Poor's
Ratings Services (``S&P Symbology Letter''); letter dated July 24,
2008 from Deborah A. Cunningham and Boyce I. Greer, Co-Chairs
Company, Co-Chairs, SIFMA Credit Rating Agency Task Force (``Second
SIFMA Symbology Letter''); letter dated July 25, 2008 from Sally
Scutt, Managing Director, and Pierre de Lauzun, Chairman, Financial
Markets Working Group, International Banking Federation (``IBFED
Symbology Letter''); letter dated July 25, 2008 from Denise L.
Nappier, Treasurer, State of Connecticut (``Nappier Symbology
Letter''); letter dated July 25, 2008 from Suzanne C. Hutchinson,
Mortgage Insurance Companies of America (``MICA Symbology Letter'');
letter dated July 25, 2008 from Kieran P. Quinn, Chairman, Mortgage
Bankers Association (``MBA Symbology Letter''); letter dated July
25, 2008 from Frank Chin, Chairman, Municipal Securities Rulemaking
Board (``MSRB Symbology Letter''); letter dated July 25, 2008 from
Charles D. Brown, General Counsel, Fitch Ratings (``Fitch Symbology
Letter''); letter dated July 25, 2008 from Bill Lockyer, State
Treasurer, California (``Lockyer Symbology Letter''); letter dated
July 25, 2008 from Jeremy Reifsnyder and Richard Johns, Co-Chairs,
American Securitization Forum Credit Rating Agency Task Force (``ASF
Symbology Letter''); letter dated July 25, 2008 from Francisco Paez,
Metropolitan Life Insurance Company (``MetLife Symbology Letter'');
letter dated July 25, 2008 from Cate Long, Multiple-Markets
(``Multiple-Markets Symbology Letter''); letter dated July 25, 2008
from Kurt N. Schacht, Executive Director and Linda L. Rittenhouse,
Senior Policy Analyst, CFA Institute Centre for Financial Market
Integrity (``CFA Institute Symbology Letter''); letter dated July
25, 2008 from Lawrence J. White, Professor of Economics, Stern
School of Business, New York University (``White Symbology
Letter''); letter dated July 25, 2008 from Jack Davis, Head of Fixed
Income Research, Schroder Investment Management North America Inc.
(``Schroders Symbology Letter''); letter dated July 25, 2008 from
Karrie McMillan, General Counsel, Investment Company Institute
(``ICI Symbology Letter''); letter dated July 25, 2008 from Michael
Decker, Co-Chief Executive Officer and Mike Nicholas, Co-Chief
Executive Officer, Regional Bond Dealers Association (``RBDA
Symbology Letter''); letter dated July 25, 2008 from Richard M.
Whiting, Executive Director and General Counsel, Financial Services
Roundtable (``Roundtable Symbology Letter''); letter dated July 25,
2008 from James H. Gellert, Chairman and CEO and Dr. Patrick J.
Caragata, Founder and Executive Vice Chairman, Rapid Ratings
International Inc. (``Rapid Ratings Symbology Letter''); letter
dated July 25, 2008 from James A. Kaitz, President and CEO,
Association for Financial Professionals (``AFP Symbology Letter'');
letter dated July 25, 2008 from Gregory W. Smith, General Counsel,
Colorado Public Employees' Retirement Association (``Colorado PERA
Symbology Letter''); letter dated July 25, 2008 from Keith A.
Styrcula, Chairman, Structured Products Association (``SPA Symbology
Letter''); letter dated July 28, 2008 from Michel Madelain, Chief
Operating Officer, Moody's Investors Service (``Moody's Symbology
Letter''); letter dated July 28, 2008 from Keith F. Higgins, Chair,
Committee on Federal Regulation of Securities and Vicki O. Tucker,
Chair, Committee on Securitization and Structured Finance, American
Bar Association (``ABA Business Law Committees Symbology Letter'');
letter dated July 31, 2008 from Robert S. Khuzami Managing Director
and General Counsel, Deutsche Bank Americas (``DBA Symbology
Letter''); letter dated August 8, 2008 from Jeffrey A. Perlowitz,
Managing Director and Co-Head of Global Securitized Markets, and
Myongsu Kong, Director and Counsel, Citigroup Global Markets Inc.
(``Citi Symbology Letter''); letter dated August 12, 2008 from John
J. Niebuhr, Managing Director, Lehman Brothers, Inc. (``Lehman
Symbology Letter''); letter dated August 17, 2008 from Olivier
Raingeard, Ph.D (``Raingeard Symbology Letter''); letter dated
August 22, 2008 from Robert Dobilas, CEO and President, Realpoint
LLC (``Realpoint Symbology Letter'').
    \118\ See Realpoint Symbology Letter; CMSA Symbology Letter;
STRH Symbology Letter; Inland Symbology Letter; Centerline Symbology
Letter; Capmark Symbology Letter; Hillenbrand Symbology Letter; DBRS
Symbology Letter; JCR Symbology Letter; S&P Symbology Letter;
Nappier Symbology Letter; MBA Symbology Letter; MetLife Symbology
Letter; AFP Symbology Letter; Moody's Symbology Letter; Raingeard
Symbology Letter.
    \119\ See MICA Symbology Letter; Lockyer Symbology Letter; CFA
Symbology Letter; RDBA Symbology Letter; Colorado PERA Symbology
Letter; MSRB Symbology Letter.
    \120\ See Second SIFMA Symbology Letter; IBFED Symbology Letter;
ASF Symbology Letter; Schroders Symbology Letter; ICI Symbology
Letter; Principal Symbology Letter; Rapid Ratings Symbology Letter;
ABA Business Law Committees Symbology Letter; DBA Symbology Letter;
Citi Symbology Letter; Lehman Symbology Letter.
    \121\ See First SIFMA Letter; Realpoint Symbology Letter; CMSA
Symbology Letter; STRH Symbology Letter; Inland Symbology Letter;
Centerline Symbology Letter; Capmark Symbology Letter; Hillenbrand
Symbology Letter; DBRS Symbology Letter; JCR Symbology Letter; S&P
Symbology Letter; Second SIFMA Symbology Letter; IBFED Symbology
Letter; Nappier Symbology Letter; MBA Symbology Letter; ASF
Symbology Letter; Fitch Symbology Letter; MetLife Symbology Letter;
Rapid Ratings Symbology Letter; Roundtable Symbology Letter;
Schroders Symbology Letter; ICI Symbology Letter; Principal
Symbology Letter; AFP Symbology Letter; Moody's Symbology Letter;
Raingeard Symbology Letter; ABA Business Law Committees Symbology
Letter; DBA Symbology Letter; Citi Symbology Letter; Lehman
Symbology Letter.
---------------------------------------------------------------------------

    Commenters criticized the proposed amendment as burdensome \122\
and as providing little, if any, benefit to investors.\123\ Several
commenters argued that the proposed new requirements would be confusing
and, therefore, detrimental to investors.\124\ Others expressed
concerns that the proposed amendments would stigmatize structured
finance products and further weaken the market for these
instruments.\125\
---------------------------------------------------------------------------

    \122\ See JCR Symbology Letter; S&P Symbology Letter; Moody's
Symbology Letter; Roundtable Symbology Letter.
    \123\ See Realpoint Symbology Letter; Schroders Symbology
Letter; Raingeard Symbology Letter; MICA Symbology Letter;
Roundtable Symbology Letter.
    \124\ See CMSA Symbology Letter; STRH Symbology Letter; Inland
Symbology Letter; Centerline Symbology Letter; Capmark Symbology
Letter; Hillenbrand Symbology Letter; DBRS Symbology Letter; JCR
Symbology Letter; ICI Symbology Letter; Principal Symbology Letter;
MetLife Symbology Letter; Rapid Ratings Symbology Letter;
    \125\ See First SIFMA Symbology Letter; Realpoint Symbology
Letter; Principal Symbology Letter; MBA Symbology Letter; Lockyer
Symbology Letter; ASF Symbology Letter; MetLife Symbology Letter;
ABA Business Law Committees Symbology Letter; DBA Symbology Letter;
Lehman Symbology Letter.
---------------------------------------------------------------------------

    The Commission, like a number of commenters, is concerned that the
proposal, if adopted, could have limited utility in encouraging
investors to perform more rigorous internal risk analysis on such
products because NRSROs likely would have opted to use a distinguishing
symbology as the less costly alternative. The Commission is concerned
about whether the use of a distinct symbol or identifier for structured
finance ratings might not achieve the goal of the proposal: Promoting
independent analysis and understanding of the distinct risks of
structured finance products.
    Furthermore, the Commission is concerned that mandating a distinct
symbology could create the inaccurate impression that the Commission
believes other types of debt instruments

are less risky. The Commission believes a more effective way to
differentiate credit ratings for structured finance products may be by
enhancing investor understanding of the distinct risk characteristics
of these debt instruments and their credit ratings. For these reasons,
at this time the Commission is deferring consideration of action on the
proposal to issue a report or use a distinct symbology at this time.
Instead, the Commission wants to study further whether there are other
ways to better achieve the goals of the proposal: greater investor
awareness of the unique risks of structured finance products and credit
ratings for structured finance products.
    The Commission believes that some differences in the risk
characteristics seem readily apparent and are fairly well understood by
investors. For example, the Commission believes that an investor would
understand that the continued payment of principal and interest to the
holder of a structured finance debt instrument typically depends on the
performance of a pool of underlying financial assets such as mortgages,
business and student loans, or credit card receivables; whereas the
performance of a corporate bond typically depends on the issuer's
ability to generate income from business operations, and the
performance of a municipal bond typically depends on the issuer's
ability to collect taxes or earn revenues from services provided by a
specific utility such as a sewer or water company.
    However, even high-level generalizations about the differences
between classes of debt instruments may not always hold true. Some
structured finance issuers actively manage the composition of the pool
of underlying financial assets (in contrast to a static pool) and, as a
result, these products are more risk-sensitive to the discretion of the
manager. For example, the performance of the structured finance issuer
will depend on the judgment of the manager of the pool of underlying
assets. This is similar to how the performance of corporate issuers is
sensitive to the judgment of senior management and their boards.
Moreover, some corporate issuers--particularly in the financial
sector--are highly risk-sensitive to the performance of financial
assets similar to structured finance issuers that hold or reference the
same types of assets. In short, generalizations about differences that
are not carefully crafted run the risk of creating more confusion or
misunderstanding than clarity for investors.
    For these reasons, the Commission is asking a series of questions
below designed to elicit further views from market participants and
others on how the risk characteristics of structured finance products
and credit ratings differ from the risk characteristics of corporate,
municipality, and sovereign nation debt instruments and their credit
ratings.\126\ Specifically, the Commission requests market participants
and others to provide their views in the following four areas: (1) The
differences between structured finance products and other debt
instruments; (2) the differences between credit ratings for structured
finance products and credit ratings for other types of debt
instruments; (3) potential measures to communicate differences in
structured finance products to investors; and (4) potential measures to
communicate differences in structured finance credit ratings to
investors.\127\
---------------------------------------------------------------------------

