paragraph (a):
---------------------------------------------------------------------------

    \1684\ See paragraph (b) of Rule 17g-9.
---------------------------------------------------------------------------

     If the credit rating procedures and methodologies used by
the individual involve qualitative analysis, the knowledge necessary to
effectively evaluate and process the data relevant to the
creditworthiness of the obligor being rated or the issuer of the
securities or money market instruments being rated; \1685\
---------------------------------------------------------------------------

    \1685\ See paragraph (b)(1) of Rule 17g-9.
---------------------------------------------------------------------------

     If the credit rating procedures and methodologies used by
the individual involve quantitative analysis, the technical expertise
necessary to understand any models and model inputs that are a part of
the procedures and methodologies; \1686\
---------------------------------------------------------------------------

    \1686\ See paragraph (b)(2) of Rule 17g-9.
---------------------------------------------------------------------------

     The classes and subclasses of credit ratings for which the
individual participates in determining credit ratings and the factors
relevant to such classes and subclasses, including the geographic
location, sector, industry, regulatory and legal framework, and
underlying assets, applicable to the obligors or issuers in the classes
and subclasses; \1687\ and
---------------------------------------------------------------------------

    \1687\ See paragraph (b)(3) of Rule 17g-9.
---------------------------------------------------------------------------

     The complexity of the obligors, securities, or money
market instruments for which the individual participates in determining
credit ratings.\1688\
---------------------------------------------------------------------------

    \1688\ See paragraph (b)(4) of Rule 17g-9. Consistent with the
modifications to paragraph (a) discussed above, the Commission is
modifying paragraph (b)(4) from the proposal by replacing the phrase
``rated by the individuals'' with the phrase ``for which the
individual participates in determining credit ratings''.
---------------------------------------------------------------------------

    Commenters addressed paragraph (b) of Rule 17g-9, as
proposed.\1689\ One commenter stated that ``the Commission should set
forth more specific expectations'' and that, for example, ``the
Commission should provide guidance regarding what kind of technical
expertise in quantitative analysis should be required, depending on how
the person will be using quantitative procedures and methodologies.''
\1690\ Another commenter stated that the factors listed in paragraph
(b) should include that certain types of securities (for example new or
highly complex securities) may require more training and specialized
expertise.\1691\ On the other hand, an NRSRO stated that the factors
set forth in paragraph (b) of proposed Rule 17g-9 ``sufficiently
capture the general issues an NRSRO should consider in designing its
analyst training program.'' \1692\ Another NRSRO stated that the
factors were ``reasonable.'' \1693\
---------------------------------------------------------------------------

    \1689\ See AFSCME Letter; Better Markets Letter; CFA/AFR Letter;
COPERA Letter; DBRS Letter; S&P Letter.
    \1690\ See AFSCME Letter.
    \1691\ See CFA/AFR Letter.
    \1692\ See DBRS Letter.
    \1693\ See S&P Letter.
---------------------------------------------------------------------------

    In response to the comment that the rule should include more
specific expectations,\1694\ the Commission believes the factors strike
an appropriate balance in terms of identifying critical matters an
NRSRO should take into

consideration but with sufficient generality to have broad application
across NRSROs with different business models, sizes, and rating
methodologies, while identifying specific factors the Commission
believes are important for an NRSRO to consider when designing the
standards. Further, as discussed below, the Commission is adopting, in
paragraph (c) of Rule 17g-9, specific items that an NRSRO must include
in its standards of training, experience, and competence.\1695\
---------------------------------------------------------------------------

    \1694\ See AFSCME Letter; CFA/AFR Letter; COPERA Letter; S&P
Letter.
    \1695\ See paragraph (c) of Rule 17g-9.
---------------------------------------------------------------------------

    One commenter stated that the rule should recognize that certain
types of securities (for example new or highly complex securities) may
require more training and specialized expertise.\1696\ The factor
listed in paragraph (b)(4) of Rule 17g-9, as adopted, requires NRSROs
to consider the complexity of the obligors or securities rated by the
analyst when establishing the standards required under paragraph (a) of
Rule 17g-9. The Commission believes that this requirement achieves the
commenter's objective of having the standards take into account the
complexity of securities being rated by the analyst.
---------------------------------------------------------------------------

    \1696\ See CFA/AFR Letter.
---------------------------------------------------------------------------

    As proposed, paragraphs (c)(1) and (2) of Rule 17g-9 provided that
an NRSRO must include the following in the standards, respectively:
     A requirement for periodic testing of the individuals
employed by the NRSRO to determine credit ratings on their knowledge of
the procedures and methodologies used by the NRSRO to determine credit
ratings in the classes and subclasses of credit ratings for which the
individual participates in determining credit ratings; \1697\ and
---------------------------------------------------------------------------

    \1697\ See paragraph (c)(1) Rule 17g-9, as proposed; Nationally
Recognized Statistical Rating Organizations, 76 FR at 33543.
---------------------------------------------------------------------------

     A requirement that at least one individual with three
years or more experience in performing credit analysis participates in
the determination of a credit rating.\1698\
---------------------------------------------------------------------------

    \1698\ See paragraph (c)(2) of Rule 17g-9, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33543.
---------------------------------------------------------------------------

    The Commission is adopting paragraph (c)(1) of Rule 17g-9
substantially as proposed but with modifications in response to
comments.\1699\ As adopted, paragraph (c)(1) provides that an NRSRO
must include in the standards required under paragraph (a) a
requirement for periodic testing of the individuals employed by the
NRSRO to participate in the determination of credit ratings on their
knowledge of the procedures and methodologies used by the NRSRO to
determine credit ratings in the classes and subclasses of credit
ratings for which the individual participates in determining credit
ratings.\1700\
---------------------------------------------------------------------------

    \1699\ Consistent with the modifications to paragraph (a)
discussed above, the Commission is modifying paragraph (c)(1) from
the proposal to replace the phrase ``individuals employed by [the
NRSRO] to determine credit ratings'' with the phrase ``individuals
employed by [the NRSRO] to participate in the determination of
credit ratings''. See paragraph (c)(1) of Rule 17g-9.
    \1700\ See paragraph (c)(1) Rule 17g-9.
---------------------------------------------------------------------------

    Commenters addressed paragraph (c)(1) of Rule 17g-9, as
proposed.\1701\ Some commenters stated that the Commission or another
regulatory body or independent credentialing organization should
establish and administer NRSRO testing regimes or establish minimum
testing standards.\1702\ One of these commenters stated that the
testing requirement should be more detailed, and should include
requirements related to the ``frequency of testing, basic content,
consequences of failure, and eligibility for retesting.'' \1703\ In
contrast, three NRSROs stated that an NRSRO should be able to design
its own testing programs.\1704\
---------------------------------------------------------------------------

    \1701\ See Better Markets Letter; CFA/AFR Letter; COPERA Letter;
DBRS Letter; Fitch Letter; Harrington Letter; Moody's Letter;
Morningstar Letter.
    \1702\ See Better Markets Letter; CFA/AFR Letter; COPERA Letter.
    \1703\ See Better Markets Letter.
    \1704\ See DBRS Letter; Morningstar Letter; S&P Letter.
---------------------------------------------------------------------------

    In response to comments that the Commission or another independent
entity should establish and administer NRSRO credit analyst testing
programs or that the testing requirement should be more detailed,\1705\
the Commission notes that section 936 of the Dodd-Frank Act requires
that NRSRO credit analysts be ``tested for knowledge of the credit
rating process.'' \1706\ As rating methodologies vary among the NRSROs,
the Commission believes it is appropriate for NRSROs to design their
own testing programs, subject to the requirements of paragraphs (a),
(b), and (c) of Rule 17g-9. In particular, the standards for testing
must be reasonably designed to achieve the objective that the NRSRO
produces accurate credit ratings in the classes of credit ratings for
which the NRSRO is registered.\1707\
---------------------------------------------------------------------------

    \1705\ See Better Markets Letter; CFA/AFR Letter; COPERA Letter.
    \1706\ Public Law 111-203, 936(2).
    \1707\ See paragraph (a) of Rule 17g-9.
---------------------------------------------------------------------------

    An NRSRO stated that the testing program should ``apply only to the
credit rating procedures and methodologies that fall within the scope
of the individual's primary area or areas of analytical
responsibility'' and that credit analysts should be tested on the
``principal methodologies'' used by the NRSRO to determine credit
ratings.\1708\ The Commission notes that the question of whether an
NRSRO's standards for testing are reasonably designed to ensure that
credit analysts meet standards of training, experience, and competence
necessary to produce accurate ratings for categories of issuers whose
securities the person rates and that they are tested for knowledge of
the credit rating process will depend on the NRSRO's rating
methodologies and how the NRSRO requires its credit analysts to apply
them. An individual's primary area or areas of responsibility certainly
will be relevant to the designing testing standards that will apply to
the employee. For example, an NRSRO may need to tailor its training and
testing program to account for the different rating methodologies it
uses to determine credit ratings across classes and subclasses of
credit ratings so that a given employee is trained and tested on the
particular rating methodology or methodologies the employee uses to
determine credit ratings.
---------------------------------------------------------------------------

    \1708\ See Moody's Letter.
---------------------------------------------------------------------------

    An NRSRO stated that analysts with certain qualifications and
subject to professional examinations and continuing education
requirements should be exempt from the testing requirement.\1709\ In
response, the Commission notes that section 936 of the Dodd-Frank Act
provides that the Commission shall issue rules that are reasonably
designed to ensure that any person employed by an NRSRO to perform
credit ratings is tested for knowledge of the credit rating
process.\1710\ Paragraph (c)(1) of Rule 17g-9, as adopted, implements
this section by providing that an NRSRO must include in the standards
required under paragraph (a) a requirement for periodic testing of the
individuals employed by the NRSRO to participate in the determination
of credit ratings on their knowledge of the procedures and
methodologies used by the NRSRO to determine credit ratings in the
classes and subclasses of credit ratings for which the individual
participates in determining credit ratings.\1711\ Consequently, the
subject matter of the training must be the NRSRO's rating
methodologies. This does not mean that the standards of training
established by the NRSRO cannot take into account qualifications,
professional

examinations, and continuing education requirements. However, unless
external professional examinations and continuing education
requirements address the NRSRO's specific rating methodologies,
exemptions from the required testing and continuous education
requirements would not be appropriate.
---------------------------------------------------------------------------

    \1709\ See Fitch Letter.
    \1710\ See Public Law 111-203, 936(2) (emphasis added).
    \1711\ See paragraph (c)(1) of Rule 17g-9 (emphasis added).
---------------------------------------------------------------------------

    One commenter stated that testing of credit analysts on their
knowledge of the credit rating process could be abused by
managers.\1712\ The Commission believes testing credit analysts for
knowledge of the credit rating process as mandated by section 936 and
Rule 17g-9 will benefit the NRSRO, the analysts employed by the NRSRO,
and investors and other users of credit ratings by promoting the
analysts' adherence to, the proper application of, the NRSRO's rating
methodologies. In response to the commenter's concern, the Commission
notes that section 15E(j) of the Exchange Act requires the NRSRO to
designate an individual responsible for, among other things, ensuring
compliance with the securities laws.\1713\ This individual is
responsible for, among other things, establishing procedures for the
receipt, retention, and treatment of confidential anonymous complaints
by employees of the NRSRO.\1714\ Thus, employees have the recourse of
submitting confidential and anonymous complaints if managers seek to
abuse the training program administered by the NRSRO. For all of these
reasons, the Commission does not believe it would be appropriate or
necessary to refrain from implementing the statute in response to the
concern raised by the commenter.
---------------------------------------------------------------------------

    \1712\ See Harrington Letter.
    \1713\ See 15 U.S.C. 78o-7(j).
    \1714\ See 15 U.S.C. 78o-7(j)(3)(B).
---------------------------------------------------------------------------