    \126\ For the purposes of this request for comment, the
Commission intends the term ``corporate issuer'' to include any
issuer that is not a structured finance issuer or a government
issuer.
    \127\ For views on some of these issues see, for example, The
Role of Credit Rating Agencies in the Structured Finance Markets,
May 2008, Technical Committee of the International Organization of
Securities Commissioners; The Role of Ratings in Structured Finance:
Issues and Implications, (CGFS 2005), January 2005, Committee on the
Global Financial System, Bank of International Settlements; The Role
of Credit Rating Agencies in Structured Finance, Consultation Paper,
February 2008, The Committee of European Securities Regulators.
---------------------------------------------------------------------------

    Persons making submissions are asked to provide detailed
explanations of their views and analyses and cite relevant studies.
Differences Between Structured Finance Products and Other Debt
Instruments
     What do market participants and others believe are the
significant differences in the risk characteristics of structured
finance debt instruments as compared with debt instruments issued by
corporate issuers, municipalities, and sovereign nations in terms of
credit risk, market risk, interest rate risk, and liquidity risk? What
do market participants and others believe are the main drivers of the
differences in risk characteristics?
     How do market participants and others believe the trading
markets for structured finance products compare with the trading
markets for debt instruments of corporate issuers, municipalities, and
sovereign nations in terms of transparency and providing liquidity to
investors? Do market participants and others believe differences in the
trading markets for these debt instruments create differing levels of
credit risk, market risk, interest rate risk, or liquidity risk for
structured finance products as compared with debt instruments issued by
corporate issuers companies, municipalities, and sovereign nations?
     How do market participants and others assess the relative
use of leverage by structured finance issuers as compared with
corporate issuers, municipalities, and sovereign nations? Do
differences in the use of leverage create differing levels of credit
risk, market risk, interest rate risk, or liquidity risk for structured
finance products as compared with debt instruments issued by corporate
issuers, municipalities, and sovereign nations? Does leverage act as a
driver of differing levels of risk for structured finance products and
account for the fact that certain corporate issuers also employ
leverage?
     How do market participants and others assess the relative
complexity of structured finance issuers as compared with corporate
issuers, municipalities, and sovereign nations in terms of capital
structure and operations? For example, in assessing complexity, how do
market participants and others account for the fact that a structured
finance product can be comprised of a static pool of cash flow assets
whereas a corporate issuer may have an array of business lines operated
through hundreds of affiliates located around the globe? Do differences
in complexity create differing levels of credit risk, market risk,
interest rate risk, and liquidity risk for structured finance products
as compared with debt instruments issued by corporate issuers,
municipalities, and sovereign nations?
     How do market participants and others assess the relative
sensitivity of structured finance issuers to macroeconomic factors as
compared with corporate issuers, municipalities, and sovereign nations?
For example, do structured finance products have greater or lesser risk
sensitivity to a macroeconomic stress event such as a recession than
debt instruments issued by corporate issuers, municipalities, and
sovereign nations?
     How do market participants and others assess the relative
risks of a sector of structured finance issuers such as issuers that
rely on the performance of a particular type of financial asset (e.g.,
residential mortgages or credit card receivables) as compared with an
industry of corporate debt issuers (e.g., financial services,
automakers, technology companies, or healthcare providers) or
geographically concentrated municipal issuers (e.g., within a State) or
sovereign debt issuers (e.g., within a region of the globe)? For
example, does a structured finance

sector have greater or lesser risk sensitivity to a macroeconomic
stress event such as a recession than corporate debt issuers within a
specific industry or geographically concentrated municipal or sovereign
issuers?
     How do market participants and others perceive the degree
of idiosyncratic risk inherent in structured finance products relative
to debt instruments issued by corporate issuers, municipalities, and
sovereign nations? Do market participants and others believe the
different ways these debt issuers generate income to meet principal and
interest payments to debt holders (e.g., through underlying income
generating assets for structured finance products, revenues generated
through business operations for corporate issuers, and taxing authority
or utility revenues for municipal and sovereign issuers) create
differing levels of idiosyncratic risk?
     In assessing the relative level of idiosyncratic risk
inherent in structured finance issuers as compared with debt
instruments issued by corporate issuers, municipalities, and sovereign
nations, what do market participants and others believe is the impact
of the fact that different structured finance issuers can hold the same
types of underlying cash flow generating assets (e.g., residential
mortgages) and have very similar legal structures? What is the impact
of the fact that corporate issuers can operate using different business
models and have differing levels of management competence?
     Do market participants and others believe there are
material differences between structured finance products and debt
instruments issued by corporate issuers, municipalities, and sovereign
nations in terms of recovery after default? Do market participants and
others believe debt holders are likely to recover more or less
principal after a structured finance debt instrument default than after
the default of a debt instrument issued by a corporate issuer,
municipality, or sovereign nation?
     Do market participants and others believe there are
important differences in the level of moral hazard present in
structured finance products relative to debt instruments issued by
corporate issuers, municipalities and sovereign nations? Could the fact
that structured finance products consist of asset pools which are
ultimately purchased from originators of such assets result in lower
quality assets for structured finance products as compared with the
assets of corporate issuers, municipalities and sovereign nations?
     To the extent that market participants and others identify
differences between the risk characteristics of structured finance
products and other debt instruments, do they believe the differences
identified apply across all types of structured finance products or
just to certain categories of products? Are generalizations about the
different risk characteristics of structured finance products as
compared to other debt instruments appropriate or is it more
appropriate to categorize structured finance products by underlying
asset type (e.g., residential mortgage, commercial mortgage, student
loan, credit card receivable, lease) or structure type (e.g., asset-
backed security, collateralized debt obligation (CDO), CDO-squared or
cubed, synthetic or hybrid CDO, constant proportion debt obligation,
asset-backed commercial paper conduit)?
Differences Between Credit Ratings for Structured Finance Products and
Credit Ratings for Other Types of Debt Instruments
     What are the significant differences in the risk
characteristics of credit ratings for structured finance products as
compared with credit ratings for debt instruments issued by corporate
issuers, municipalities, and sovereign nations in terms of ratings
accuracy and performance?
     Are structured finance debt instruments inherently more
difficult to rate accurately than debt instruments issued by corporate
issuers, municipalities, and sovereign nations? If so, what do market
participants and others believe are the factors that make structured
finance products more difficult to rate?
     Does the fact that the creditworthiness of a structured
finance issuer typically depends on the performance of a pool of
financial assets make these debt instruments more difficult to rate
accurately than debt instruments issued by corporate issuers,
municipalities, and sovereign nations?
     Do market participants and others believe that the
reliance on quantitative analysis (e.g., statistical models and
historical data) to determine credit ratings for structured finance
products as compared with a greater reliance on qualitative analysis to
determine credit ratings for debt instruments issued by corporate
issuers, municipalities, and sovereign nations increases or decreases
the accuracy risk for structured finance credit ratings?
     Do market participants and others believe that the
information available about structured finance issuers used to
determine credit ratings as compared to the information available to be
used to determine credit ratings about corporate issuers,
municipalities, and sovereign nations makes it more difficult to
determine accurate credit ratings for structured finance debt
instruments and/or to conduct surveillance on outstanding structured
finance credit ratings? If so, do market participants and others
believe it is easier to determine accurate credit ratings, and monitor
those ratings, for corporate issuers that are required to file periodic
public reports and financial statements and provide access to
management? Is the information used to determine and monitor credit
ratings of corporate issuers, municipalities, or sovereign nations more
forward looking (e.g., based on more on forecasts)? In addition, do
market participants and others believe that the historical data used to
determine and monitor structured finance credit ratings of shorter
duration or otherwise less robust than the historical data used to
determine and monitor credit ratings for corporate issuers,
municipalities, or sovereign nations?
     Do market participants and others believe it is more
difficult for investors and market observers to perform independent
analysis of structured finance products than of securities issued by
corporate issuers, municipalities, and sovereign nations? If so, does
this impact the accuracy of structured finance credit ratings as
compared to credit ratings for corporate issuers, municipalities, and
sovereign nations?
     Do market participants and others believe the conflict of
being paid to determine credit ratings is more attenuated in the
structured finance sector than in the corporate, municipal, and
sovereign sectors? If so, why? Does this impact the accuracy of
structured finance credit ratings?
     Do market participants and others believe structured
finance credit ratings are more likely to have a greater number of
ratings transitions (i.e., upgrades or downgrades) than credit ratings
for debt instruments issued by corporate issuers, municipalities, or
sovereign nations? If so, what are the factors that create this effect?
     Are structured finance credit ratings more likely to
experience transitions of greater magnitude (i.e., upgrades or
downgrades that span a larger number of credit rating categories
(notches)) than credit ratings for debt instruments issued by corporate
issuers, municipalities, or sovereign nations? If so, what are the
factors that make structured finance credit ratings more

prone to transitions of greater magnitude in credit rating category?
     Do market participants and others believe issuers,
arrangers, sponsors, and managers of structured finance products are
able to ``game'' rating agency methodologies resulting in credit
ratings that are less accurate than ratings for other debt instruments?
Do they believe the ability of issuers, arrangers, sponsors and
managers to adjust the characteristics of structured finance products,
including the number and relative size of tranches and the composition
of the asset pool in order to achieve particular credit ratings, result
in ratings that are less accurate than ratings for debt instruments
issued by corporate issuers, municipalities and sovereign nations?
     To the extent that market participants and others identify
differences between the risk characteristics of structured finance
credit ratings and credit ratings for other debt instruments, do
differences identified apply globally to all structured finance
products or just to certain categories of products? Do market
participants and others believe generalizations about the different
risk characteristics of credit ratings for structured finance products
as compared to credit ratings for other debt instruments can be made?
Is it more appropriate to categorize structured finance credit ratings
by underlying asset type (e.g., residential mortgage, commercial
mortgage, student loan, credit card receivable, lease) or structure
type (e.g., asset-backed security, collateralized debt obligation
(CDO), CDO-squared or cubed, synthetic or hybrid CDO, constant
proportion debt obligation, asset-backed commercial paper conduit)?
Measures To Communicate Differences in Structured Finance Products to
Investors
     To the extent that market participants and others
identified significant differences in the risk characteristics of
structured finance debt instruments as compared with debt instruments
issued by corporate issuers, municipalities, and sovereign nations in
terms of credit risk, market risk, interest rate risk, and liquidity
risk, what are their views on whether steps should be taken to better
communicate these differences to investors in a manner reasonably
designed to enhance investor understanding of the differences?
     Do market participants and others believe structured
finance issuers should be required to disclose these general
differences in the types of securities? If so, how should the
disclosures be made? For example, should they be stated in offering
documents and periodic reports or are there other mechanisms that could
be used to convey the differences in the types of securities?
     Do market participants and others believe NRSROs should be
required to disclose these differences? If so, how should the
disclosures be made? For example, should the disclosures be included in
a report issued at the same time a rating action is taken with respect
to a structured finance product, in Form NRSRO, or through some other
mechanism?
     Do market participants and others believe the disclosure
documents should required to be delivered to prospective investors in
investment pools that may hold structured finance products be required
to include these disclosures? If so, how should these disclosures be
made?
Measures To Communicate Differences in Structured Finance Credit
Ratings to Investors
     To the extent that market participants and others
identified material differences in the risk characteristics of credit
ratings for structured finance debt instruments as compared with credit
ratings for debt instruments issued by corporate issuers,
municipalities, and sovereign nations in terms of ratings accuracy and
performance, what are their views on measures that can be taken to
communicate these differences to investors in a manner reasonably
designed to enhance investor understanding of the differences?
     Do market participants and others believe structured
finance issuers should be required to disclose these differences? If
so, how should the disclosures be made? Should they be stated in
offering documents and periodic reports, or are there other mechanisms
that could be used to convey the disclosures?
     Do market participants and others believe NRSROs should be
required to disclose these differences? For example, it has been
suggested that NRSRO disclose the following types of information about
structured finance products: \128\
---------------------------------------------------------------------------