    The Commission is adopting paragraph (c)(2) of Rule 17g-9 with a
modification from the proposal in response to comments.\1715\ In
particular, a number of commenters addressed the proposed requirement
that at least one individual with three or more years of experience in
performing credit analysis participate in the determination of a credit
rating.\1716\ Some commenters stated that the three-year requirement
was not sufficient, for example, with respect to complex
securities.\1717\ For example, one of these commenters stated that
``[g]iven the enormous complexity of the ratings process, and the
importance of ratings in our financial markets, requiring the
involvement of a person with only three years of experience in each
rating is woefully insufficient'' and that ``[s]ubstantially more
seasoning is necessary to ensure that each rating is properly
supervised.'' \1718\ Similarly, an NRSRO stated that the proposed
requirement ``sets such a low bar that it is almost meaningless.''
\1719\ Another NRSRO stated that ``the Commission should not establish
a minimum number of years experience for participating in the
determination of a rating'' and that ``NRSROs should establish their
own requirements.'' \1720\ In contrast, one commenter stated that
requiring that at least three years of credit rating committee
experience would be ``sensible.'' \1721\
---------------------------------------------------------------------------

    \1715\ See paragraph (c)(2) of Rule 17g-9.
    \1716\ See AFSCME Letter; Better Markets Letter; CFA/AFR Letter;
DBRS Letter; Harrington Letter; Morningstar Letter; S&P Letter.
    \1717\ See AFSCME Letter; Better Markets Letter; CFA/AFR Letter.
    \1718\ See Better Markets Letter.
    \1719\ See DBRS Letter.
    \1720\ See S&P Letter.
    \1721\ See Harrington Letter.
---------------------------------------------------------------------------

    The Commission is persuaded that the rule should not solely require
three years of experience. For example, there may be types of obligors
or obligations that--because of their complexity--require an individual
to participate in determining the credit rating who has more than three
years of experience. Consequently, as adopted, paragraph (c)(2) of Rule
17g-9 provides that an NRSRO must include in the standards required
under paragraph (a) a requirement that at least one individual with an
appropriate level of experience in performing credit analysis, which
may in some instances be more than, but cannot be less than, three
years participates in the determination of a credit rating.\1722\ Thus,
the rule requires that the level of experience be commensurate with the
type of obligor or obligation being rated and it sets a floor of a
minimum of three years of experience.
---------------------------------------------------------------------------

    \1722\ See paragraph (c)(2) of Rule 17g-9.
---------------------------------------------------------------------------

    As proposed, paragraph (c)(2) provided that the experience must be
in performing credit analysis.\1723\ In the proposing release, the
Commission noted that performing credit analysis is not synonymous with
determining credit ratings and that many financial institutions have
credit risk departments staffed by individuals who analyze the
creditworthiness of existing and future counterparties and
borrowers.\1724\ The Commission stated in the proposing release that it
preliminarily intended that this type of work would qualify a credit
analyst to meet the three-year requirement in paragraph (c)(2) of
proposed Rule 17g-9.\1725\
---------------------------------------------------------------------------

    \1723\ See paragraph (c)(2) of Rule 17g-9, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33543.
    \1724\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33479.
    \1725\ Id. at 33479.
---------------------------------------------------------------------------

    One commenter stated that the experience should be in determining
credit ratings and that ``other experiences in assessing credit should
not serve to fulfill this requirement.'' \1726\ In contrast, an NRSRO
stated that the requisite experience should not be limited to having
worked for an NRSRO because such a requirement ``could negatively
impact smaller NRSROs and possible new entrants, given the small number
of entities in the industry.'' \1727\ The Commission continues to
believe that experience performing credit analysis whether in
determining credit ratings or in other contexts (for example, in the
credit department of a financial institution) can qualify an individual
to meet the requirement in paragraph (c)(2) of Rule 17g-9, as adopted.
In fact, the fresh perspective of a credit analyst who has been
performing credit analysis for purposes other than determining credit
ratings could promote the quality of credit ratings and innovation.
---------------------------------------------------------------------------

    \1726\ See Harrington Letter.
    \1727\ See Morningstar Letter.
---------------------------------------------------------------------------

    Finally, one commenter stated that that an experienced analyst also
should be required to certify approval of the rating in writing.\1728\
At this time, due to other measures in place, the Commission does not
believe such a requirement is necessary. First, as discussed above, the
Commission is implementing section 15E(q)(2)(F) through paragraph
(a)(1)(iii) of Rule 17g-7, as adopted. This paragraph, as adopted,
provides that the NRSRO must attach to the form accompanying a credit
rating a signed statement by a person within the NRSRO stating that the
person has responsibility for the rating action and, to the best
knowledge of the person: (1) No part of the credit rating was
influenced by any other business activities; (2) the credit rating was
based solely upon the merits of the obligor, security, or money market
instrument being rated; and (3) the credit rating was an independent
evaluation of the credit risk of the obligor, security, or money market
instrument. Second, paragraph (a)(2) of Rule 17g-2 requires NRSROs to
make and retain records with respect to each current credit rating,
including the identity of any credit analyst that participated in
determining the rating and the identity of any person that approved the
credit rating.
---------------------------------------------------------------------------

    \1728\ See Better Markets Letter.

---------------------------------------------------------------------------

2. Amendment to Rule 17g-2
    The Commission proposed adding paragraph (b)(15) to Rule 17g-2 to
identify the standards of training, experience, and competence the
NRSRO must establish, maintain, enforce, and document pursuant to
proposed Rule 17g-9 as a record that must be retained.\1729\ As a
result, the standards would have been subject to the record retention
and production requirements in paragraphs (c) through (f) of Rule 17g-
2.\1730\ The Commission stated that this record, along with other
records the proposal would have required NRSROs to make, should be
subject to the same recordkeeping requirements applicable to other
records an NRSRO is required to retain pursuant to Rule 17g-2.\1731\
---------------------------------------------------------------------------

    \1729\ See section 17(a)(1) of the Exchange Act, which requires
an NRSRO to make and keep such records, and make and disseminate
such reports, as the Commission prescribes by rule as necessary or
appropriate in the public interest, for the protection of investors,
or otherwise in furtherance of the Exchange Act. 15 U.S.C.
78q(a)(1).
    \1730\ See 17 CFR 240.17g-2(c) through (f).
    \1731\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33423.
---------------------------------------------------------------------------

    One commenter stated that ``we strongly support the Commission
proposal to make training, testing, and experience policies subject to
recordkeeping requirements'' and that the Commission ``should make
clear that this includes testing results.'' \1732\ Another commenter
stated that ``the documentation requirement should include
documentation not only of the standards, but also of the
implementation, including records showing that analysts have been
tested, that ratings have been reviewed for accuracy to identify
weaknesses in the training regime, and that a seasoned analyst has
participated in and approved of each credit rating.'' \1733\ The
Commission does not believe for now that it is necessary to require the
documentation and/or retention of these specific types of records. The
Commission notes that NRSROs may need to be able to demonstrate
compliance with Rule 17g-9 and that making and retaining records
showing that analysts have been tested and the experience level of
persons participating in credit ratings is one way to demonstrate
compliance with the rule. Further, as noted above, paragraph (a)(2) of
Rule 17g-2 requires NRSROs to make and retain records with respect to
each current credit rating, including the identities of any credit
analyst that participated in determining the rating and the identity of
any person that approved the credit rating.\1734\ Finally, using credit
rating performance statistics could be a useful input in evaluating the
effectiveness of training programs.\1735\
---------------------------------------------------------------------------

    \1732\ See CFA/AFR Letter.
    \1733\ See Better Markets Letter.
    \1734\ See paragraph (a)(2) of Rule 17g-2.
    \1735\ See Better Markets Letter.
---------------------------------------------------------------------------

    The Commission is adding paragraph (b)(15) to Rule 17g-2 as
proposed.\1736\ This will provide a means for the Commission to monitor
the NRSROs' compliance with Rule 17g-9. The record must be retained
until three years after the date the record is replaced with an updated
record in accordance with the amendment to paragraph (c) of Rule 17g-2
discussed above in section II.A.2. of this release.\1737\
---------------------------------------------------------------------------

    \1736\ See paragraph (b)(15) of Rule 17g-2. Section 17(a)(1) of
the Exchange Act requires an NRSRO to make and keep such records,
and make and disseminate such reports, as the Commission prescribes
by rule as necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the Exchange
Act. 15 U.S.C. 78q(a)(1).
    \1737\ See paragraphs (b)(15) and (c) of Rule 17g-2.
---------------------------------------------------------------------------

3. Economic Analysis
    This section builds on the economic analysis in section I.B. of
this release by presenting a focused analysis of the potential economic
effects that may derive from the amendments and new rule relating to
the standards of training, experience, and competence.\1738\ The
baseline that existed before today's adoption of Rule 17g-9 and the
amendment to Rule 17g-2 was one in which an NRSRO was not required to
establish, maintain, enforce, and document standards of training,
experience, and competence for its credit analysts that are reasonably
designed to achieve the objective that the NRSRO produces accurate
credit ratings in the classes of credit ratings for which the NRSRO is
registered and that include a requirement to conduct periodic testing
of its credit analysts for knowledge of the NRSRO's procedures and
methodologies to determine credit ratings and a requirement that at
least one individual with an appropriate level of experience in
performing credit analysis, but not less than three years, participates
in the determination of a credit rating. Further, NRSROs were not
required to retain a record documenting the procedures and
methodologies. However, NRSROs and applicants for registration as
NRSROs were required to disclose in Exhibit 8 to Form NRSRO a general
description of the minimum qualifications required of their credit
analysts and credit analyst supervisors, including education level and
work experience.
---------------------------------------------------------------------------

    \1738\ The economic analysis in section I.B. of this release
discusses the primary economic impacts that may derive from the
amendments and new rules being adopted today.
---------------------------------------------------------------------------

    Relative to this baseline, Rule 17g-9 and the amendment to Rule
17g-2 will likely provide benefits. These new requirements should
result in higher levels of competency among NRSRO credit analysts,
which should result in higher quality credit ratings. The factors
enumerated in paragraph (b) of Rule 17g-9 could serve an investor
protection function by providing benchmarks that could be used by the
Commission and the NRSRO to evaluate whether a given NRSRO's standards
are reasonably designed to meet the objective that the NRSRO produce
accurate credit ratings in the classes of credit ratings for which the
NRSRO is registered. In particular, the first two factors should help
the Commission and the NRSRO evaluate the degree to which knowledge and
technical expertise with respect to data and models is emphasized in
the standards of an NRSRO. The latter two factors should help the
Commission and the NRSRO evaluate the degree to which expertise in
factors relevant to credit ratings and the complexity of obligors,
securities, or money market instruments are emphasized in the NRSRO's
standards of training for its credit analysts.
    The requirement in paragraph (c)(2) of Rule 17g-9 that at least one
individual with an appropriate level of experience in performing credit
analysis, but not less than three years, participates in the
determination of a credit rating should help achieve the objective that
an NRSRO produces accurate credit ratings. The requirement in paragraph
(c)(1) of Rule 17g-9 for periodic testing of an NRSRO's credit analysts
on their knowledge of the NRSRO's procedures and methodologies to
determine credit ratings in the classes and subclasses of credit
ratings for which the individual participates in determining credit
ratings should also enhance integrity and quality of the credit
ratings. Higher quality credit ratings should benefit those who use
credit ratings in making investment and credit-based decisions. The
requirement to document the standards will also help the NRSRO to
adhere to the standards.
    The record the NRSROs must retain under the amendment to Rule 17g-2
will be used by Commission examiners to evaluate whether a given
NRSRO's policies and procedures are reasonably designed to achieve the
objective that the NRSRO produces accurate credit ratings in the
classes of credit ratings for which it is registered and whether the
NRSRO is complying with the policies and procedures.

    Relative to the baseline, the amendments and new rule will result
in costs for NRSROs. NRSROs will incur one-time costs when establishing
and documenting the standards of training, experience, and competence
for NRSRO credit analysts and ongoing costs to update these standards
and conduct periodic testing. Based on analysis for purposes of the
PRA, the Commission estimates that Rule 17g-9 will result in total
industry-wide one-time costs to NRSROs of approximately $7,834,000 and
total industry-wide annual costs to NRSROs of approximately
$1,629,000.\1739\ Further, NRSROs will incur costs in conducting
periodic testing for knowledge of the credit rating process. The cost
of this testing will likely vary significantly across NRSROs and depend
on their size, the different types of credit ratings they issue, and
the complexity of their methodologies. However, based on analysis for
purposes of the PRA, the Commission estimates that Rule 17g-9 will
result in additional total industry-wide annual costs for NRSROs to
conduct periodic testing of their credit analysts of approximately
$5,990,000.\1740\
---------------------------------------------------------------------------

    \1739\ See section V.K. of this release (discussing
implementation and annual compliance considerations). The one-time
and annual costs are determined by monetizing internal hour burdens
and adding external costs identified in the PRA analysis in section
IV.D.8. of this release.
    \1740\ See section V.K. of this release (discussing
implementation and annual compliance considerations). The annual
costs are determined by monetizing internal hour burdens and adding
external costs identified in the PRA analysis in section IV.D.8. of
this release.
---------------------------------------------------------------------------

    Relative to the baseline, the amendments to Rule 17g-2 prescribing
retention requirements for the documentation of the standards will
result in costs to NRSROs. NRSROs already have recordkeeping systems in
place to comply with the recordkeeping requirements in Rule 17g-2
before today's amendments. Therefore, the recordkeeping costs of this
rule will be incremental to the costs associated with these existing
requirements. Specifically, the incremental costs will consist largely
of updating their record retention policies and procedures and
retaining and producing the additional record. Based on analysis for
purposes of the PRA, the Commission estimates that paragraph (b)(15) of
Rule 17g-2 and the amendment to paragraph (c) of Rule 17g-2 will result
in total industry-wide one-time costs to NRSROs of approximately
$12,000 and total industry-wide annual costs to NRSROs of approximately
$3,000.\1741\
---------------------------------------------------------------------------

    \1741\ See section V.K. of this release (discussing
implementation and annual compliance considerations). The one-time
and annual costs are determined by monetizing internal hour burdens
and adding external costs identified in the PRA analysis in section
IV.D.3. of this release.
---------------------------------------------------------------------------

    A possible additional cost is that the requirements could distort
the labor market for individuals with at least three years of
experience in performing credit analysis. For example, NRSROs may need
to pay a premium to retain such individuals, which may inhibit them
from moving to productive activity in other industries. The magnitude
of this cost is infeasible to estimate as the degree to which these
salaries may increase is unknown.
    The amendments and new rule should have a number of effects related
to efficiency, competition, and capital formation.\1742\ First, they
could improve the quality of credit ratings. As a result, users of
credit ratings could make more efficient investment decisions based on
this higher-quality information. Market efficiency could also improve
if this information is reflected in asset prices. Consequently, capital
formation could also improve as capital could flow to more efficient
uses with the benefit of this enhanced information. These amendments
also will result in costs, which may have a component that is fixed in
magnitude across NRSROs and does not depend on the size of an NRSRO.
Therefore, the operating costs per credit rating of smaller NRSROs may
increase relative to that of larger NRSROs, creating adverse effects on
competition. As a result of these amendments, the barriers to entry for
credit rating agencies to register as an NRSRO might be higher for
credit rating agencies, while some NRSROs, particularly smaller firms,
may decide to withdraw from registration as an NRSRO. These costs also
will depend on the complexity of operations within the NRSRO.
---------------------------------------------------------------------------

    \1742\ See section I.B.3. of this release (providing a broader
discussion of the potential impacts of the amendments and new rules
on efficiency, competition, and capital formation).
---------------------------------------------------------------------------

    There are reasonable alternatives to the requirements in the
amendments and new rule. First, the Commission or an independent entity
could provide standards for training and testing programs or administer
these programs as suggested by commenters.\1743\ As discussed earlier,
the Commission believes at this time that allowing NRSROs the
flexibility to design their own standards achieves an appropriate
balance between prescribing standards and allowing NRSROs to tailor the
standards to their business models, size, and rating methodologies,
which vary significantly across NRSROs and potential NRSRO applicants.
---------------------------------------------------------------------------

    \1743\ See Better Markets Letter; CFA/AFR Letter; COPERA Letter;
Davis Letter.
---------------------------------------------------------------------------

    Another alternative is that the Commission could make the
requirements of paragraph (c)(2) of Rule 17g-9 less restrictive. For
example, one commenter suggested that the Commission not require a
minimum number of years of experience for individuals participating in
the determination of credit ratings and that NRSROs should establish
their own requirements.\1744\ However, if NRSROs established a lower
requirement, this alternative could decrease the quality of credit
ratings by decreasing the level of expertise brought to determinations
of credit ratings. However, it could also decrease costs if it
eliminates the potential distortions to the labor market for analysts
with at least three years of experience discussed earlier.
---------------------------------------------------------------------------

    \1744\ See S&P Letter.
---------------------------------------------------------------------------

J. Universal Rating Symbols

    Section 938(a) of the Dodd-Frank Act provides that the Commission
shall require, by rule, each NRSRO to establish, maintain, and enforce
written policies and procedures that: (1) Assess the probability that
an issuer of a security or money market instrument will default, fail
to make timely payments, or otherwise not make payments to investors in
accordance with the terms of the security or money market instrument;
\1745\ (2) clearly define and disclose the meaning of any symbol used
by the NRSRO to denote a credit rating; \1746\ and (3) apply any symbol
described in item (2) in a manner that is consistent for all types of
securities and money market instruments for which the symbol is
used.\1747\ Section 938(b) of the Dodd-Frank Act provides that nothing
in section 938 shall prohibit an NRSRO from using distinct sets of
symbols to denote credit ratings for different types of securities or
money market instruments.\1748\
---------------------------------------------------------------------------

    \1745\ See Public Law 111-203, 938(a)(1).
    \1746\ See Public Law 111-203, 938(a)(2).
    \1747\ See Public Law 111-203, 938(a)(3).
    \1748\ See Public Law 111-203, 938(b).
---------------------------------------------------------------------------

    Further, section 939(h)(1) of the Dodd-Frank Act provides that the
Commission shall undertake a study on the feasibility and desirability
of:
     Standardizing credit rating terminology, so that all
credit rating agencies issue credit ratings using identical terms;
     standardizing the market stress conditions under which
ratings are evaluated;
     requiring a quantitative correspondence between credit
ratings

and a range of default probabilities and loss expectations under
standardized conditions of economic stress; and
     standardizing credit rating terminology across asset
classes, so that named ratings correspond to a standard range of
default probabilities and expected losses independent of asset class
and issuing entity.\1749\
---------------------------------------------------------------------------

    \1749\ See Public Law 111-203, 939(h)(1).
---------------------------------------------------------------------------

    Section 939(h)(2) of the Dodd-Frank Act provides that the
Commission shall submit to Congress a report containing the findings of
the study and the recommendations, if any, of the Commission with
respect to the study.\1750\ The Commission submitted the staff report
to Congress in September 2012.\1751\
---------------------------------------------------------------------------

    \1750\ See Pub. L. 111-203, 939(h)(2).
    \1751\ See 2012 Staff Report on Credit Rating Standardization.
---------------------------------------------------------------------------

    Finally, section 15E(c)(2) of the Exchange Act provides, in
pertinent part, that the Commission may not regulate the substance of
credit ratings or the procedures and methodologies by which any NRSRO
determines credit ratings.\1752\
---------------------------------------------------------------------------

    \1752\ See 15 U.S.C. 78o-7(c)(2).
---------------------------------------------------------------------------

    The Commission proposed to implement section 938(a) of the Dodd-
Frank Act by proposing paragraph (b) of Rule 17g-8 and by adding
paragraph (b)(14) to Rule 17g-2.\1753\
---------------------------------------------------------------------------

    \1753\ See paragraph (b) of Rule 17g-8, as proposed; Nationally
Recognized Statistical Rating Organizations, 76 FR at 33543. See
also paragraph (b)(14) of Rule 17g-2, as proposed; Nationally
Recognized Statistical Rating Organizations, 76 FR at 33539.
---------------------------------------------------------------------------

1. Paragraph (b) of New Rule 17g-8
    Section 938(a) of the Dodd-Frank Act prescribes the policies and
procedures the Commission shall require, by rule, of each NRSRO.\1754\
Consequently, paragraph (b) of Rule 17g-8, as proposed, was modeled on
the statutory text.\1755\
---------------------------------------------------------------------------

    \1754\ See Public Law 111-203, 938(a).
    \1755\ See paragraph (b) of proposed Rule 17g-8; Nationally
Recognized Statistical Rating Organizations, 76 FR at 33480-33481,
33543.
---------------------------------------------------------------------------

    As proposed, the prefatory text of paragraph (b) provided that an
NRSRO must establish, maintain, enforce, and document policies and
procedures that are reasonably designed to achieve three objectives
identified in paragraphs (b)(1), (2), and (3).\1756\ The prefatory text
of paragraph (b), as proposed, mirrored the prefatory text of section
938(a) of the Dodd-Frank Act, except that the proposed rule text
included the word ``document'' so that the rule, as proposed, would
require the NRSRO to document the policies and procedures it
establishes, maintains, and enforces.\1757\ The requirement was added
so that an NRSRO would need to set forth its policies and procedures in
writing.\1758\ This requirement, coupled with the Commission's proposed
amendment to Rule 17g-2, was designed, among other things, to make the
policies and procedures more readily available to Commission
examiners.\1759\ Documenting the policies and procedures in writing
also will promote the NRSRO's compliance with them. For all these
reasons, the Commission is adopting the prefatory text as
proposed.\1760\
---------------------------------------------------------------------------

    \1756\ See prefatory text of paragraph (b) of Rule 17g-8, as
proposed.
    \1757\ See Public Law 111-203, 938(a).
    \1758\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33480.
    \1759\ See id.
    \1760\ See prefatory text of paragraph (b) of Rule 17g-8.
---------------------------------------------------------------------------

    Paragraph (b)(1) of Rule 17g-8, as proposed, would require the
NRSRO to have policies and procedures reasonably designed to assess the
probability that an issuer of a security or money market instrument
will default, fail to make timely payments, or otherwise not make
payments to investors in accordance with the terms of the security or
money market instrument.\1761\ The text of this provision mirrored the
text of section 938(a)(1) of the Dodd-Frank Act.\1762\ One commenter
stated that the paragraph, as proposed, was ``sufficiently explicit.''
\1763\ The Commission is adopting paragraph (b)(1) of Rule 17g-8 as
proposed.\1764\
---------------------------------------------------------------------------

    \1761\ See proposed paragraph (b)(1) of Rule 17g-8.
    \1762\ See Public Law 111-203, 938(a)(1).
    \1763\ See S&P Letter.
    \1764\ See paragraph (b)(1) of Rule 17g-8.
---------------------------------------------------------------------------

    The Commission noted in the proposing release that section
15E(s)(3)(B)(ii) of the Exchange Act provides that the Commission's
rule requiring an NRSRO to generate a form to disclose information with
the publication of a credit rating requires disclosure of information
on the content of the credit rating, including: (1) The historical
performance of the credit rating; and (2) the expected probability of
default and the expected loss in the event of default.\1765\ As
discussed above in section II.G.3. of this release, the Commission has
implemented this requirement in paragraph (a)(1)(ii)(L) of Rule 17g-7,
as adopted.\1766\ The Commission continues to believe that paragraph
(b)(1) of Rule 17g-8, as adopted, will work in conjunction with the
requirement in paragraph (a)(1)(ii)(L) of Rule 17g-7, as adopted, in
that the policies and procedures required under paragraph (b)(1) of
Rule 17g-8 will assist the NRSRO in generating the information required
to be disclosed pursuant to paragraph (a)(1)(ii)(L) of Rule 17g-7. The
information produced by an NRSRO's policies and procedures under
paragraph (b)(1) is expected to be relevant to the credit analyses
performed by the NRSRO.
---------------------------------------------------------------------------