    \128\ See e.g., June 25, 2008 Letter from Jeff Riefsnyder and
Richard Johns on behalf of the American Securitization Forum to the
US Securities and Exchange Commission regarding ``Exchange Act
Release No. 34-57967 (File No. S7-13-08)''.
---------------------------------------------------------------------------

    1. The diligence that is performed by or provided to the NRSRO
about the underlying assets, and quality control of numerical data
provided to the NRSRO;
    2. The characteristics and sensitivities of models used or relied
upon by the NRSRO in assessing the likely performance of the structured
finance product or the underlying assets;
    3. The extent to which the NRSRO relies on representations and
warranties made by transaction participants;
    4. The assumptions as to future events and economic conditions that
are embedded in the analytical models used by the NRSRO in arriving at
a given rating;
    5. Publishing ``what if'' scenario analyses that address the
ratings implications of changes in the underlying assumptions upon
which ratings are based and provide insight into ratings tolerance to
changing economic or risk circumstances;
    6. Providing additional information relating to default
probability, loss sensitivity, severity of loss given default, short-
tail and long-tail risk and similar risk metrics associated with each
class of credit ratings.
     If you believe these types of disclosures and other
disclosures should be made by NRSROs, how should the disclosures be
made? Should the disclosures be stated in a report issued at the same
time a rating action is taken with respect to a structured finance
product, in Form NRSRO, or through some other mechanism?
     Do market participants and others believe the disclosure
documents required to be delivered to prospective investors in
investment pools that may hold structured finance products should be
required to include the disclosures? If so, how should the disclosures
be made?

B. Credit Ratings for Existing Structured Finance Debt Instruments

    Another way to differentiate credit ratings for structured finance
products from other types of debt instrument ratings is to increase the
opportunity for independent analysis of the credit worthiness of the
products. To this end, in the companion release, the Commission is
adopting amendments to Rule 17g-5 that require NRSROs that are paid by
arrangers to determine credit ratings for structured finance products
to provide other NRSROs access to a password-protected Internet Web
site that lists each deal they have been hired to rate. A hired NRSRO
also would be required to obtain representations from the arranger
hiring the NRSRO that the arranger will maintain a password-protected
Internet Web site that contains all the information the arranger
provides to the hired NRSRO to determine and monitor the credit rating
and that it will make this information available to

NRSROs not hired to determine and monitor the rating. As discussed in
detail in the Commission's Companion Release, these requirements are
designed to create a mechanism by which non-hired NRSROs will be able
to access the NRSRO Internet Web sites to learn of new deals being
rated and then access the arranger Internet Web sites to obtain the
information provided by the arranger to the hired NRSRO during the
entire initial rating process and, thereafter, for the purpose of
surveillance.\129\ The hired NRSRO need only provide access to its
password-protected Internet Web site to a non-hired NRSRO whose
certification provided to the Commission indicates that it has either
(1) determined and maintained credit ratings for at least 10% of the
issued securities and money market instruments for which it accessed
information pursuant to Rule 17g-5(a)(3) as amended in the calendar
year prior to the year covered by the certification, if it accessed
such information for 10 or more issued securities or money market
instruments; or (2) has not accessed information pursuant to Rule 17g-
5(a)(3) as amended 10 or more times in the calendar year prior to the
year covered by the certification. NRSROs also will be required to
disclose in their certifications the number of deals for which they
obtained information through accessing the Internet Web sites and the
number of ratings they issued using that information during the most
recent calendar year during which it obtained information through
accessing these Internet Web sites certification or that they
previously had not accessed such information 10 or more times in a
calendar year.
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    \129\ See Companion Release.
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    These amendments to Rule 17g-5 described above are designed to
allow NRSROs not hired to rate a structured finance deal to get
sufficient information to determine a credit rating for the debt
instruments to be issued. Generally, the information relied on by the
hired NRSROs to rate new debt issuances of structured finance issuers
is non-public. This makes it difficult for other NRSROs to rate these
securities and money market instruments. As a result, the products
frequently are issued with ratings from only one or two NRSROs and only
by NRSROs that are hired by the issuer, sponsor, or underwriter (i.e.,
NRSROs that may be subject to the conflict of being repeatedly paid by
certain arrangers to rate these securities and money market
instruments).
    The rule amendments also are designed to require the disclosure of
the necessary information to any NRSRO--whether hired or not--to permit
non-hired NRSROs to determine credit ratings for the debt instruments
to be issued. The Commission believes that absent this requirement a
non-hired NRSRO would have a much more difficult time obtaining the
information necessary to issue an unsolicited credit rating at the time
the debt instruments were issued into the market. Without the rule
amendment, in most cases, the non-hired NRSRO's prospects for
determining a pre-issuance credit rating would depend on the issuer's
willingness to provide the information to the NRSRO notwithstanding the
fact that the issuer was paying other NRSROs to rate the to-be-issued
debt instruments.
    The goal is to increase the number of credit ratings extant for a
given structured finance security or money market instrument and, in
particular, promote the issuance of credit ratings by NRSROs that are
not hired by the arranger. This is designed to provide users of credit
ratings with a broader range of views on the creditworthiness of the
security or money market instrument. In addition, the rule amendments
are designed to make it more difficult for arrangers to exert influence
over the NRSROs they hire to determine credit ratings for structured
finance products. By opening up the rating process to more NRSROs, the
rule amendments make it easier for the hired NRSRO to resist such
pressure by increasing the likelihood that any steps taken to
inappropriately favor the arranger could be exposed to the market
through the credit ratings issued by other NRSROs.
    As the Commission noted in the February 2009 Proposing Release, the
text of paragraph (a)(3)(i) refers to transactions where the NRSRO is
in the process of determining an ``initial'' credit rating.\130\ The
rule does not require the NRSRO to include on the Internet Web site
information about securities or money market instruments once the NRSRO
has published the initial rating and is monitoring the rating. The
amendment is designed to alert other NRSROs about new deals and direct
them to the Internet Web site of the arranger where information to
determine initial ratings and monitor the ratings can be accessed.
Consequently, upon publication of the initial rating, the NRSRO can
remove the information about the security or money market instrument
from the list it maintains on the Internet Web site. Similarly, if the
arranger decides to terminate the rating process before a hired NRSRO
publishes an initial rating, the NRSRO would be permitted to remove the
information from the list.\131\
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    \130\ See February 2009 Proposing Release, 74 FR at 6493.
    \131\ See Companion Release.
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    The Commission is aware that there are conflicting
characterizations about the ability of market participants and others,
including NRSROs not hired to rate the deal, to obtain information
necessary to determine and monitor a credit rating for structured
finance debt instrument after issuance. The Commission understands that
some of the trustees and servicers involved with the structured finance
issuer provide monthly reports that allow NRSROs not hired to rate the
issuer's debt instruments to determine and monitor credit ratings for
those securities and money market instruments. The Commission also
understands that some third-party venders aggregate the information
provided by the trustees and servicers in a manner that permits
independent credit analysis by NRSROs and investors. The Commission
understands that some market participants argue that the trustees and
servicers restrict access to the information to investors and hired
NRSROs and that the third-party venders do not provide sufficient
information.
    The Commission believes it would be helpful to solicit comments
from market participants and others as to whether measures should be
taken by the Commission to enhance the ability of non-hired NRSROs to
determine credit ratings for structured finance debt instruments that
were issued before the compliance date of the amendments to Rule 17g-5
being adopted in the Companion Release.
    For these reasons, the Commission is asking a series of questions
below designed to elicit comments from market participants and others
about whether currently there is sufficient information (or access to
such information) to permit an NRSRO to determine unsolicited credit
ratings for structured finance debt instruments issued prior to the
compliance date of the amendments to Rule 17g-5 being adopted today.
    Persons making submissions are asked to provide detailed
explanations and analyses and cite relevant studies.
     Do market participants and others believe the ability of
NRSROs to access information about structured finance debt instruments
issued before the compliance date for the Rule 17a-5

amendments (``compliance date'') is restricted in such a manner as to
preclude or seriously discourage NRSROs from determining credit ratings
if they have not been hired by the arranger? Do the issuers, trustees
and servicers that control access to this information preclude a non-
hired NRSRO from accessing the information or impose barriers that
discourage a non-hired NRSRO from accessing it?
     Do market participants and others believe the information
disclosed by structured finance issuers, trustees, and servicers or by
third-party venders is insufficient to determine unsolicited credit
ratings for structured finance debt instruments issued before the
compliance date?
     What specific measures, if any, should be taken to secure
the disclosure of information by issuers, trustees or servicers of
structured finance products issued before the compliance date or the
NRSROs that were hired to rate those structured finance products to
enable NRSROs that were not hired to determine and monitor a credit
rating where the debt instrument was issued prior the compliance date?
     Do market participants and others believe if the
information provided to the hired NRSRO to determine and monitor a
credit rating for a structured finance product issued before the
compliance date was made available to another NRSRO, the non-hired
NRSRO would be able to determine a meaningful unsolicited credit using
that information alone?

VII. General Request for Comment

    The Commission invites interested persons to submit written
comments on any aspect of the proposed amendments, in addition to the
specific requests for comments. Further, the Commission invites comment
on other matters that might have an effect on the proposal contained in
the release, including any competitive impact.

VIII. Paperwork Reduction Act

    Certain provisions of the proposed amendments to Rule 17g-3 and the
Instructions to Exhibit 6 to Form NRSRO, as well as the new proposed
Rule 17g-7 contain a ``collection of information'' within the meaning
of the Paperwork Reduction Act of 1995 (``PRA''). The Commission is
submitting the proposed amendments and the proposed new collection to
the Office of Management and Budget (``OMB'') for review in accordance
with the PRA. An agency may not conduct or sponsor, and a person is not
required to comply with, a collection of information unless it displays
a currently valid control number. The titles for the collections of
information are:
    (1) Rule 17g-3, Annual reports to be furnished by nationally
recognized statistical rating organizations (OMB Control Number 3235-
0626);
    (2) Rule 17g-1, Application for registration as a nationally
recognized statistical rating organization; Form NRSRO and the
Instructions for Form NRSRO (OMB Control Number 3235-0625); and
    (3) Rule 17g-7, Reports to be made public by nationally recognized
statistical rating organizations about persons that paid the nationally
recognized statistical rating organization for the issuance or
maintenance of a credit rating (a proposed new collection of
information).