    \1765\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33480; 15 U.S.C. 78o-7(s)(3)(B)(ii).
    \1766\ See paragraph (a)(1)(ii)(L) of Rule 17g-7 (providing that
the form to accompany a credit rating must include information on
the content of the credit rating, including: (1) If applicable, the
historical performance of the credit rating; and (2) the expected
probability of default and the expected loss in the event of
default).
---------------------------------------------------------------------------

    Paragraph (b)(2) of Rule 17g-8, as proposed, would require the
NRSRO to establish, maintain, enforce, and document policies and
procedures reasonably designed to clearly define each symbol, number,
or score in the rating scale used by the NRSRO to denote a credit
rating category and notches within a category for each class and
subclass of credit ratings for which the NRSRO is registered and to
include such definitions in Exhibit 1 to Form NRSRO.\1767\ This
proposed provision would implement section 938(a)(2) of the Dodd-Frank
Act.\1768\ One commenter stated that the paragraph, as proposed, was
``sufficiently explicit.'' \1769\
---------------------------------------------------------------------------

    \1767\ See proposed paragraph (b)(2) of Rule 17g-8.
    \1768\ See Public Law 111-203, 938(a)(2).
    \1769\ See S&P Letter.
---------------------------------------------------------------------------

    The Commission is adopting paragraph (b)(2) of Rule 17g-8
substantially as proposed.\1770\ As adopted, the paragraph provides
that an NRSRO must establish, maintain, enforce, and document policies
and procedures that are reasonably designed to clearly define each
symbol, number, or score in the rating scale used by the NRSRO to
denote a credit rating category and notches within a category for each
class of credit ratings for which the NRSRO is registered (including
subclasses within each class) and to include such definitions in
Exhibit 1 to Form NRSRO.\1771\
---------------------------------------------------------------------------

    \1770\ See paragraph (b)(2) of Rule 17g-8.
    \1771\ See id. The text of paragraph (b)(2), as proposed,
referred to ``each class and subclass of credit ratings'' for which
the NRSRO is registered. As discussed above in section II.I.1. of
this release, the Commission has modified paragraph (a) of Rule 17g-
9 to, among other things, remove a reference to an NRSRO being
registered in a subclass of credit ratings. Consistent with this
modification, the Commission is modifying paragraph (b)(2) from the
proposal to remove the reference to being registered in a subclass
of credit ratings. However, the Commission added a parenthetical to
the rule text to include a reference to ``subclasses'' of credit
ratings.
---------------------------------------------------------------------------

    In the proposing release, the Commission stated that paragraph
(b)(2) of Rule 17g-8 would work in conjunction with the requirements to

disclose definitions of symbols, numbers, or scores that denote credit
rating categories and notches within categories in Exhibit 1 to Form
NRSRO.\1772\ As discussed above in section II.E.1. of this release,
Exhibit 1 requires, among other things, that an NRSRO clearly define,
after the presentation of all applicable Transition/Default Matrices,
each symbol, number, or score in the rating scale used by the NRSRO to
denote a credit rating category and notches within a category for each
class and subclass of credit ratings in any Transition/Default Matrix
presented in the Exhibit.\1773\ Consequently, taken together, paragraph
(b)(2) of Rule 17g-8, as adopted, and the instructions for Exhibit 1 to
Form NRSRO require an NRSRO to have policies and procedures that
clearly define the meaning of each symbol, number, or score used by the
NRSRO to denote a credit rating and to disclose those meanings in
Exhibit 1 where investors and other users of credit ratings can find
them.
---------------------------------------------------------------------------

    \1772\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33480-33481.
    \1773\ See paragraph (2) of the instructions for Exhibit 1.
---------------------------------------------------------------------------

    Paragraph (b)(3) of Rule 17g-8, as proposed, would require the
NRSRO to have policies and procedures reasonably designed to apply any
symbol, number, or score defined pursuant to paragraph (b)(2) of Rule
17g-8 in a manner that is consistent for all types of obligors,
securities, and money market instruments for which the symbol, number,
or score is used.\1774\ This provision mirrored the text of section
938(a)(3) of the Dodd-Frank Act, except that the proposed rule text
added the term ``obligors.'' \1775\ The Commission proposed this
addition in order to apply the provisions of paragraph (b)(3), as
proposed, to credit ratings of obligors as entities in addition to
credit ratings of securities and money market instruments.\1776\ One
commenter stated that the paragraph, as proposed, was ``sufficiently
explicit.'' \1777\ The Commission is adopting paragraph (b)(3) of Rule
17g-8 as proposed.\1778\
---------------------------------------------------------------------------

    \1774\ See paragraph (b)(3) of Rule 17g-8, as proposed.
    \1775\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33481.
    \1776\ See id. at 33481.
    \1777\ See S&P Letter.
    \1778\ See paragraph (b)(3) of Rule 17g-8.
---------------------------------------------------------------------------

    The Commission received comments regarding paragraph (b) of
proposed Rule 17g-8.\1779\ One NRSRO stated that it supported the
proposal and that it ``is generally consistent'' with what the NRSRO
``does today.'' \1780\ Another NRSRO stated, as noted above, that the
rule text was ``sufficiently explicit'' and also stated that it did not
support the addition of further detail regarding the objectives of the
rule, and that additional requirements with respect to the rule may
``interfere with the analytical independence of NRSROs in violation of
Section 15E(c)(2) of the Exchange Act.'' \1781\
---------------------------------------------------------------------------

    \1779\ See AFSCME Letter; CFA/AFR Letter; CFA II Letter; COPERA
Letter; DBRS Letter; Moody's Letter; S&P Letter.
    \1780\ See DBRS Letter.
    \1781\ See S&P Letter.
---------------------------------------------------------------------------

    Several commenters were critical of the proposal.\1782\ One
commenter stated that paragraph (b) of proposed Rule 17g-8 did not
achieve the objective of section 938 of the Dodd-Frank Act.\1783\ This
commenter raised concerns about how municipalities are assigned credit
ratings as compared to other types of obligors and recommended that the
Commission ``adopt language that would clearly require NRSROs to apply
symbols consistently across classes and subclasses of credit ratings.''
\1784\ Similarly, another commenter stated that because the proposed
rule does not ``require that rating symbols would have to be designed
to clearly reflect the potential degree of default,'' the rule will not
``correct the discrepancy between what AAA means in the municipal or
corporate debt context and what it means in the structured product
context.'' \1785\ One commenter stated that the Commission should re-
propose the rule and, in doing so, require NRSROs ``to specify an
acceptable range of default probabilities and corresponding loss
expectations for each asset class and rating symbol.'' \1786\ The
commenter also provided its analysis of NRSROs' credit rating
performance statistics as disclosed in Exhibit 1 to Form NRSRO through
2012, which the commenter stated shows that ``performance across asset
classes has not been comparable.'' \1787\
---------------------------------------------------------------------------

    \1782\ See AFSCME Letter; CFA/AFR Letter; CFA II Letter; COPERA
Letter.
    \1783\ See AFSCME Letter. See also Committee on Banking,
Housing, and Urban Affairs, U.S. Senate, The Restoring American
Financial Stability Act of 2010, Committee Report No. 111-176, at
124 (Apr. 30, 2010), available at http://www.gpo.gov/fdsys/pkg/CRPT-111srpt176/pdf/CRPT-111srpt176.pdf.
    \1784\ See AFSCME Letter (``An AAA rating for a municipal bond
should indicate the same likelihood of default or non-payment as an
AAA rating for any other kind of security. Failure to do so would
eviscerate Section 938 and continue to burden municipal issuers
unfairly.'').
    \1785\ See COPERA Letter.
    \1786\ See CFA II Letter.
    \1787\ See CFA II Letter. See also CFA/AFR Letter (citing
findings that the 5-year default rate prior to 2005 of one NRSRO's
ratings at the Baa notch was 0.l% for municipal bonds, 2.2% for
corporate bonds, and 24% for CDOs).
---------------------------------------------------------------------------

    The Commission shares the concerns raised by these commenters that
the historical performance of credit ratings at the same notch in a
global rating scale of some NRSROs has been significantly different for
certain classes of credit ratings, particularly the historical
performance of credit ratings of structured finance products. The
Commission staff noted this inconsistency of performance in its 2012
report on credit rating standardization, which was submitted to
Congress as required by section 939(h)(2) of the Dodd-Frank Act.\1788\
---------------------------------------------------------------------------

    \1788\ See 2012 Staff Report on Credit Rating Standardization,
pp. 37-38. See also Pub. L. 111-203, 939(h)(2).
---------------------------------------------------------------------------

    In drafting paragraph (b) of Rule 17g-8, the Commission has sought
to address this concern in a manner that strikes an appropriate balance
between adopting a measure designed to address inconsistencies in the
performance of credit ratings in different classes to which an NRSRO
applies the same rating scale and definitions with the prohibition in
section 15E(c)(2) of the Exchange Act under which the Commission may
not regulate the substance of credit ratings or the procedures and
methodologies by which any NRSRO determines credit ratings.\1789\ In
seeking to strike this balance, the Commission modeled the rule closely
on the text of section 938(a) of the Dodd-Frank Act.\1790\ This section
provides, in pertinent part, that the Commission shall require, by
rule, each NRSRO to establish, maintain, and enforce written policies
and procedures to, among other things, apply any defined credit rating
symbol in a manner that is consistent for all types of securities and
money market instruments for which the symbol is used.\1791\ The
Commission also considered the fact that section 939(h)(1) of the Dodd-
Frank Act required the Commission to study certain matters relating to
credit rating standardization (as opposed to mandating rulemaking),
including the feasibility and desirability of standardizing credit
rating terminology across asset classes, so that named ratings
correspond to a standard range of default probabilities and expected
losses independent of asset class and issuing entity.\1792\ Comments
received in response to the study argued that that the Commission does
not have the authority to require credit rating standardization
because, by statute, the Commission may not regulate the methodologies
NRSROs use to

determine credit ratings.\1793\ Moreover, as required under section
939(h)(2) of the Dodd-Frank Act, the Commission was required to report
its findings to Congress upon completion of the study.\1794\ The
Commission submitted a staff report to Congress in 2012 and the
findings in the report have not resulted in any legislative changes
relating to credit rating standardization at this time.\1795\
---------------------------------------------------------------------------

    \1789\ See 15 U.S.C. 78o-7(c)(2).
    \1790\ See Public Law 111-203, 938(a).
    \1791\ See id.
    \1792\ See Public Law 111-203, 939(h)(1).
    \1793\ See 2012 Staff Report on Credit Rating Standardization,
pp. 2, 12-14 (summarizing commenters' views).
    \1794\ See Public Law 111-203, 939(h)(2).
    \1795\ See 2012 Staff Report on Credit Rating Standardization.
---------------------------------------------------------------------------

    The Commission believes at this time that paragraph (b) of Rule
17g-8, as adopted, implements section 938(a) of the Dodd-Frank Act in a
manner that appropriately balances relevant concerns. The rule requires
NRSROs to have policies and procedures that are reasonably designed to
apply the definition of any credit symbol, number, or score in a manner
that is consistent for all types of obligors, securities, and money
market instruments for which the symbol, number, or score is
used.\1796\ An NRSRO--in establishing, maintaining, and enforcing these
policies and procedures--will need to take into consideration how it
applies its rating scales and definitions to classes of credit ratings
and the rating methodologies it uses to determine credit ratings in
those classes. Moreover, the prefatory text of the rule requires that
the policies and procedures must be reasonably designed.\1797\
Consequently, Rule 17g-8, as adopted, requires an NRSRO to have
policies and procedures reasonably designed to achieve the objective of
consistency without specifically mandating how an NRSRO's credit
ratings and rating methodologies must be designed to achieve this
consistency.
---------------------------------------------------------------------------