A. Collections of Information Under the Proposed Rule Amendments

    The Commission is proposing for comment rule amendments to
prescribe additional requirements for NRSROs. The proposed amendments
to Rule 17g-3 would require an NRSRO to submit an additional annual
report to the Commission. The proposed amendments to Rule 17g-3 would
require an NRSRO to furnish a new unaudited report describing the steps
taken by the NRSRO's designated compliance officer during the fiscal
year to administer the policies and procedures that are required to be
established pursuant to paragraphs (g) and (h) of Section 15E of the
Exchange Act (prevention of misuse of material nonpublic information
and management of conflicts of interest), and to ensure compliance with
the securities laws and rules and regulations thereunder.\132\ The
proposed amendment to Rule 17g-3 also 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.\133\
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    \132\ See proposed Rule 17g-3(a)(7).
    \133\ See proposed Rule 17g-3(a)(7)(ii). The proposed report
also would be certified by the designated compliance officer. See
proposed Rule 17g-3(b)(2).
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    In addition, proposed amendments to the Instructions to Exhibit 6
to Form NRSRO would require an applicant/NRSRO to furnish the
Commission with information regarding the revenues an NRSRO receives
from major clients and from services other than determining credit
ratings. Finally, proposed Rule 17g-7 would require an NRSRO, on an
annual basis, to make publicly available on its Internet Web site a
consolidated report that shows certain information with respect to each
person that paid the NRSRO to issue or maintain a credit rating. First,
the NRSRO must include the percent of the net revenue attributable to
the person earned by the NRSRO for that fiscal year for providing
services and products other than credit rating services. Second, the
NRSRO must include the relative standing of the person in terms of the
person's contribution to the net revenue of the NRSRO for the fiscal
year. Third, the NRSRO must include all outstanding credit ratings paid
for by the person.\134\
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    \134\ See proposed Rule 17g-7.
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B. Proposed Use of Information

    The collections of information in the proposed amendments to Rule
17g-3 to add an additional unaudited report to describe the steps taken
by the designated compliance officer during the fiscal year to
administer certain policies and procedures and to ensure compliance
with securities laws and rules and regulations would improve the
integrity of the ratings process by establishing a discipline under
which the NRSRO's designated compliance officer would need to report to
the Commission the steps taken by the compliance officer 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 internal
policies and procedures. The proposed report also could 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 monitor how the NRSRO's designated compliance officer is
fulfilling the responsibilities prescribed in Section 15E(j) of the
Exchange Act. In addition, with respect to the proposed amendments to
Rule 17g-3, the identification of 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.
    Further, the collections of information in the proposed amendments
to Exhibit 6 to the Instructions to Form NRSRO would allow users of
credit ratings to more effectively evaluate the integrity of the
NRSRO's credit ratings themselves

and whether they believe the NRSRO is effectively managing its
conflicts of interests otherwise identified in Exhibit 6. The
collection of information in proposed new Rule 17g-7 would provide
users of credit ratings with information about the potential conflicts
of interest that arise when an NRSRO is paid to determine a credit
rating for a specific obligor, security, or money market instrument.
    Finally, the collections of information in the proposed amendments
also are designed to further assist the Commission in effectively
monitoring, through its examination function, whether an NRSRO is
conducting its activities in accordance with Section 15E of the
Exchange Act \135\ and the rules thereunder.
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    \135\ 15 U.S.C. 78o-7.
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C. Respondents

    In adopting the original rules under the Rating Agency Act, as well
as additional rules in February 2009, the Commission estimated that
approximately 30 credit rating agencies would be registered as
NRSROs.\136\ The Commission believes that this estimate continues to be
appropriate for identifying the number of respondents for purposes of
the amendments and the proposed new rule. Since the original rules
under the Rating Agency Act became effective in June 2007, ten credit
rating agencies have registered with the Commission as NRSROs.\137\ The
rules regarding the registration have been in effect for just over two
years; consequently, the Commission expects additional entities will
register.
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    \136\ See June 2007 Adopting Release, 72 FR at 33607.
    \137\ A.M. Best Company, Inc.; DBRS Ltd.; Fitch; Japan Credit
Rating Agency, Ltd.; Moody's; Rating and Investment Information,
Inc.; S&P LACE Financial Corp.; Egan-Jones Rating Company; and
Realpoint LLC.
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    The Commission generally requests comment on all aspects of these
estimates for the number of respondents. In addition, the Commission
requests specific comment on the following items related to these
estimates.
     For purposes of the PRA should the Commission continue to
use the estimate that 30 credit rating agencies will register as
NRSROs?
     Alternatively, should the Commission raise or lower that
number, given that ten credit rating agencies have registered with the
Commission as NRSROs in the two years that the NRSRO registration
program has been in effect? If so, what should the number be?
Commenters should explain how they arrived at the estimate and identify
any sources of industry information used in arriving at the estimate.

Commenters should provide specific data and analysis to support any
comments they submit with respect to these estimates with respect to
the number of respondents.

D. Total Annual Recordkeeping and Reporting Burden

    As discussed in further detail below, the Commission estimates the
total recordkeeping burden resulting from the proposed rule amendments
and proposed new rule would be approximately 2,760 hours \138\ on an
annual basis and 4,650 hours \139\ on a one-time basis.
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    \138\ 900 + 60 + 1,800 = 2,760.
    \139\ 750 + 3,900 = 4,650.
---------------------------------------------------------------------------

    The total annual and one-time hour burden estimates described below
are averages across all types of NRSROs expected to be affected by the
proposed rule amendments. The size and complexity of NRSROs range from
small entities to entities that are part of complex global
organizations employing thousands of credit analysts. Consequently, the
burden hour estimates represent the average time across all NRSROs. The
Commission further notes that, given the significant variance in size
between the largest NRSROs and the smallest NRSROs, the burden
estimates, as averages across all NRSROs, are skewed higher because the
largest firms currently predominate in the industry.
1. Proposed Amendments to Rule 17g-3
    Rule 17g-3 requires an NRSRO to furnish certain reports to the
Commission on an annual basis, including audited financial statements,
as well as other annual reports.\140\ The Commission is proposing to
amend Rule 17g-3 to require an NRSRO to furnish the Commission with an
additional unaudited report containing a description of the steps taken
by the designated compliance officer during the fiscal year to
administer the policies and procedures that are required to be
established pursuant to paragraphs (g) and (h) of Section 15E of the
Exchange Act (management of conflicts of interest and prevention of the
misuse of material nonpublic information); and 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.\141\
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    \140\ 17 CFR 240.17g-3.
    \141\ See proposed Rule 17g-3(a)(7)(ii).
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    Proposed new paragraph (a)(7)(ii) of Rule 17g-3 also would provide
that the 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.
    The total annual burden currently approved by OMB for Rule 17g-3 is
7,000 hours.\142\ The current annual hour burden estimate to prepare
and file the annual reports under Rule 17g-3 is 200 hours per
respondent, including the audited financial statements under Rule 17g-
3(a)(1).\143\ With respect to the proposed amendment, the Commission
estimates, based on staff experience, that the amount of time it would
take to prepare a report describing the steps taken by the designated
compliance officer during the fiscal year to administer the policies
and procedures that are required to be established pursuant to
paragraphs (g) and (h) of Section 15E of the Exchange Act (management
of conflicts of interest and prevention of the misuse of material
nonpublic information); and to ensure compliance with the securities
laws and rules and regulations thereunder, would be approximately 30
hours per year for a total annual hour burden of 900 hours.\144\
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    \142\ See February 2009 Adopting Release, 74 FR at 6473.
    \143\ See February 2009 Adopting Release, 74 FR at 6472. The
Commission based this proposed estimate, in part, on the average
number of annual hours (200 hours) divided by the number of annual
reports required to be prepared under current Rule 17g-3(a)(1)-(6):
200 annual hours/6 reports = 33.33 hours (rounded to 30 hours).
    \144\ 30 hours x 30 NRSROs = 900 hours.
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    The Commission based this estimate, in part, on the fact that the
areas covered by the proposed amendment to Rule 17g-3 overlap with the
duties already required of the NRSRO's designated compliance officer
pursuant to Section 15E(j) of the Exchange Act. The Commission
preliminarily believes that the estimated hour burden under the
proposed amendment to Rule 17a-3 would include the time it would take
to compile information to draft the report and the preparation and
filing of the report itself. In addition, this one-time hour burden
estimate also includes the time it would take to identify and describe
material compliance matters,

any remediation and the persons advised of the results of the reviews.
Consequently, the Commission also based this estimate, in part, on the
average estimated number of hours it would currently take an NRSRO to
complete one annual report under current Rule 17g-3 (i.e.,
approximately 30 hours).\145\
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    \145\ 15 U.S.C. 78o-7(j). Under this provision of the statute,
an NRSRO must ``designate an individual responsible for
administering the policies and procedures that are required to be
established pursuant to [Sections 15E(g) and (h) of the Exchange Act
(15 U.S.C. 78o-7(g) and (h))], 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].'' Id.
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    Given the potentially sensitive nature of the proposed report, the
Commission also preliminarily believes that an NRSRO would likely
engage outside counsel to assist it in the process of drafting and
reviewing the proposed report under Rule 17g-3. The Commission
estimates that the time an outside attorney would spend on this work
would depend on the size and complexity of the NRSRO. The Commission
estimates that, on average, an outside counsel would spend
approximately 20 hours assisting an NRSRO and its designated compliance
officer in drafting and reviewing the proposed report on a one-time
basis for an aggregate burden to the industry of 600 hours.\146\ Based
on industry sources, the Commission estimates that the cost of an
outside counsel would be approximately $400 per hour. For these
reasons, the Commission estimates that the average one-time cost to an
NRSRO would be approximately $8,000 \147\ and the one-time cost to the
industry would be approximately $240,000.\148\
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    \146\ 30 NRSROs x 20 hours = 600 hours.
    \147\ $400 per hour x 20 hours = $8,000.
    \148\ $8,000 x 30 NRSROs = $240,000.
---------------------------------------------------------------------------

    The Commission generally requests comment on all aspects of the
burden estimates for the proposed amendments to Rule 17g-3. Commenters
should provide specific data and analysis to support any comments they
submit with respect to these burden estimates. In addition, the
Commission requests specific comment on the following items related to
these estimates.
     To what extent would NRSROs rely on outside counsel with
respect to the preparation, drafting and review of the proposed report?
2. Amendments to Form NRSRO
    The Commission is proposing to amend the Instructions to Exhibit 6
to Form NRSRO to require an applicant/NRSRO to furnish the Commission
with information regarding the revenues an NRSRO receives from major
clients and from services other than determining credit ratings.
    As stated above, the Commission proposes amending the instructions
for Exhibit 6 to augment the information about conflicts of interest
disclosed in Form NRSRO. The Commission prescribed the information
currently required in 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.\149\
The proposed amendments to Form NRSRO would change the instructions for
the Form to require that NRSROs provide specific disclosure of certain
percentages of its revenue related to its large customers and services
it provides, other than the issuance of credit ratings, in Exhibit 6 to
the Form. The Commission preliminarily believes that an NRSRO would
generate the financial information and complete the proposed new
additional disclosures required by Exhibit 6 to Form NRSRO using
internal records and current NRSRO personnel.
---------------------------------------------------------------------------

    \149\ 15 U.S.C. 78o-7(a)(1)(B)(vi).
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    The total annual burden currently approved by OMB for Rule 17g-1
and Form NRSRO is 6,400 hours.\150\ Based on staff experience, the
Commission estimates that the average time necessary for an applicant
or NRSRO to gather the information for the first time in order to
complete the additional disclosures that would be required by the
proposed amendments to Exhibit 6 to Form NRSRO would be 25 hours per
NRSRO, which would be a one-time hour burden to the industry of 750
hours.\151\ The Commission preliminarily believes, based on staff
experience, that the average time it would take an NRSRO to complete
the additional disclosures that would be required by the proposed
amendments would be comparable to the current estimate of 25 hours that
it would take an NRSRO to complete an amendment to a Form NRSRO.\152\
The Commission preliminarily believes that these burden estimates would
be comparable because, based on the staff's experience with Form NRSRO
filings furnished to the Commission over the past two years, the
Commission believes that time and amount of information involved in
filing an amendment to part of the Form NRSRO would be similar to the
time involved to update the Form NRSRO with the proposed information to
Exhibit 6 to Form NRSRO.
    In addition, the proposed amendments to the Instructions to Exhibit
6 would provide that after registration, an NRSRO with a fiscal year
end of December 31 must update the proposed additional disclosures in
Exhibit 6 information 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.\153\ The currently approved OMB
annual hour estimate to complete the annual certification is 10 hours
per NRSRO, for a total aggregate annual hour burden to the industry of
300 hours. The Commission estimates that once an NRSRO completes its
first annual certification with the additional proposed disclosures
required in the Instructions to Exhibit 6 to Form NRSRO that the
completion of subsequent annual certifications, generally, would take
less time because the additional disclosures proposed to be required
would be furnished on a regular basis (albeit yearly) and, therefore,
become more a matter of routine over time. Consequently, the Commission
believes that the annual certifications with the proposed additional
discloses would take more time to complete in the first year the rule
would become effective, than it would take to complete in subsequent
years.
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    \150\ 2,100 annual hours + [13,000 one-time hours annualized
over the three year approval period/3] = 6,433 hours = rounded to
6,400 hours.
    \151\ 30 NRSROs x 25 hours = 750 hours. The Commission also
notes that the currently approved PRA collection for Rule 17g-1 and
Form NRSRO includes an estimate that an outside counsel would spend
approximately 40 hours assisting a credit rating agency in the
process of completing and furnishing a Form NRSRO to the Commission.
June 2007 Adopting Release, 72 FR at 33608. The Commission believes
that any outside counsel review of the amendments to Exhibit 6 to
Form NRSRO would de minimis and therefore the current estimate
remains accurate.
    \152\ See June 2007 Adopting Release, at 72 FR 33609.
    \153\ 17 CFR 240.17g-4(f). The Commission also notes that if an
NRSRO has an annual year end other than December 31st, the proposed
additional instructions Exhibit 6 to Form NRSRO would require that
the NRSRO file an Update of Registration no later than 90 days
following the end of the NRSRO's fiscal year. The Commission
believes that the annual hour burden for this proposed collection of
information is encompassed within the time it would take an NRSRO to
file an amendment to the Form NRSRO which has been estimated to be a
25 annual hour burden per year. The Commission estimates that an
NRSRO will on average file two amendments to Form NRSRO per year.
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    Therefore, based on staff experience, the Commission estimates that
with the additional disclosures proposed to be contained in
Instructions to Exhibit 6 to Form NRSRO, the annual hour burden for
each NRSRO to complete the annual certification would increase 2 hours
per year, from 10 to 12 hours, for a total

aggregate annual hour burden of 360 hours, resulting in an increase to
the estimated annual hour burden for Rule 17g-1 and Form NRSRO of 60
hours.\154\
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    \154\ 12 hours x 30 NRSROs = 360 hours. The Commission also
based this estimate, in part, on the time it would take an NRSRO to
furnish a withdrawal of registration on Form NRSRO of 1 hour. June
2007 Proposing Release, 72 FR at 33608-33609. However, because the
NRSRO would have to update information for calculations with respect
to its revenues, the Commission believes it would take an NRSRO
longer than 1 hour. Therefore, the Commission preliminarily believes
that it would take an NRSRO approximately 2 hours each year to
update the proposed information.
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    The Commission preliminarily believes that an applicant/NRSRO would
incur only limited internal costs to modify its systems to generate and
disclose the proposed additional disclosures in Exhibit 6 to Form NRSRO
because an applicant/NRSRO is already required to generate similar
financial information in other parts of Form NRSRO and certain
financial reports required under Rule 17g-3.
    The Commission generally requests comment on all aspects of these
proposed burden estimates for Rule 17g-1 and Form NRSRO, as proposed to
be amended. Commenters should provide specific data and analysis to
support any comments they submit with respect to these burden
estimates.
3. Proposed Rule 17g-7
    The Commission is proposing new Rule 17g-7, which would require an
NRSRO, on an annual basis, to make publicly available on its Internet
Web site a consolidated report that would contain certain information
about the revenues earned by the NRSRO for providing products and
services to any obligor, issuer, underwriter, sponsor, and subscriber
that paid the NRSRO to issue or maintain the credit rating. In order to
generate the report as required by proposed paragraph (a)(1) of Rule
17g-7, the NRSRO would have to perform two calculations and identify
any outstanding credit ratings at the end of the fiscal year.
    As proposed under new Rule 17g-7, an NRSRO would be required to
perform a calculation to state the percentage of net revenue earned by
the NRSRO from providing services to the entity that is derived from
services other than credit ratings attributable to each person that
paid the NRSRO for the issuance or maintenance of a credit rating.
    The second calculation that the NRSRO would be required to perform
to generate the report once a year as described in paragraph (a)(1)(i)
of proposed Rule 17g-7 would require the NRSRO to derive and state the
relative standing of the entity as a contributor of revenues to the
NRSRO as compared to other entities that contribute revenue to the
NRSRO. In particular, the NRSRO would need to identify which of the
following cohorts of contributors to the annual net revenue of the
NRSRO the entity is included in: top 10%, top 25%, top 50%, bottom 50%,
bottom 25%. Finally, once a year an NRSRO would also be required to
identify all outstanding credit ratings paid for by the person, which
the NRSRO must identify by name of obligor, security, or money market
instrument and, as applicable, CIK number, CUSIP, or ISIN.
    The Commission also notes that 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.\155\
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    \155\ For purposes of this collection of information, the
Commission has determined that it would preliminarily use 30
respondents in calculating the burden estimates. While some
subscriber-based NRSROs would be exempt from new Rule 17g-7, the
Commission has preliminarily determined to include all 30
respondents because if a subscriber-paid NRSRO was specifically
requested to issue a rating, the NRSRO would no longer be exempt
from Rule 17g-7. Therefore, the Commission preliminarily believes
that this approach would result in an appropriate PRA estimate for
new Rule 17g-7.
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    For purposes of the PRA, based on staff experience, the Commission
estimates that it would take an NRSRO approximately 100 hours on a one-
time basis to develop the calculations necessary to generate the
percents required under the report under proposed Rule 17g-7; to
populate the proposed report with the required data; and to develop and
draft the form report. Additionally, the Commission is basing this one-
time hour burden estimate on the Commission's experience with, and
burden estimates for, Rules 17g-1 through 17g-6, given that the NRSRO
rules have been in effect for over two years.\156\ More specifically,
the Commission notes that the current one-time hour burden estimates
under the PRA for an NRSRO to file a Form NRSRO is 400 hours, and to
file an amendment to Form NRSRO is 25 hours.\157\
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    \156\ See generally, June 2007 Adopting Release.
    \157\ June 2007 Adopting Release, 72 FR at 33609; see also
February 2009 Adopting Release, 74 FR at 6470.
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    The Commission preliminarily believes that the report to be
required under proposed Rule 17g-7 would be more complex and
comprehensive to complete than a typical amendment to Form NRSRO
because the new proposed rule would require an NRSRO to calculate
percents for every person that paid the NRSRO for the issuance or
maintenance of a credit rating. In contrast, however, the Commission
preliminarily does not believe that the one-time hour burden to comply
with the new Rule 17g-7 would be as extensive and time consuming as the
time necessary to complete the initial Form NRSRO. Therefore, the
Commission preliminarily believes that the estimate of a one-time
burden of 100 hours per respondent is conservative and reasonable given
the significant variance in size between the largest NRSROs and the
smallest NRSROs. Thus, based on staff experience, the Commission
preliminarily estimates that the aggregate initial one-time hour burden
to complete the report required by proposed Rule 17g-7 would be 3,000
hours for 30 NRSROs.\158\
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    \158\ 100 hours x 30 NRSROs = 3,000 hours.
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    In addition to the one-time hour burden, proposed new Rule 17g-7
also would result in an annual hour burden for an NRSRO to generate the
percents required under the proposed report and to populate the
proposed report with the required data once a year. The Commission
notes that an NRSRO would have already developed the equations
necessary to generate the percents in order to comply with the new Rule
17g-7 in the first year. Additionally, the Commission believes that
once an NRSRO complies with Rule 17g-7 in the first year, that
preparation of the new annual report would become more routine.
Therefore, based on staff experience, the Commission estimates that it
would take an NRSRO approximately 50 hours per year to generate the
percents required under the proposed report, as well as to generate the
report itself.\159\ Thus, the Commission preliminarily estimates that
this would result in a total annual hour burden of 1,500 hours for 30
NRSROs.\160\
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    \159\ The Commission based this estimate, in part, on the number
of estimated hours it would take an NRSRO to file an amendment to
Form NRSRO of 25 hours. The Commission, however, preliminarily
believes that it would take an NRSRO substantially more time to
generate the information once a year to complete the proposed report
under proposed Rule 17g-7. Therefore, the Commission preliminarily
estimates that the average time necessary to complete the report
under proposed Rule 17g-7 would be more comparable to the time it
would take an NRSRO to file 2 amendments to Form NRSRO, or 50 hours
(2 x 25 hours).
    \160\ 50 hours x 30 NRSROs = 1,500 hours.
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    Proposed Rule 17g-7 also would require an NRSRO to make publicly
available on its Internet Web site the report required under paragraph