    \1796\ See paragraphs (b)(2) and (3) of Rule 17g-8.
    \1797\ See prefatory text of paragraph (b) of Rule 17g-8.
---------------------------------------------------------------------------

    Commenters raised concerns about how the Commission would enforce
Rule 17g-8, as proposed.\1798\ One commenter stated that ``the
Commission fails to make clear how it will enforce the requirement that
ratings be based on an assessment of the likelihood of default and
applied consistently across different rating categories.'' \1799\ In
particular, the commenter asked what standards the Commission will use
to determine whether ratings are being applied consistently across
categories of ratings and what steps will NRSROs be required to take if
their performance statistics reveal discrepancies in the performance of
ratings across different rating categories.\1800\ The commenter that
suggested that the Commission re-propose the rule stated that, if
ratings of certain asset classes diverge significantly from the
expected norms, the Commission should require the NRSRO to identify the
source of the error that led to the divergence and what it is doing to
remedy the problem and ``where the divergence in ratings performance
across asset classes persists, the Commission should require the NRSRO
to adjust its methodology--which in turn could affect its outstanding
and prospective ratings--to correct the problem.'' \1801\ The commenter
further stated that a different system of symbols should be used for
certain asset classes ``where comparability cannot be achieved.''
\1802\ In addition, the commenter stated that the Commission should
hold NRSROs accountable if they fail to achieve a high degree of
ratings comparability between asset classes by, for example, seeking
fines or the disgorgement of profits or suspending or revoking the
NRSRO's registration for the affected asset class.\1803\ In contrast,
an NRSRO stated that ``because credit ratings reflect forward-looking
opinions, we would be concerned about any attempt to judge an NRSRO's
adherence to this proposed rule based on an analysis of its ratings
performance over any defined period of time'' and that ``an NRSRO's
compliance with this rule should be measured by whether the NRSRO has
policies and procedures in place to promote comparability of ratings
across the asset classes it rates and has adhered to such policies and
procedures.'' \1804\
---------------------------------------------------------------------------

    \1798\ See CFA/AFR Letter; CFA II Letter; S&P Letter.
    \1799\ See CFA/AFR Letter.
    \1800\ See id.
    \1801\ See id.
    \1802\ See id.
    \1803\ See CFA II Letter.
    \1804\ See S&P Letter.
---------------------------------------------------------------------------

    In response to these comments, the Commission notes that paragraph
(b) of Rule 17g-8, as adopted, sets forth an objective: That the
definition of any credit rating symbol, number, or score is applied in
a manner that is consistent for all types of obligors, securities, and
money market instruments for which the symbol, number, or score is
used.\1805\ Further, the rule provides that an NRSRO must establish,
maintain, enforce, and document policies and procedures that are
reasonably designed to achieve this objective.\1806\ Consequently, in
enforcing the rule, the Commission will consider whether the NRSRO is
achieving the objective through the use of established procedures and
methodologies that are reasonably designed. In response to the
commenters, the Commission agrees that the performance of credit
ratings (transition and default statistics) in each class of credit
ratings for which the NRSRO applies the same rating scale and
definitions will be relevant to considering whether the objective of
consistency is being met.\1807\ If the Commission staff believes the
objective of consistency is not being met, the staff will need to
consider whether the NRSRO has established, maintained, enforced, and
documented policies and procedures that are reasonably designed to
achieve this objective before making a recommendation to the Commission
that the Commission institute an enforcement action. The staff may also
bring a potential violation to the attention of the NRSRO. In response
to the commenters, the Commission notes that if appropriate the
Commission can take enforcement action for such a violation.\1808\
Finally, an NRSRO that has not complied with paragraph (b) of Rule 17g-
8 may take steps to adjust its rating methodology or use different
rating scales and definitions for different classes of credit ratings,
as suggested by one of the commenters, to the extent doing so is
necessary and appropriate to address the failure.\1809\
---------------------------------------------------------------------------

    \1805\ See paragraphs (b)(2) and (3) of Rule 17g-8.
    \1806\ See prefatory text of paragraph (b) of Rule 17g-8.
    \1807\ See S&P Letter.
    \1808\ See CFA II Letter. As discussed above in section II.D. of
this release, the Exchange Act provides the Commission with
authority to impose a wide range of fines, penalties, and other
sanctions on NRSROs for violations of any section of the Exchange
Act and the rules under the Exchange Act. See 15 U.S.C. 78o-7(d); 15
U.S.C. 78u; 15 U.S.C. 78u; 15 U.S.C. 78u-2; 15 U.S.C. 78u-3; 15
U.S.C. 78ff.
    \1809\ See CFA II Letter (suggesting the NRSRO adjust its rating
methodology or use different rating scales and definitions).
---------------------------------------------------------------------------

2. Amendment to Rule 17g-2
    The Commission proposed adding paragraph (b)(14) of Rule 17g-2 to
identify the policies and procedures an NRSRO must establish, maintain,
enforce, and document pursuant to paragraph (b) of Rule 17g-8 as a
record that must be retained.\1810\ As a result, the policies and
procedures would be subject to the record retention and production
requirements in paragraphs (c) through (f) of Rule 17g-2. One NRSRO
stated that it ``supports'' the amendment to Rule 17g-2.\1811\ The
Commission is adding paragraph (b)(14)

to Rule 17g-2 as proposed.\1812\ This will provide a means for the
Commission to monitor the NRSROs' compliance with paragraph (b) of Rule
17g-8 as a record. The record must be retained until three years after
the date the record is replaced with an updated record in accordance
with the amendment to paragraph (c) of Rule 17g-2 discussed above in
section II.A.2. of this release.\1813\
---------------------------------------------------------------------------

    \1810\ See paragraph (b)(14) 0f Rule 17g-2, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33481.
    \1811\ See DBRS Letter.
    \1812\ See paragraph (b)(14) of Rule 17g-2. Section 17(a)(1) of
the Exchange Act requires an NRSRO to make and keep such records,
and make and disseminate such reports, as the Commission prescribes
by rule as necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the Exchange
Act. 15 U.S.C. 78q(a)(1).
    \1813\ See paragraphs (b)(14) and (c) of Rule 17g-2.
---------------------------------------------------------------------------

3. Economic Analysis
    This section builds on the economic analysis in section I.B. of
this release by presenting a focused analysis of the potential economic
effects that may derive from the amendments and new rule regarding
NRSRO credit rating symbols, numbers, or scores.\1814\ The economic
baseline that existed before today's new rules was one in which an
NRSRO was not required to establish, maintain, enforce, document, and
retain records of policies and procedures reasonably designed to:
Assess the probability that an issuer of a security or money market
instrument will default, fail to make timely payments, or otherwise not
make payments to investors in accordance with the terms of the security
or money market instrument; clearly define each symbol, number, or
score in the NRSRO's rating scale for each class of credit ratings
(including subclasses within each class) for which the NRSRO is
registered; or to apply any such symbol, number, or score in a manner
that is consistent for all types of obligors, securities, and money
market instruments for which the symbol, number, or score is used.
However, the instructions for Exhibit 1 to Form NRSRO required an NRSRO
or a credit rating agency applying for registration as an NRSRO to
``define the credit rating categories, notches, grades, and rankings
used'' by the NRSRO or applicant.\1815\
---------------------------------------------------------------------------

    \1814\ The economic analysis in section I.B. of this release
discusses the primary economic impacts that may derive from the
amendments and new rules being adopted today.
    \1815\ Before today's amendments, paragraph (i) of Rule 17g-1
required an NRSRO to make Form NRSRO and Exhibits 1 through 9
publicly available on its Web site ``or through another comparable,
readily accessible means.''
---------------------------------------------------------------------------

    One academic study finds that performance within comparable rating
categories has been inconsistent across asset classes from 1980 until
2010.\1816\ In addition, it has been reported that five-year default
rates for CDOs at the lowest investment-grade rating as determined by a
large NRSRO were roughly ten times higher from 1993 to 2005 than for
corporate bonds at the same rating for the same NRSRO from 1983 to
2005.\1817\ Another academic study concludes that having new structured
products rated similarly to corporate bonds created the illusion of
comparability with existing ``single-name'' securities and provided
access to a large pool of potential buyers in the years prior to the
financial crisis.\1818\ This academic study also finds evidence
suggesting that differences in observed default rates between
structured products and comparable corporate bonds may be explained by
differences in the types of risk to which these instruments are
exposed.\1819\
---------------------------------------------------------------------------

    \1816\ See Jess Cornaggia, Kimberly J. Cornaggia, and John E.
Hund, Credit Ratings across Asset Classes (2014), available at
http://papers.ssrn.com/sol3/papers.cfm?abstractid=1909091.
    \1817\ See Charles Calomiris and Joseph Mason, Reclaim Power
from the Ratings Agencies, Financial Times (Aug. 24, 2007), p. 11.
    \1818\ See Coval, Jurek, and Stafford, The Economics of
Structured Finance.
    \1819\ See id. (A ``feature of the securitization process is
that it substitutes risks that are largely diversifiable for risks
that are highly systematic. As a result, securities produced by
structured finance activities have far less chance of surviving a
severe economic downturn than traditional corporate securities of
equal rating.'').
---------------------------------------------------------------------------

    Relative to this baseline, paragraph (b) of Rule 17g-8 should
provide benefits. In particular, it should promote greater consistency
by NRSROs in terms of assigning credit ratings across different classes
of credit ratings and, thereby, promote the information value of credit
ratings as assessments of relative creditworthiness for the benefit of
users of credit ratings. The requirement that an NRSRO have policies
and procedures reasonably designed to assess the probability that an
issuer will default, fail to make timely payments, or otherwise not
make payments to investors should facilitate this outcome.
Specifically, this assessment may provide additional inputs in terms of
the relative creditworthiness of obligors and issuers, which may be
used to inform credit ratings if deemed appropriate by the NRSRO, and
thereby improve the quality of credit ratings as assessments of
relative creditworthiness. The requirement that an NRSRO have policies
and procedures to disclose the meaning of credit rating symbols,
numbers, and scores could benefit users of credit ratings by promoting
a better understanding of credit rating terminology and allowing these
parties to better compare the various credit ratings issued by a single
NRSRO and credit ratings across NRSROs.
    The records the NRSRO must retain under the amendments to Rule 17g-
2 will be used by Commission examiners to evaluate whether a given
NRSRO's policies and procedures are reasonably designed and the NRSRO
is adhering to them. Setting forth the policies and procedures in
writing also will promote adherence to them by the NRSRO.
    Relative to the baseline, paragraph (b) of Rule 17g-8 will result
in costs for NRSROs. NRSROs will need to expend resources to develop
the policies and procedures required by the rule, to document, comply
with, and enforce them, and to update them periodically as appropriate.
Based on analysis for purposes of the PRA, the Commission estimates
that paragraph (b) of Rule 17g-8 will result in total industry-wide
one-time costs to NRSROs of approximately $566,000 and total industry-
wide annual costs to NRSROs of approximately $142,000.\1820\
---------------------------------------------------------------------------

    \1820\ See section V.L. of this release (discussing
implementation and annual compliance considerations). The one-time
and annual costs are determined by monetizing internal hour burdens
and adding external costs identified in the PRA analysis in section
IV.D.3. of this release.
---------------------------------------------------------------------------

    NRSROs may also incur costs expending resources to modify credit
rating symbols, numbers, scores, and their definitions in order to
conform to the requirement that these symbols, numbers, and scores be
applied consistently across applicable asset classes. For example, one
NRSRO claimed that the new rule would require some NRSROs to change
their rating symbol systems or how they apply their symbols to certain
categories of obligors or obligations.\1821\ However, another NRSRO
stated that the new rule ``is generally consistent'' with what it
``does today.'' \1822\ This cost will likely vary significantly across
NRSROs and depend on the number of asset classes rated and the degree
to which their current symbols, numbers, and scores are applied
consistently.
---------------------------------------------------------------------------

    \1821\ See Moody's Letter.
    \1822\ See DBRS Letter.
---------------------------------------------------------------------------

    Relative to the baseline, the amendments to Rule 17g-2 prescribing
retention requirements for the documentation of the policies and
procedures will result in costs to NRSROs. NRSROs already have
recordkeeping systems in place to comply with the recordkeeping
requirements in Rule 17g-2 before today's amendments. Therefore, the
recordkeeping costs of this rule will be incremental to the costs
associated with

these existing requirements. Specifically, the incremental costs will
consist largely of updating their record retention policies and
procedures and retaining and producing the additional record. Based on
analysis for purposes of the PRA, the Commission estimates that
paragraph (b)(14) of Rule 17g-2 and the amendment to paragraph (c) of
Rule 17g-2 will result in total industry-wide one-time costs to NRSROs
of approximately $12,000 and total industry-wide annual costs to NRSROs
of approximately $3,000.\1823\
---------------------------------------------------------------------------

    \1823\ See section V.L. of this release (discussing
implementation and annual compliance considerations). The one-time
and annual costs are determined by monetizing internal hour burdens
and adding external costs identified in the PRA analysis in section
IV.D.3. of this release.
---------------------------------------------------------------------------

    As an additional possible cost, the final rule has the potential to
decrease the quality of credit ratings in circumstances where the
subjective judgment of participants in the rating process could improve
the quality of ratings. In order to ensure that rating symbols,
numbers, and scores are applied consistently across applicable ratings
in compliance with these requirements, an NRSRO may establish credit
rating procedures and methodologies that diminish the ability of
participants in the rating process to exercise subjective judgment. The
credit ratings may not therefore benefit fully from the expertise of
the participants in the rating process. These amendments may also
increase costs associated with understanding the definition of rating
symbols, numbers, and scores. In order to ensure that rating symbols,
numbers, and scores are applied consistently across applicable ratings
in compliance with these requirements, an NRSRO may create different
rating symbols, numbers, and scores for different asset classes. As a
result, users of credit ratings may need to expend more effort in
understanding a greater number of definitions.
    The amendments and new rule should have a number of effects related
to efficiency, competition, and capital formation.\1824\ First, they
could improve the quality and consistency of credit ratings as well as
increasing the information available to users of credit ratings
regarding the meaning of rating symbols, numbers, and scores. As a
result, users of credit ratings could make more efficient investment
decisions based on this higher-quality information. Market efficiency
could also improve if this information is reflected in asset prices.
Consequently, capital formation also could improve as capital could
flow to more efficient uses with the benefit of this enhanced
information. Alternatively, the quality of credit ratings may decrease
in certain circumstances if an NRSRO establishes credit rating
procedures and methodologies that diminish the ability of participants
in the rating process to exercise subjective judgment. In this case,
the quality of credit ratings may decrease, which could decrease the
efficiency of investment decisions made by users of credit ratings.
Market efficiency and capital formation also may be adversely impacted
if lower quality information is reflected in asset prices, which may
impede the flow of capital to efficient uses. These amendments will
result in costs, some of which may have a component that is fixed in
magnitude across NRSROs, and does not vary with the size of the NRSRO.
Therefore, the operating costs per credit rating of smaller NRSROs may
increase relative to that of larger NRSROs, creating adverse effects on
competition. As a result of these amendments, the barriers to entry for
credit rating agencies to register as an NRSRO might be higher for
credit rating agencies, while some NRSROs, particularly smaller firms,
may decide to withdraw from registration as an NRSRO.
---------------------------------------------------------------------------

    \1824\ See section I.B.3. of this release (providing a broader
discussion of the potential impacts of the amendments and new rules
on efficiency, competition, and capital formation).
---------------------------------------------------------------------------

K. Annual Report of Designated Compliance Officer

    Section 932(a)(5) of the Dodd-Frank Act amended section 15E(j) of
the Exchange Act to re-designate paragraph (j) as paragraph (j)(1) and
to add paragraphs (j)(2) through (j)(5).\1825\ Section 15E(j)(1) of the
Exchange Act contains a self-executing provision that requires that an
NRSRO designate an individual (the ``designated compliance officer'')
responsible for administering the policies and procedures that are
required to be established pursuant to sections 15E(g) and (h) of the
Exchange Act,\1826\ and for compliance with the securities laws and the
rules and regulations under the securities laws, including those
promulgated by the Commission under section 15E of the Exchange
Act.\1827\ Sections 15E(j)(2) through (4) of the Exchange Act contain
self-executing requirements with respect to, among other things, the
activities, duties, and compensation of the designated compliance
officer.\1828\
---------------------------------------------------------------------------

    \1825\ See Public Law 111-203, 932(a)(5); 15 U.S.C. 78o-7(j)(1)
through (5).
    \1826\ See 15 U.S.C. 78o-7(g) (``Prevention of misuse of
nonpublic information''); 15 U.S.C. 78o-7(h) (``Management of
conflicts of interest'').
    \1827\ See 15 U.S.C. 78o-7(j)(1).
    \1828\ See 15 U.S.C. 78o-7(j)(1) through (4).
---------------------------------------------------------------------------

    Section 15E(j)(5)(A) of the Exchange Act contains a self-executing
requirement that the designated compliance officer must submit to the
NRSRO an annual report on the compliance of the NRSRO with the
securities laws and the policies and procedures of the NRSRO that
includes: (1) A description of any material changes to the code of
ethics and conflict of interest policies of the NRSRO; and (2) a
certification that the report is accurate and complete.\1829\ Section
15E(j)(5)(B) of the Exchange Act contains a self-executing requirement
that the NRSRO shall file the report required under section
15E(j)(5)(A) together with the financial report that is required to be
submitted to the Commission under section 15E of the Exchange
Act.\1830\
---------------------------------------------------------------------------

    \1829\ See 15 U.S.C. 78o-7(j)(5)(A).
    \1830\ See 15 U.S.C. 78o-7(j)(5)(B).
---------------------------------------------------------------------------

    Section 15E(k) of the Exchange Act provides that each NRSRO shall,
on a confidential basis, file with the Commission, at intervals
determined by the Commission, such financial statements, certified (if
required by the rules or regulations of the Commission) by an
independent public accountant, and information concerning its financial
condition, as the Commission, by rule, may prescribe as necessary or
appropriate in the public interest or for the protection of
investors.\1831\ The Commission implemented section 15E(k) by adopting
Rule 17g-3.\1832\ Therefore, under the self-executing requirement in
section 15E(j)(5)(B) of the Exchange Act, an NRSRO must file the report
of the designated compliance officer with the reports required to be
filed with the Commission pursuant to Rule 17g-3.\1833\
---------------------------------------------------------------------------

    \1831\ The Dodd-Frank Act replaced the phrase ``furnish to the
Commission'' with the phrase ``file with the Commission'' in section
15E(k) of the Exchange Act. See 15 U.S.C. 78o-7(k).
    \1832\ See 17 CFR 240.17g-3; see also Oversight of Credit Rating
Agencies Registered as Nationally Recognized Statistical Rating
Organizations, 72 FR at 33590-33593.
    \1833\ See 15 U.S.C. 78o-7(j)(5)(B); 15 U.S.C. 78o-7(k); 17 CFR
240.17g-3.
---------------------------------------------------------------------------

    Before today's amendments, paragraph (a) of Rule 17g-3 required an
NRSRO to furnish five or, in some cases, six separate reports within
ninety days after the end of the NRSRO's fiscal year and identified the
reports that must be furnished.\1834\ The first report--on the

NRSRO's financial statements--must be audited; the remaining reports
may be unaudited.
---------------------------------------------------------------------------

    \1834\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33481-33482. As discussed above in section
II.A.3. of this release, an NRSRO must file an additional internal
controls report and, as discussed below, an NRSRO must file the
report of the designated compliance officer. See paragraphs (a)(7)
and (a)(8) of Rule 17g-3. Consequently, an NRSRO must now file seven
or, in some cases, eight reports.
---------------------------------------------------------------------------

1. Amendment to Rule 17g-3
    The Commission proposed adding paragraph (a)(8) to Rule 17g-3 to
identify the report on the compliance of the NRSRO with the securities
laws and the policies and procedures of the NRSRO required to be filed
with the Commission pursuant to section 15E(j)(5)(B) of the Exchange
Act as a report that must be filed with the other reports required
under Rule 17g-3.\1835\ Paragraph (a)(8) of Rule 17g-3 would provide
that the report would be ``unaudited.'' \1836\ As stated above, section
15E(j)(5)(A)(ii) of the Exchange Act provides that the designated
compliance officer must certify that the report is accurate and
complete.
---------------------------------------------------------------------------

    \1835\ See paragraph (a)(8) of Rule 17g-3, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33481-33482, 33539.
    \1836\ See paragraph (a)(8) of Rule 17g-3, as proposed.
---------------------------------------------------------------------------

    Commenters addressed this proposal.\1837\ One commenter supported
the Commission's proposal to include the report as one of the annual
financial reports an NRSRO is required to file with the
Commission,\1838\ and another stated that the proposed requirement
would facilitate effective NRSRO oversight by the Commission.\1839\
This commenter stated that the requirement could be strengthened,
however, by requiring the annual report be subjected to a third-party
audit.\1840\ Two commenters stated that the rule should not prescribe
how the report must be certified because another section of the
Exchange Act already provides that the designated compliance officer
must certify that the report is accurate and complete.\1841\
Specifically, one commenter stated that this requirement would be
``unnecessarily duplicative.'' \1842\ The other commenter stated that
the certification already required by section 15E(j)(5)(A)(ii) of the
Exchange Act is sufficient.\1843\
---------------------------------------------------------------------------

    \1837\ See DBRS Letter; Levin Letter; S&P Letter.
    \1838\ See DBRS Letter.
    \1839\ See Levin Letter.
    \1840\ See id.
    \1841\ See DBRS Letter; S&P Letter.
    \1842\ See S&P Letter.
    \1843\ See DBRS Letter.
---------------------------------------------------------------------------

    The Commission is adopting paragraph (a)(8) to Rule 17g-3 as
proposed. In response to the comment suggesting that the Commission
require that the report be subject to a third-party audit,\1844\ the
Commission is not persuaded that such a requirement is necessary at
this time, given the cost of requiring a third-party audit. Section
15E(j)(5)(A) of the Exchange Act provides that the report shall be
filed with ``together with the financial report that is required to be
submitted to the Commission under'' section 15E.\1845\ Section 15E(k)
provides, in pertinent part, that the financial reports shall be filed
on a confidential basis.\1846\ Consequently, the report of the
designated compliance officer is not a public document that will be
relied upon by investors and other users of credit ratings. The report
is a non-public report that will be used by Commission examiners, who
can consider the accuracy of the report in the context of their annual
examinations of NRSROs.\1847\ Finally, the Commission agrees with the
commenters that it is not necessary to prescribe how the report must be
certified because section 15E(j)(5)(A)(ii) of the Exchange Act provides
that the designated compliance officer must certify that the report is
accurate and complete.\1848\
---------------------------------------------------------------------------

    \1844\ See Levin Letter.
    \1845\ See 15 U.S.C. 78o-7(j)(5)(B).
    \1846\ See 15 U.S.C. 78o-7(k).
    \1847\ The report also will be used as governance tool by the
NRSRO to evaluate its compliance with the securities laws and its
policies and procedures.
    \1848\ See 15 U.S.C. 78o-7(j)(5)(A)(ii).
---------------------------------------------------------------------------

2. Economic Analysis
    This section builds on the economic analysis in section I.B. of
this release by presenting a focused analysis of the potential economic
effects that may derive from the amendment regarding the annual report
of the designated compliance officer.\1849\ The economic baseline which
existed before today's amendments was one in which section 15E(j)(5)(A)
of the Exchange Act requires that the designated compliance officer of
an NRSRO submit to the NRSRO an annual report on the NRSRO's compliance
with its policies and procedures and the securities laws, that includes
a description of any material changes to the NRSRO's code of ethics and
conflicts of interest policies and a certification that the report is
accurate and complete. In addition, section 15E(j)(B) of the Exchange
Act requires the NRSRO to file the report with the financial report
that is required to be submitted to the Commission under section 15E of
the Exchange Act. The Commission is adding paragraph (a)(8) to Rule
17g-3 to reflect the baseline requirement that the report must be filed
with the other reports filed pursuant to Rule 17g-3. The amendment is
not expected to result in benefits or costs relative to the economic
baseline and is not expected to affect efficiency, competition, or
capital formation.
---------------------------------------------------------------------------