(a)(1).\161\ The Commission estimates that it would take an NRSRO
approximately 30 hours to disclose the initial information in its Web
site for a total one-time burden of 900 hours,\162\ and thereafter 10
hours per year to disclose updated information for a total annual
burden of 300 hours.\163\ This one-time hour burden is estimated in
part based on the current one-time and annual burden hours for an NRSRO
to publicly disclose its Form NRSRO.\164\ Accordingly, the Commission
estimates that implementation of proposed new Rule 17g-7 would result
in a total one-time hour burden of 3,900 \165\ hours and a total annual
hour burden of 1,800 hours.\166\
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    \161\ See proposed Rule 17g-7(a)(1).
    \162\ 30 hours x 30 NRSROs = 900 hours.
    \163\ 30 NRSROs x 10 hours = 300 hours.
    \164\ June 2007 Adopting Release, 71 FR at 33609.
    \165\ 3,000 hours + 900 hours = 3,900 total hours for one-time
burden.
    \166\ 1,500 hours + 300 hours = 1,800 total annual hours.
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    The Commission also believes that an NRSRO may need to purchase
and/or modify its software and operating systems in order to generate
and publish the information proposed to be required in the report in
proposed new Rule 17g-7. The Commission estimates that the cost of any
software incurred in connection with its systems modifications would
vary based on the size and complexity of the NRSRO. The Commission
estimates that some NRSROs would not need such software because they
may already have such systems in place to generate the proposed report,
or given their small size, other NRSROs may find the purchase of
additional software unnecessary. The Commission preliminarily believes
that an NRSRO would be able to generate and compile the information for
the reports using the NRSRO's own personnel. Therefore, based on staff
experience, the Commission estimates that the average cost of software
across all NRSROs would be approximately $4,000 per firm, with an
aggregate one-time cost to the industry of $120,000.\167\
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    \167\ $4,000 x 30 NRSROs = $120,000. As a means of comparison,
the Commission notes that the average cost of recordkeeping software
across all NRSROs under Rule 17g-2 is estimated to be $1,800 per
respondent. See February 2009 Adopting Release, 74 FR, at 6472. The
Commission preliminarily believes that the one-time cost of
purchasing software in order to comply with proposed new Rule 17g-7
would be greater than $1,800 because the proposed rule would require
the publication of two new reports not previously required by any
rule.
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    The Commission generally requests comment on all aspects of these
burden estimates for proposed Rule 17g-7. In addition, the Commission
requests specific comment on the following items related to these
burden estimates:
     Would there be additional systems costs or other costs
involved in developing this collection of information?
     Given that 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, should the Commission
revise the number of respondents for this proposed new collection of
information? If so, what should the number be?

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

E. Collection of Information Is Mandatory

    The collection of information obligations imposed by the proposed
rule amendments and the proposed new rule would be mandatory for credit
rating agencies that are registered with the Commission as NRSROs. Such
registration is voluntary.\168\
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    \168\ See Section 15E of the Exchange Act (15 U.S.C. 78o-7).
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F. Confidentiality

    The information collected under the proposed amendments to Rule
17g-3 would be generated from the internal records of the NRSRO and
would be furnished to the Commission on a confidential basis, to the
extent permitted by law.\169\ The proposed disclosures that would be
required under Exhibit 6 to Form NRSRO and proposed Rule 17g-7 would be
public.
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    \169\ 15 U.S.C. 78o-7(k). 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.
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G. Record Retention Period

    The records required under the proposed amendments to Rules 17g-3
and 17g-7, as well as Exhibit 6 to Form NRSRO would need to be retained
by the NRSRO for at least three years.\170\
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    \170\ 17 CFR 240.17g-2(c).
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H. Request for Comment

    The Commission requests pursuant to 44 U.S.C. 3306(c)(2)(B) comment
on the proposed collections of information in order to: (1) Evaluate
whether the proposed collection of information is necessary for the
proper performance of the functions of the Commission, including
whether the information would have practical utility; (2) evaluate the
accuracy of the Commission's estimates of the burden of the proposed
collections of information; (3) determine whether there are ways to
enhance the quality, utility, and clarity of the information to be
collected; (4) evaluate whether there are ways to minimize the burden
of the collection of information on those who respond, including
through the use of automated collection techniques or other forms of
information technology; and (5) evaluate whether the proposed rule
amendments would have any effects on any other collection of
information not previously identified in this section.
    Persons who desire to submit comments on the collection of
information requirements should direct their comments to the OMB,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
should also send a copy of their comments to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090, and refer to File No. S7-28-09. OMB is
required to make a decision concerning the collections of information
between 30 and 60 days after publication of this document in the
Federal Register; therefore, comments to OMB are best assured of having
full effect if OMB receives them within 30 days of this publication.
Requests for the materials submitted to OMB by the Commission with
regard to these collections of information should be in writing, refer
to File No. S7-28-09, and be submitted to the Securities and Exchange
Commission, Records Management Office, 100 F Street, NE., Washington,
DC 20549.

IX. Costs and Benefits of the Proposed Rules

    The Commission is sensitive to the costs and benefits that result
from its rules. The Commission has identified certain costs and
benefits of the proposed rule amendments and proposed new rule and
requests comment on all aspects of this cost-benefit analysis,
including identification and assessment of any costs and benefits not
discussed in the analysis.\171\ The

Commission seeks comment and data on the value of the benefits
identified. The Commission also seeks comments on the accuracy of its
cost estimates in each section of this cost-benefit analysis, and
requests those commenters to provide data, including identification of
statistics relied on by commenters to reach conclusions on cost
estimates. Finally, the Commission seeks estimates and views regarding
these costs and benefits for particular types of market participants,
as well as any other costs or benefits that may result from these
proposed rule amendments and the new proposed rule.
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    \171\ For the purposes of this cost/benefit analysis, the
Commission is using salary data from the Securities Industry and
Financial Markets Association (``SIFMA'') Report on Management and
Professional Earnings in the Securities Industry 2008, which
provides base salary and bonus information for middle-management and
professional positions within the securities industry. The
Commission believes that the salaries for these securities industry
positions would be comparable to the salaries of similar positions
in the credit rating industry. The salary costs derived from the
report and referenced in this cost benefit section are modified to
account for an 1,800-hour work year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits and overhead. The
Commission used comparable estimates in adopting final rules
implementing the Rating Agency Act in 2007 and additional rules in
2009, requested comments on such estimates, and received no comments
in response to these requests. See June 2007 Adopting Release, note
576, and February 2009 Adopting Release, note 179. Hereinafter,
references to data derived from the report as modified in the manner
described above will be cited as ``SIFMA 2008 Report as Modified.''
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A. Benefits

    The purposes of the Rating Agency Act, as stated in the
accompanying Senate Report, are to improve ratings quality for the
protection of investors and in the public interest by fostering
accountability, transparency, and competition in the credit rating
industry.\172\ As the Senate Report states, the Rating Agency Act
establishes ``fundamental reform and improvement of the designation
process'' with the goal that ``eliminating the artificial barrier to
entry will enhance competition and provide investors with more choices,
higher quality ratings, and lower costs.'' \173\
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    \172\ See ``Senate Report,'' p. 2.
    \173\ Id., p. 7.
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    The Commission is proposing to amend Rule 17g-3 to require an NRSRO
to furnish the Commission with an additional unaudited report
containing a description of the steps taken by the designated
compliance officer during the fiscal year to administer the policies
and procedures that are required to be established pursuant to
paragraphs (g) and (h) of Section 15E of the Exchange Act (management
of conflicts of interest and prevention of the misuse of material
nonpublic information); and 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.
    The Commission's staff understands that the designated compliance
officer of some NRSROs may, in some cases, not be fulfilling the
compliance officer's statutorily mandated duties, as prescribed by
Section 15E(j) of the Exchange Act.\174\ Further, during examinations
in 2008 of three of the largest NRSROs, Commission staff also
identified issues with respect to each NRSRO's policies and procedures
and improvements that could be made.\175\ 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.
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    \174\ 15 U.S.C. 78o-7(j).
    \175\ 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.
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    The amendments to proposed new paragraph (a)(7) of Rule 17g-3 would
also provide that the 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 finding;
(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.\176\
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    \176\ See proposed Rule 17g-3(a)(7)(ii).
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    The Commission believes that the proposed amendment to Rule 17g-3
would further address concerns about the integrity of the ratings
process by establishing a discipline under which the NRSRO's designated
compliance officer would need to report to the Commission the steps
taken by the compliance officer to fulfill the officer's
responsibilities as set forth in Section 15E(j) of the Exchange Act.
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 internal policies and procedures. The reports also
could 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 monitor how the NRSRO's
designated compliance officer is fulfilling the responsibilities
prescribed in Section 15E of the Exchange Act. For example, if an NRSRO
reports an unusual level of significant compliance exceptions in a
particular area, the Commission examination staff could focus their
next review of the NRSRO in that particular area. Alternatively, if a
report indicates no problems, but a subsequent staff examination
reveals significant compliance exceptions, this could be brought to the
attention of the NRSRO's management to be used to assess whether the
designated compliance officer is adequately fulfilling the officer's
statutory duties.
    As stated above, 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). The first item the Commission is proposing be
included in the report is a description of any compliance reviews of
the activities of the NRSRO.\177\ The Commission intends that the
designated compliance officer would describe all such reviews conducted
during the most recently ended fiscal year. This would provide the
Commission with an understanding of the scope of the designated
compliance officer's reviews of the NRSRO's activities. 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 finding.
The Commission preliminarily intends a ``material compliance matter''
to be the discovery that the NRSRO or a person within the NRSRO had
violated the securities laws \178\ or the rules thereunder or the
policies, procedures, or methodologies established, maintained and
enforced by the NRSRO to, for example, determine credit ratings,
prevent the misuse of material non-public information, manage conflicts
of interest, and comply with the Commission's NRSRO rules.\179\ The
proposed requirement to report a material compliance matter would be
designed to alert the Commission to matters identified by the
designated compliance officer that could 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 interactions with an issuer that hired several NRSROs to rate
its securities.
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    \177\ See proposed Rule 17g-3(a)(7)(ii)(A).
    \178\ The term ``securities laws'' is defined in Section
3(a)(47) of the Exchange Act.
    \179\ See e.g., 17 CFR 270.38a-1(e)(2); see also supra note 37.
---------------------------------------------------------------------------