    \1849\ The economic analysis in section I.B. of this release
discusses the primary economic impacts that may derive from the
amendments and new rules being adopted today.
---------------------------------------------------------------------------

    One reasonable alternative to the amendment, as adopted, is to
establish a requirement that the report be audited by a third party, as
suggested by one commenter.\1850\ This alternative would increase the
cost of compliance with the rule, as NRSROs would be required to pay a
third party to conduct the audit. However, an audit by a third party
may improve the accuracy, reliability, and thoroughness of the report.
As a result, this alternative could enhance Commission oversight of
NRSROs as well as improve an NRSRO's internal compliance controls,
which could improve the integrity and quality of an NRSRO's credit
ratings.
---------------------------------------------------------------------------

    \1850\ See Levin Letter.
---------------------------------------------------------------------------

    As discussed above, the Commission is not persuaded that such a
requirement is necessary at this time, given the cost of requiring a
third-party audit and how the audit would be used.\1851\ The report of
the designated compliance officer is not a public document that will be
relied upon by investors and other users of credit ratings. Instead, it
will be used by Commission examiners, who can consider the accuracy of
the report in the context of their annual examinations of NRSROs.
---------------------------------------------------------------------------

    \1851\ See section II.K.1. of this release (discussing how the
report is not a public document that will be relied upon by
investors and other users of credit ratings but rather will be used
by Commission examiners).
---------------------------------------------------------------------------

L. Electronic Submission of Form NRSRO and the Rule 17g-3 Annual
Reports

1. Amendments to Rule 17g-1, Form NRSRO, Rule 17g-3, and Regulation S-T
    Before today's amendments, applicants for registration as an NRSRO
and NRSROs submitted Form NRSRO to the Commission in paper form.\1852\
In addition, NRSROs submitted their annual reports under Rule 17g-3 in
paper form.\1853\ The Commission proposed amending Rule 17g-1, the
instructions to Form NRSRO, Rule 17g-3, and Regulation S-T \1854\ to
implement a program for filing Forms NRSRO

(other than in the case of a registration application) and the annual
reports electronically.\1855\ Under the proposals, an NRSRO would be
required to use the Commission's EDGAR system to: (1) Electronically
file or furnish, as applicable, Form NRSRO and the information and
documents contained in the exhibits required to be submitted with Form
NRSRO if the submission is made pursuant to paragraph (e), (f), or (g)
of Rule 17g-1 (an update of registration, an annual certification, or a
withdrawal from registration, respectively); \1856\ and (2)
electronically file or furnish, as applicable, the annual reports
required by Rule 17g-3.\1857\ In the proposing release, the Commission
stated that it intended that Form NRSRO would be an electronic,
fillable, form and that the exhibits would be submitted with the
Form.\1858\
---------------------------------------------------------------------------

    \1852\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33482.
    \1853\ See id. at 33482.
    \1854\ 17 CFR 232 et seq. Regulation S-T contains ``General
Rules and Regulations for Electronic Filers.''
    \1855\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33482-33485.
    \1856\ See id. at 33538. Under the proposal, the electronic
submissions of Form NRSRO and the exhibits required to be submitted
with Form NRSRO would be made available to the public on EDGAR
immediately upon filing. The amendments to paragraph (f) of Rule
17g-1 referred to a Form NRSRO and Exhibits 1 through 9 as the
submissions that would be required to be made electronically. The
proposed amendments to paragraph (e) of Rule 17g-1 also referred to
a Form NRSRO and Exhibits 1 through 9. However, Exhibit 1
(performance statistics) should not have been included with respect
to the proposed amendments to paragraph (e) because section
15E(b)(1)(A) of the Exchange Act provides that NRSROs are not
required to update performance statistics if they becomes materially
inaccurate, but that NRSROs must file updated performance statistics
with the annual certification. Accordingly, as adopted, the
amendments to paragraph (e) of Rule 17g-1 refer to Exhibits 2
through 9 to Form NRSRO. The proposed amendments to paragraph (g) of
Rule 17g-1 did not refer to exhibits to Form NRSRO because an NRSRO
is not required to include exhibits to Form NRSRO with a notice of
withdrawal from registration under this paragraph.
    \1857\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33539. Under the proposal, the electronic
submission of the annual reports required under Rule 17g-3 would not
be available to the public. The information submitted under Rule
17g-3 is, and would continue to be, kept confidential to the extent
permitted by law.
    \1858\ See id. at 33483.
---------------------------------------------------------------------------

    Under the proposal, an applicant or NRSRO would continue to submit
in paper format Forms NRSRO pursuant to paragraphs (a), (b), (c), and
(d) of Rule 17g-1 (initial applications for registration, applications
to register for an additional class of credit ratings, supplements to
an initial application or application to register for an additional
class of credit ratings, and withdrawals of initial applications or
applications to register for an additional class of credit ratings,
respectively). The Commission stated in the proposing release that
these materials are appropriately received in paper form because of the
iterative nature of the NRSRO registration application process.\1859\
For example, an applicant often will have a number of phone conferences
and meetings with the Commission staff during the application process
to clarify the information submitted in the application. These
interactions may result in applicants informally providing additional
information relating to the application and informally amending or
augmenting information provided in the form and its exhibits. The
Commission continues to believe paper submissions facilitate this type
of iterative process.
---------------------------------------------------------------------------

    \1859\ See id.
---------------------------------------------------------------------------

    The Commission also proposed amending Items A.8 and A.9 of the
instructions to Form NRSRO to distinguish between Form NRSRO
submissions under paragraph (a), (b), (c), or (d) of Rule 17g-1 and
submissions under paragraph (e), (f), or (g) of Rule 17g-1.\1860\
Before today's amendments, Item A.8 provided the address of Commission
headquarters as the address where a Form NRSRO submitted under
paragraph (a), (b), (c), (d), (e), (f), or (g) of Rule 17g-1 must be
submitted.\1861\ The Commission proposed amending Item A.8 to add above
the address a sentence that would instruct an applicant to submit to
the Commission at the address indicated two paper copies of a Form
NRSRO submitted pursuant to paragraph (a), (b), (c), or (d) of Rule
17g-1 and adding a sentence below the address providing that after
registration, an NRSRO must submit Form NRSRO electronically to the
Commission in the format required by the EDGAR Filer Manual, as defined
in Rule 11 of Regulation S-T, if the submission is made pursuant to
paragraph (e), (f), or (g) of Rule 17g-1.\1862\
---------------------------------------------------------------------------

    \1860\ See id. at 33552.
    \1861\ See id. at 33483.
    \1862\ See id. at 33552.
---------------------------------------------------------------------------

    Before today's amendments, Item A.9 of the Instructions to Form
NRSRO provided that a Form NRSRO will be considered furnished to the
Commission on the date the Commission receives a complete and properly
executed Form NRSRO that follows all applicable instructions for the
Form.\1863\ The Commission proposed amending the instruction to provide
that a Form NRSRO will be considered filed with or furnished to, as
applicable, the Commission on the date the Commission receives a
complete and properly executed Form NRSRO that follows all applicable
instructions for the Form, including the instructions in Item A.8 with
respect to how a Form NRSRO must be filed with or furnished to the
Commission.\1864\
---------------------------------------------------------------------------

    \1863\ See id. at 33483.
    \1864\ See id. at 33552.
---------------------------------------------------------------------------

    The Commission proposed amending Rule 17g-3 to add paragraphs (d)
and (e).\1865\ Proposed paragraph (d) of Rule 17g-3 would provide that
the reports required by the rule must be submitted electronically with
the Commission in the format required by the EDGAR Filer Manual, as
defined in Rule 11 of Regulation S-T.\1866\ In addition, because the
Rule 17g-3 annual reports are not required to be made public, the
Commission proposed adding paragraph (e) to Rule 17g-3, which would
provide that information submitted on a confidential basis and for
which confidential treatment has been requested pursuant to applicable
Commission rules will be accorded confidential treatment to the extent
permitted by law and that confidential treatment may be requested by
marking each page ``Confidential Treatment Requested'' and by complying
with Commission rules governing confidential treatment.\1867\
---------------------------------------------------------------------------

    \1865\ See id. at 33484.
    \1866\ See id. at 33539.
    \1867\ See id.
---------------------------------------------------------------------------

    Electronic submissions using the EDGAR system are subject to
Regulation S-T and the EDGAR Filer Manual.\1868\ The EDGAR Filer Manual
contains detailed technical specifications concerning EDGAR submissions
and provides technical guidance concerning how to begin making
submissions on EDGAR.
---------------------------------------------------------------------------

    \1868\ See 17 CFR 232.101 et seq. See also EDGAR Filer Manual,
available at http://www.sec.gov/info/edgar/edmanuals.htm;
Information for EDGAR Filers, available at http://www.sec.gov/info/edgar.shtml#guidance.
---------------------------------------------------------------------------

    One technical specification the EDGAR Filer Manual includes is the
electronic ``submission type'' for each submission made through the
EDGAR system, and under the proposal, the EDGAR Filer Manual and the
EDGARLink software would provide for two EDGAR electronic submission
types: One for the submission of Form NRSRO and one for the submission
of the annual reports under Rule 17g-3.\1869\
---------------------------------------------------------------------------

    \1869\ See, e.g., EDGAR Filer Manual, Vol. II, section 5.1
(``Non-Public and Confidential''), section 5.4 (``Document Types in
EDGAR''), available at http://www.sec.gov/info/edgar/edgarfm-vol2-v26.pdf.
---------------------------------------------------------------------------

    The Commission proposed amending Rule 101 of Regulation S-T \1870\
by adding paragraph (a)(1)(xiv).\1871\ Proposed paragraph (a)(1)(xiv)
would

identify the Forms NRSRO and the information and documents submitted in
Exhibits 1 through 9 to Form NRSRO submitted to the Commission under
paragraphs (e), (f), and (g) of Rule 17g-1 and the annual reports
submitted under Rule 17g-3 as submissions to the Commission that must
be made in electronic format.\1872\
---------------------------------------------------------------------------

    \1870\ 17 CFR 232.101(a)(1).
    \1871\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33484.
    \1872\ See id. at 33537.
---------------------------------------------------------------------------

    The Commission also proposed an amendment to Rule 201 of Regulation
S-T.\1873\ Rules 201 and 202 \1874\ of Regulation S-T address hardship
exemptions from EDGAR filing requirements, and paragraph (b) of Rule 13
of Regulation S-T \1875\ addresses the related issue of filing date
adjustments. Under Rule 201, if an electronic filer experiences
unanticipated technical difficulties that prevent the timely
preparation and submission of an electronic filing, the filer may file
a properly legended paper copy of the filing under cover of Form TH
\1876\ no later than one business day after the date on which the
filing was to be made.\1877\ A filer who files in paper form under the
temporary hardship exemption must submit an electronic copy of the
filed paper document within six business days of the filing of the
paper document.\1878\
---------------------------------------------------------------------------

    \1873\ 17 CFR 232.201. See Nationally Recognized Statistical
Rating Organizations, 76 FR at 33484.
    \1874\ 17 CFR 232.202.
    \1875\ 17 CFR 232.13(b).
    \1876\ 17 CFR 239.65, 249.447, 269.10, and 274.404.
    \1877\ See 17 CFR 232.201(a).
    \1878\ See 17 CFR 232.201(b).
---------------------------------------------------------------------------