    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.\180\ The reporting of these measures could
assist the Commission in evaluating the risk of such re-occurrences. It
also could provide the Commission with potential ``best practices'' for
mitigating the risk of future material compliance matters, which could
assist the Commission in its overall supervision of NRSROs. Finally,
the fourth item the Commission is proposing be included in the report
is a description of the persons within the NRSRO who were advised of
the results of the reviews. 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 improve the focus of examination resources
of a particular NRSRO on practices related to material compliance
matters reported and the possible selection of NRSROs for examination.
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    \180\ See proposed Rule 17g-3(a)(7)(ii)(C).
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    In summary, as stated above, the amendments to Rule 17g-3 related
to the new unaudited annual report related to the NRSRO's compliance
function could serve to improve the NRSRO's compliance function. This
improved compliance function, in turn, could improve the integrity of
NRSROs' ratings processes.
    The Commission also believes that the proposed new report would
facilitate improvements to an NRSRO's compliance program in light of
the concerns that the designated compliance officer of some NRSROs may,
in some cases, not be fulfilling the compliance officer's statutorily
mandated duties as prescribed in Section 15E(j) of the Exchange Act.
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. In
addition to improving the quality of credit ratings, increased
oversight of NRSROs could increase the accountability of an NRSRO to
its subscribers, investors, and other persons who rely on the
credibility and objectivity of a credit rating in making an investment
decision.
    Finally, the Commission believes that the proposed amendments to
Rule 17g-3 would complement the Commission's examination program for
NRSROs, and that the proposed amendments would enhance the Commission's
ability to protect investors. The requirement to furnish the Commission
with an annual report related to an NRSRO's compliance program would
serve to help facilitate the examination staff's efforts to conduct
each NRSRO examination in an organized and efficient manner and thus to
allocate resources to maximize investor protection. The Commission
notes that the proposed report would be one of numerous factors the
Commission's exam staff may use to determine the focus of a particular
exam.
    The proposed amendments to the Instructions to Exhibit 6 to Form
NRSRO would require an applicant/NRSRO to furnish the Commission with
information regarding the revenues an NRSRO receives from major clients
and from services other than determining credit ratings. The proposed
new information is designed to assist users of NRSRO credit ratings in
assessing the potential magnitude of the conflicts of interest inherent
in a given NRSRO's business operations. In particular, by disclosing
information about revenues received from major clients and other
services, users of credit ratings would have access to more information
about conflicts of interest that may exist when the NRSRO is being paid
to determine credit ratings and is offering other services to persons
who pay for ratings. The Commission believes these enhanced disclosures
would allow users of credit ratings to more effectively assess the
conflicts of interest affecting an NRSRO. Although the disclosures an
NRSRO provides on the Form NRSRO, including the proposed additional
disclosures to Exhibit 6 to Form NRSRO cannot substitute for an
investor's due diligence in evaluating a credit rating and the
integrity of an NRSRO, the Commission believes the proposed amendment
to Exhibit 6 to Form NRSRO would aid investors by providing additional
publicly accessible information about an NRSRO.
    The first proposed new disclosure in Exhibit 6 would require that
an applicant/NRSRO disclose the percentage of total net revenue
attributable to the 20 largest users of credit rating services of the
applicant/NRSRO. The Commission preliminarily believes this disclosure
would assist investors and other users of credit ratings by providing
them with an understanding of 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
given that an increase in concentration would result in an increase in
the potential risk that the customers could use their contribution to
the NRSRO's revenues to influence the objectivity of its credit
ratings. Making the degree of this concentration transparent would
allow investors and market participants to take this potential risk
into account when considering the accuracy and reliability of the
NRSRO's credit ratings. This, in turn, could improve the integrity of
NRSROs. Increased confidence in the integrity of NRSROs and the credit
ratings they issue could promote participation in the securities
markets. In addition, the Commission believes that the proposed
disclosures would allow investors and market participants to more
effectively compare the concentrations across all NRSROs.
    The second proposed new disclosure would require the applicant/
NRSRO to disclose the percentage of total revenue attributable to other
services and products of the applicant/NRSRO. The Commission
preliminarily believes this information would be useful to investors
and other users of credit ratings because it would provide scale to the
amount of revenues an NRSRO earns from providing services other than
credit ratings. An NRSRO that obtains substantial revenues from other
services may be inclined to favor a client that purchases those other
services when determining credit ratings solicited by the client.
Consequently, creating greater transparency about the revenues
generated from other services could assist investors and other users of
credit ratings in assessing the potential risks to the NRSRO's
objectivity.
    Proposed Rule 17g-7 would require an NRSRO to make publicly
available on its Internet Web site a consolidated

report, which would need to be updated annually, containing information
about the revenues earned by the NRSRO as a result of providing
services and products to persons that paid the NRSRO to issue or
maintain a credit rating. The Commission preliminarily believes that
proposed Rule 17g-7 would provide users of credit ratings with
information about the potential risk that arises when an NRSRO is paid
to determine a credit rating for a specific obligor, security, or money
market instrument--the risk that the revenue generated from the person
paying the NRSRO to determine a credit rating could influence the
NRSRO's objectivity if the NRSRO feels the need to curry favor from
that person with a corresponding negative impact on the quality and
accuracy of the credit rating. Simply put, it could cause the credit
rating agency to determine a higher than warranted credit rating,
which, as a result, does not accurately reflect the NRSRO's true view
of the level of credit risk inherent in the obligor, security, or money
market instrument. Providing users of credit ratings with the
information on revenue generated from other services provided to the
person paying the NRSRO for the issuance or maintenance of the credit
rating and on the relative standing of the entity as a contributor of
revenue to the NRSRO would enable them to better assess the degree that
a particular rating may be subject to this risk.
    In addition, proposed Rule 17g-7 could have the benefit of helping
to mitigate the potential ability an obligor, issuer, underwriter,
sponsor, and subscriber as a large consumer of the services and
products of the NRSRO from using its status to exert undue influence on
the NRSRO. Specifically, by making the potential conflict more
transparent to the marketplace, users of credit ratings, market
participants, and others could assess how credit ratings solicited by
large revenue providers are handled by the NRSRO, particularly with
respect to NRSROs that make their ratings publicly available for free.
    As stated above, the Commission also believes that the reports that
would be required to be published by proposed Rule 17g-7 would create
greater transparency about the revenues generated from other services
and could assist investors and other users of credit ratings in
assessing the potential risks to the NRSRO's objectivity by providing
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. The Commission generally requests comment on all
aspects of the proposed new rule. In addition, the Commission requests
specific comment on the following items related to these benefits.
     Are there metrics available to quantify these benefits and
any other benefits the commenter may identify, including the
identification of sources of empirical data that could be used for such
metrics?
     With respect to Rule 17g-7, to what use do users of credit
ratings anticipate putting the proposed disclosures? To what extent, if
any, might these disclosures create misimpressions as to the existence
of potential conflicts? Are the proposed disclosures in proposed Rule
17g-7 granular enough to be of value to users of credit ratings?

Commenters should provide specific data and analysis to support any
comments they submit with respect to the benefits discussed above and
any other benefits identified by the commenters.

B. Costs

    The Commission recognizes that there are potential costs that would
result if the Commission adopts the proposed rule amendments to Rule
17g-3,\181\ Exhibit 6 to Form NRSRO and proposed new Rule 17g-7. The
Commission preliminarily believes that potential costs incurred by an
NRSRO to comply with the proposed rule amendments to a given NRSRO
would depend on its size and the complexity of its business activities.
The size and complexity of NRSROs vary significantly. Therefore, the
cost could vary significantly across NRSROs. The Commission is
providing estimates of the average cost per NRSRO taking into
consideration the variance in size and complexity of NRSROs. Any costs
incurred would also vary depending on which classes of credit ratings
an NRSRO issues and how many outstanding ratings it has in each class.
For these reasons, the cost estimates represent the average cost across
all NRSROs.
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    \181\ See proposed Rule 17g-3(a)(7).
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1. Proposed Amendments to Rule 17g-3
    Rule 17g-3 requires an NRSRO to furnish audited annual financial
statements to the Commission, including certain specified
schedules.\182\ The Commission is proposing to amend Rule 17g-3 to
require an NRSRO to furnish the Commission with an additional unaudited
report containing a description of the steps taken by the designated
compliance officer during the fiscal year to administer the policies
and procedures that are required to be established pursuant to
paragraphs (g) and (h) of Section 15E of the Exchange Act; and 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. The proposed amendments to Rule 17g-3
also would provide that the 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.\183\
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    \182\ 17 CFR 240.17g-3.
    \183\ See proposed Rule 17g-3(a)(7)(ii).
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    The Commission believes that the costs to NRSROs to comply with the
proposed amendment to Rule 17g-3 would vary depending on the size and
complexity of the NRSRO, as well as the size of its compliance
programs. Larger NRSROs with comprehensive compliance programs may
already periodically review portions of their compliance programs.
These larger NRSROs may incur a cost associated with transforming their
periodic reviews into more systematic reviews and developing the report
to be required under Rule 17g-3. While smaller NRSROs all have
designated compliance officers, the Commission preliminarily believes,
based on issues brought to the staff's attention, that some NRSROs may
have less robust compliance programs than others. The Commission
believes, however, that the information to be included in the proposed
report under the amendments to Rule 17g-3 for smaller NRSROs would be
less extensive, because smaller NRSROs may have less complex
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, it may be less costly than for
larger NRSROs.
    Further, the Commission notes that the proposed report would
explicitly require the NRSRO to describe the steps taken by the
designated compliance officer during the fiscal year to administer the
policies and procedures that are required to be established pursuant to
paragraphs (g) and (h) of

Section 15E of the Exchange Act; and ensure compliance with the
securities laws and rules and regulations thereunder. Since these are
statutorily mandated responsibilities of the designated compliance
officer under Section 15E(j) of the Exchange Act, the Commission notes
that certain costs are already being incurred by the NRSRO and
therefore are not direct costs of the proposed amendments to Rule 17g-
3. The Commission has preliminarily quantified certain costs with
respect to the amendments to Rule 17g-3 which are discussed in detail
below.
    As discussed with respect to the PRA, the Commission preliminarily
believes that the estimated hour burden under the proposed amendments
to Rule 17a-3 would include the time it would take to compile
information to draft the report and the preparation and filing of the
report itself. In addition, this one-time hour burden estimate also
includes the time it would take to identify and describe material
compliance matters, any remediation and the persons advised of the
results of the reviews. Consequently, the Commission also based this
estimate, in part, on the average estimated number of hours it would
currently take an NRSRO to complete one annual report under current
Rule 17g-3 (i.e., approximately 30 hours).\184\ Consequently, as
discussed above with respect to the PRA, the Commission estimates that
the average amount of time across all NRSROs to prepare the additional
report proposed to be required under the rule would be approximately
900 hours \185\ at a total aggregate annual cost to the industry of
$232,200.\186\
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    \184\ 15 U.S.C. 78o-7(j). Under this provision of the statute,
an NRSRO must ``designate an individual responsible for
administering the policies and procedures that are required to be
established pursuant to [Sections 15E(g) and (h) of the Exchange Act
(15 U.S.C. 78o-7(g) and (h))], 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].'' Id.
    \185\ 30 hours x 30 NRSROs = 900 hours.
    \186\ $7,740 x 30 NRSROs = $232,200.
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    Given the potentially sensitive nature of the proposed report, the
Commission also preliminarily believes that an NRSRO would likely
engage outside counsel to assist it in the process of drafting and
reviewing the proposed report under Rule 17g-3 on a one-time basis. The
Commission estimates that the time an outside attorney would spend on
this work would depend on the size and complexity of the NRSRO.
Therefore, the Commission estimates that, on average, an outside
counsel would spend approximately 20 hours assisting an NRSRO and its
designated compliance officer in drafting and reviewing the proposed
report on a one-time basis for an aggregate burden to the industry of
600 hours.\187\ Based on industry sources, the Commission estimates
that the cost of an outside counsel would be approximately $400 per
hour. For these reasons, the Commission estimates that the average one-
time cost to an NRSRO would be approximately $8,000 \188\ and the one-
time cost to the industry would be approximately $240,000.\189\
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    \187\ 30 NRSROs x 20 hours = 600 hours.
    \188\ $400 per hour x 20 hours = $8,000.
    \189\ $8,000 x 30 NRSROs = $240,000.
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    The Commission generally requests comment on all aspects of these
cost estimates for the proposed amendments to Rule 17g-3. In addition,
the Commission requests specific comment on the following items related
to these cost estimates:
     Would an NRSRO incur any additional costs to employ an
outside counsel on an annual basis to review the proposed 17g-3 report,
rather than just on a one-time basis?
     Would the cost incurred by an NRSRO be less than those
estimated because the designated compliance officer is already
performing many of the responsibilities required to be described in the
proposed report, as well as drafting compliance reports?
     What other costs are NRSROs likely to incur?
     Are the proposals likely to impose costs on other market
participants, including persons who use credit ratings to make
investment decisions or for regulatory purposes, and persons who
purchase services and products from NRSROs?

Commenters should provide specific data and analysis to support any
comments they submit with respect to the costs discussed above and any
other costs identified by commenters.
2. Proposed Amendments to Form NRSRO
    The proposed amendments to the Instructions to Exhibit 6 of Form
NRSRO would require an applicant/NRSRO to furnish the Commission with
information regarding the revenues an NRSRO receives from major clients
and from products and services other than determining credit ratings.
In particular, the additional disclosures 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.
    The Commission believes that the costs to NRSROs to comply with the
proposed amendment to Exhibit 6 to Form NRSRO would vary depending on
the size and complexity of the NRSRO. Larger NRSROs may have more
customers and complex revenue streams, while smaller NRSROs may be less
complex in terms of sources of revenue or numbers of customers.
Consequently, as discussed above with respect to the PRA, the
Commission estimates that the average time necessary for an applicant
or NRSRO to gather the information on a one-time basis in order to
complete the additional disclosures proposed to be required by the
amendments to Exhibit 6 to Form NRSRO would be one-time hour burden to
the industry of 750 hours.\190\ For these reasons, the Commission
estimates that the average one-time cost to an NRSRO would be $6,520
\191\ and the total aggregate one-time cost to the industry would be
$195,600.\192\
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    \190\ 30 NRSROs x 25 hours = 750 hours.
    \191\ The Commission estimates that these responsibilities would
be split between a Financial Reporting Manager (10 hours) and a
Compliance Manager (15 hours). The SIA Management Report 2008
indicates that the average hourly cost for a Financial Reporting
Manager is $265 and for a Compliance Manager is $258. Therefore, the
average one-time cost would be $6,520 [(10 hours x $265 per hour) +
(15 hours x $258 per hour)].
    \192\ $6,520 x 30 NRSROs = $195,600.
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    In addition, with respect to the PRA, the Commission estimated that
the average annual burden to complete an annual certification under
Rule 17g-1(f) would increase 60 hours for all NRSROs.\193\ For these
reasons, the Commission estimates that the average annual cost with
respect to the proposed amendment to an NRSRO would be $516 \194\ and
the total aggregate annual cost to the industry would be $15,480.\195\
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    \193\ 2 hours x 30 NRSROs = 60 hours.
    \194\ The Commission estimates that these responsibilities would
be performed by a Compliance Manager. The SIA Management Report 2008
indicates that the average hourly cost for a Compliance Manager is
$258. Therefore, the average annual cost to an NRSRO would be $516
(2 hours x $258).
    \195\ $516 x 30 NRSROs = $15,480.
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    The Commission also notes that included in the current estimated
costs for the Form NRSRO are the costs related to the engagement of
outside counsel to assist in the process of completing and submitting a
Form NRSRO.\196\ In the June 2007 Proposing Release, the Commission
estimated that the amount of time an outside attorney

will spend on this work will depend on the size and complexity of the
NRSRO. Therefore, the Commission estimated that, on average, an outside
counsel will spend approximately 40 hours assisting an NRSRO in
preparing its application for registration. The Commission further
estimated that the average hourly cost for an outside counsel will be
approximately $400 per hour. For these reasons, the Commission
estimated that the average one-time cost to an NRSRO will be $16,000
and the one-time cost to the industry will be $480,000.\197\ With
respect to the proposed amendments to Exhibit 6 to Form NRSRO, the
Commission estimates that the cost to outside counsel to review a Form
NRSRO containing the additional disclosures to Exhibit 6 to Form NRSRO
would already be included within the original cost estimate for Rule
17g-1 and Form NRSRO \198\ or that such costs would be de minimis.\199\
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    \196\ June 2007 Adopting Release, 72 FR at 33614.
    \197\ Id.
    \198\ Id.
    \199\ The Commission believes that the review of the additional
disclosures would overlap with the review of similar financial
information already required to be disclosed in Exhibits 10 and 12
in Form NRSRO.
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    As discussed above with respect to the PRA, the Commission
preliminarily believes that an applicant/NRSRO would incur only limited
internal costs to modify its systems to generate and disclose the
proposed additional disclosures in Exhibit 6 to Form NRSRO because an
applicant/NRSRO is already required to generate similar financial
information in other parts of Form NRSRO and certain financial reports
required under Rule 17g-3.
    The Commission generally requests comment on all aspects of these
cost estimates for the proposed amendment to Form NRSRO. In addition,
the Commission requests specific comment on the following items related
to these cost estimates:
     Whether the proposals would impose costs on other market
participants, including persons who use credit ratings to make
investment decisions or for regulatory purposes, and persons who
purchase services and products from NRSROs?
     Would the one-time cost to engage an outside counsel to
assist in the preparation of the Form NRSRO increase as a result of the
amendments to Exhibit 6 to Form NRSRO?
     Would the proposed disclosures in Exhibit 6 to Form NRSRO
have any effect on the willingness of persons to pay for ratings as
well as other credit rating services? What are the risks that investors
and other users of credit ratings would be confused as to the
significance of the revenue-based conflicts of interest being disclosed
as a result of the proposed amendments to Exhibit 6 to Form NRSRO?

    Commenters should provide specific data and analysis to support any
comments they submit with respect to the costs discussed above and any
other costs identified by commenters.
3. Proposed Rule 17g-7
    Proposed Rule 17g-7 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 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. As discussed above with respect to PRA, the Commission
estimates that it would take an NRSRO approximately 100 hours to
develop the calculations necessary to generate the percents required by
the report under proposed Rule 17g-7; to populate the proposed report
with the required data; and to develop and draft the form report. The
Commission estimates that the proposed new Rule 17g-7 would impose a
total one-time hour burden of 3,000 hours for 30 NRSROs to prepare the
report. The Commission estimates that the average one-time cost to an
NRSRO would be $23,500 \200\ and the total aggregate one-time cost for
all NRSROs would be $705,000.\201\
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    \200\ The Commission estimates an NRSRO would have a Senior
Accountant and a Senior Programmer working together to generate the
initial calculations and report and that the two senior officers
would divide the estimated 100 hours equally. The SIFMA 2008 Report
as Modified indicates that the average hourly cost for a Senior
Accountant is $178 and that the average hourly cost for a Senior
Programmer is $292. Therefore, the average one-time cost to an NRSRO
would be $23,500 (50 hours x $178) + (50 hours x $292).
    \201\ 30 NRSROs x $23,500 = $705,000.
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    As discussed above with respect to the PRA, the Commission also
estimates that after the first year it would take NRSRO 50 hours per
year to generate the percents required under the proposed report and to
populate the proposed report with the required data once a year.
Therefore, the Commission estimates that the average annual cost to an
NRSRO would be $3,150 \202\ and the total aggregate annual cost to the
industry would be $94,500 to generate the proposed report once a
year.\203\
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    \202\ The Commission estimates that after the equations and
initial report has been developed that an NRSRO would have a
Compliance Clerk perform the necessary tasks to generate the annual
report. The SIFMA 2008 Office Salaries Report as Modified indicates
that the average hourly cost for a Compliance Clerk is $63.
Therefore, the average yearly cost to an NRSRO would be $3,150 (50
hours x $63).
    \203\ $3,150 x 30 NRSROs = $94,500.
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    Proposed Rule 17g-7 would also require an NRSRO to make publicly
available on its Internet Web site the report required under paragraph
(a)(1). As discussed with respect to the PRA, the Commission estimates
that it would take an NRSRO approximately 30 hours to disclose the
initial information in its Web site for a total one-time burden of 900
hours, and thereafter 10 hours per year to disclose updated information
for an annual hour burden of 300 hours. The Commission estimates that
an NRSRO would incur an average one-time cost of $8,760 and an average
annual cost of $2,920.\204\ The total one-time cost to the industry
would be approximately $262,800 \205\ and the total aggregate annual
cost to the industry would be approximately $87,600.\206\
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    \204\ The Commission estimates that an NRSRO will have a Senior
Programmer perform this work. The SIFMA 2008 Report as Modified
indicates that a Senior Programmer is $292. Therefore the average
one-time cost will be $8,760 (30 hours x $292) and the average
annual cost will be $2,920 (10 hours x $292).
    \205\ $8,760 x 30 NRSROs = $262,800.
    \206\ $2,920 x 30 NRSROs = $87,600.
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    Finally, the Commission also believes that an NRSRO may need to
purchase and/or modify its software and operating systems in order to
generate and publish the information required in the proposed reports
in proposed Rule 17g-7. As discussed in the PRA, the Commission
estimates that the cost of any software would vary based on the size
and complexity of the NRSRO. The Commission estimates that some NRSROs
would not need such software. Therefore, the Commission estimates that
the average cost of software across all NRSROs would be approximately
$120,000.\207\
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    \207\ $4,000 x 30 NRSROs = $120,000.
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    The Commission generally requests comment on all aspects of these
cost estimates for the proposed Rule 17g-7. In addition, the Commission
requests specific comment on the following items related to these cost
estimates:
     Would these proposals impose costs on other market
participants, including persons who use credit ratings to make
investment decisions or for regulatory purposes, and persons who
purchase services and products from NRSROs?
     Would the proposed disclosures in new Rule 17g-7 have any
effect on the willingness of persons to pay for ratings and other
credit rating services? What are the risks that investors and other
users of credit ratings would be confused as to the significance of the
information being disclosed as a result of new Rule 17g-7?

     Would there be costs in addition to those identified
above, such as costs arising from systems changes and restructuring