    In addition, an electronic filer may apply for a continuing
hardship exemption under Rule 202 of Regulation S-T if it cannot file
all or part of a filing without undue burden or expense.\1879\ The
application must be made at least ten business days before the due date
of the filing. In contrast to the self-executing temporary hardship
exemption process, a filer can obtain a continuing hardship exemption
only by submitting a written application, upon which the Commission, or
the Commission staff pursuant to delegated authority, must then act.
Under paragraph (b) of Rule 13 of Regulation S-T, if an electronic
filer in good faith attempts to file a document, but the filing is
delayed due to technical difficulties beyond the filer's control, the
filer may request that the Commission grant an adjustment of the filing
date.
---------------------------------------------------------------------------

    \1879\ See 17 CFR 232.202(a).
---------------------------------------------------------------------------

    The Commission proposed making the temporary hardship exemption in
Rule 201 unavailable for the submissions of Form NRSRO and the
information and documents submitted in Exhibits 1 through 9 to Form
NRSRO under paragraph (e), (f), or (g) of Rule 17g-1 and the annual
reports required under Rule 17g-3 by amending the introductory text of
paragraph (a) of Rule 201 of Regulation S-T to add this group of
submissions to the list of submissions for which the temporary hardship
exemption is unavailable.\1880\ An NRSRO would continue to have the
ability to apply for a continuing hardship exemption under Rule 202 if
it could not submit all or part of an application without undue burden
or expense or for an adjustment of the due date under paragraph (b) of
Rule 13 if there were technical difficulties beyond the NRSRO's
control.
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    \1880\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33537. The Commission previously has made
the temporary hardship exemption unavailable for EDGAR submissions
of beneficial ownership reports filed by officers, directors and
principal security holders under section 16(a) of the Exchange Act.
See Mandated Electronic Filing and Web site Posting for Forms 3, 4
and 5, Securities Act Release No. 8230 (May 7, 2003), 68 FR 25788
(May 13, 2010).
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    The Commission received three comments that addressed these
proposals.\1881\ One commenter stated that it supported the proposal,
and that having information available immediately and in one location
would benefit users of credit ratings by making it easier to access
information about NRSROs and to compare the information provided by
different NRSROs.\1882\ An NRSRO stated that it would have no objection
to the proposal, that providing the information as PDF documents would
be ``the preferred and simplest'' way to provide the information, and
that providing the information in XBRL or XML format would not provide
additional analytical benefit and could make it more difficult for
users to access Form NRSRO.\1883\ This commenter also stated, however,
that the temporary hardship exemption should be available for
electronic filings of Form NRSRO.
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    \1881\ See DBRS Letter; ICI Letter; S&P Letter.
    \1882\ See ICI Letter.
    \1883\ See S&P Letter.
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    One NRSRO objected to the proposal, stating that the Commission
``vastly overstated the benefits and understated the costs'' of the
proposal.\1884\ The commenter stated that having the public information
available immediately and in one place would not be useful to users of
credit ratings, as the information is not time-sensitive and it is
relatively easy to retrieve the information from the NRSROs' Web sites.
This commenter also stated that the Commission did not estimate ``the
expense an NRSRO would incur in compiling Form NRSRO, its exhibits, and
the annual reports into an EDGAR-acceptable format'' and that the
Commission underestimated the costs of becoming familiar with
Regulation S-T and the EDGAR Filer Manual and other ``start-up tasks''
as well as ongoing expenses. In addition, the commenter stated that
requiring that the documents be submitted in XBRL format would increase
costs without conferring benefits. The commenter suggested,
alternatively, that NRSROs be required to make the submissions as PDF
documents via electronic mail to a designated Commission email address,
with confidential information encrypted before transmission.
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    \1884\ See DBRS Letter.
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    The Commission is adopting the amendments to Rule 17g-1, Form
NRSRO, Rule 17g-3, and Regulation S-T substantially as proposed, with
modifications, in response to comment.\1885\ The amendments specify
that the information that is required to be submitted to the Commission
electronically on EDGAR be submitted as PDF documents and, in contrast
to the proposal, make the temporary hardship exemption in Rule 201 of
Regulation S-T available for these submissions.
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    \1885\ See DBRS Letter; S&P Letter.
---------------------------------------------------------------------------

    In response to the comment objecting to the proposal, stating that
the Commission underestimated the costs and overstated the benefits of
the proposal, and stating that the Commission should instead require
that NRSROs email the submissions as PDF documents to the
Commission,\1886\ the final amendments provide that the submissions
must be made as PDF documents, which another NRSRO described as ``the
most preferred and simplest'' way to provide the information.\1887\
However, in response to this comment, as explained below in the
economic analysis, the Commission has increased its estimate of the
cost of the proposal. In addition, as explained below in the economic
analysis, the Commission agrees with another commenter that the
amendments will benefit users of credit ratings \1888\ and also that
the amendments will benefit NRSROs and Commission staff.
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    \1886\ See DBRS Letter.
    \1887\ See S&P Letter.
    \1888\ See ICI Letter.
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    Accordingly, the amendments to paragraphs (e), (f), and (g) of Rule
17g-1, as adopted, provide that a Form NRSRO and the information and
documents in the exhibits required to be submitted with the form must
be filed electronically with the Commission on EDGAR as a PDF document
in the

format required by the EDGAR Filer Manual, as defined in Rule 11 of
Regulation S-T.\1889\ Similarly, amended Item A.8 to the Instructions
for Form NRSRO has been modified from the proposal to provide that an
NRSRO must make these submissions ``electronically on EDGAR as a PDF
document in the format required by the EDGAR Filer Manual as defined in
Rule 11 of Regulation S-T.'' \1890\ The amendments to Instruction A.9
to Form NRSRO, to include a reference to the instructions in Item A.8,
are adopted as proposed.\1891\
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    \1889\ See paragraphs (e) through (g) of Rule 17g-1.
    \1890\ See Instruction A.8 to Form NRSRO.
    \1891\ See Instruction A.9 to Form NRSRO.
---------------------------------------------------------------------------

    Paragraph (d) of Rule 17g-3 has similarly been modified from the
proposal to provide that the reports must be filed with or furnished
to, as applicable, the Commission electronically on EDGAR as PDF
documents in the format required by the EDGAR Filer Manual, as defined
in Rule 11 of Regulation S-T.\1892\ Paragraph (e) of Rule 17g-3 is
adopted as proposed.\1893\
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    \1892\ See paragraph (d) of Rule 17g-3.
    \1893\ See paragraph (e) of Rule 17g-3.
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    Rule 104 of Regulation S-T \1894\ provides for ``unofficial PDF
copies'' that are included in electronic submissions through EDGAR.
Under the amendments, however, the electronic submissions will be
``official'' filings with the Commission. Accordingly, as adopted,
paragraph (xiv) of Regulation S-T adds Form NRSRO and the information
and documents in Exhibits 1 through 9 of Form NRSRO, filed with or
furnished to, as applicable, the Commission pursuant to paragraphs (e),
(f), and (g) of Rule 17g-1 and the annual reports filed with or
furnished to, as applicable, the Commission pursuant to Rule 17g-3 as
documents that must be filed electronically with the Commission; that
the documents must be filed or furnished on EDGAR as PDF documents in
the format required by the EDGAR Filer Manual, as defined in Rule 11 of
Regulation S-T; and that notwithstanding Rule 104 of Regulation S-T,
the PDF documents filed or furnished pursuant to this paragraph will be
considered as officially filed with or furnished to, as applicable, the
Commission.\1895\
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    \1894\ 17 CFR 232.104.
    \1895\ See paragraph (a)(1)(xiv) of Rule 101 of Regulation S-T.
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    Finally, the Commission is modifying the proposal in response to
comment,\1896\ to make the temporary hardship exemption in Rule 201
available for the submissions of Form NRSRO and the information and
documents submitted in the exhibits that must be filed with the form
under paragraph (e), (f), or (g) of Rule 17g-1 and the annual reports
required under Rule 17g-3. Accordingly, if an NRSRO has unanticipated
technical difficulties beyond its control, such as a power outage or
equipment failure, that prevent the timely preparation and submission
of an electronic submission, the NRSRO may make the submission in paper
form under the temporary hardship exemption under cover of Form TH no
later than one business day after the submission was to be made. The
NRSRO must submit an electronic copy within six business days of the
submission of the paper document. This should mitigate the burden for
an NRSRO that experiences a technical problem.
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    \1896\ See S&P Letter.
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2. Economic Analysis
    This section builds on the economic analysis in section I.B. of
this release by presenting a focused analysis of the potential economic
effects that may derive from the specific amendments relating to the
requirement that NRSROs make certain submissions to the Commission
electronically.\1897\ The baseline that existed before today's
amendments was one in which, as discussed above, applicants for
registration as an NRSRO and NRSROs were required to submit Form NRSRO
to the Commission in paper form.\1898\ In addition, NRSROs were
required to submit their annual reports under Rule 17g-3 in paper
form.\1899\ NRSROs were also required under paragraph (i) of Rule 17g-1
to make the public portions of their most recent Forms NRSRO publicly
available within ten business days after submission to the Commission
(or, in the case of an application for registration as an NRSRO or for
an additional class of credit ratings, within ten business days after a
Commission order granting such an application), and did so by posting
electronic copies of their current Forms NRSRO and Exhibits 1 to 9 to
these forms on their public Web sites. Investors interested in
comparing the content of these forms across all NRSROs could visit each
of the individual NRSRO Web sites to locate the forms, or use direct
hyperlinks to the relevant Web pages published on the Commission's Web
site.\1900\
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    \1897\ The economic analysis in section I.B. of this release
discusses the primary economic impacts that may derive from the
amendments and new rules being adopted today.
    \1898\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33482.
    \1899\ See id.
    \1900\ Hyperlinks to the NRSROs' Forms NRSRO are available on
the Commission's Web site at http://www.sec.gov/ocr.
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    Relative to the baseline, the amendments may provide benefits to
users of credit ratings. In the proposing release, the Commission
preliminarily identified potential benefits resulting from the proposed
amendments.\1901\ As discussed above, one commenter stated that having
the information available immediately and in one location would benefit
users of credit ratings by making it easier to access information about
NRSROs and to compare the information provided by different
NRSROs.\1902\ However, an NRSRO commented that the Commission ``vastly
overstated'' the benefits of the proposal.\1903\ In response, the
Commission more specifically identifies the sources of expected
benefits in this release.
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    \1901\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33531.
    \1902\ See ICI Letter.
    \1903\ See DBRS Letter.
---------------------------------------------------------------------------

    The electronic submission of Form NRSRO will allow the Commission
to make the public portions of the Form NRSRO of each NRSRO publicly
available on EDGAR immediately upon submission. Moreover, past
submissions of Form NRSRO on the EDGAR system will remain available
even after updated versions are submitted, benefitting users of credit
ratings relative to the baseline by maintaining the availability of
historical data that they may find useful in evaluating and comparing
NRSROs.\1904\ The Commission believes that the availability of these
forms on EDGAR may also marginally benefit users of credit ratings by
reducing the time and effort required to retrieve Forms NRSRO, since
they will be consolidated in a single location rather than located on
separate Web sites, and potentially reducing (by up to ten days, given
the time allowed for NRSROs to post these forms on their Web sites) the
delay before the forms are made publicly available. One NRSRO commented
that users of credit ratings would be ``far more likely'' to continue
to access Forms NRSRO from NRSRO Web sites instead of EDGAR, given that
they may use these Web sites to access other useful information.\1905\
In response, the Commission notes that Forms NRSRO are likely to be a
helpful

starting point for evaluating and comparing NRSROs.
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    \1904\ See section II.E.4. of this release (discussing the
limitations of interpreting performance statistics computed using
the single cohort approach using only the most current Forms NRSRO,
since these forms would only contain information about the most
recent cohorts of credit ratings).
    \1905\ See DBRS Letter.
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    The Commission believes that the electronic submission of the Forms
NRSRO and the Rule 17g-3 annual reports may marginally benefit NRSROs
because they will avoid the uncertainties, delay, and expense related
to the physical delivery of multiple paper copies of the submissions.
    The Commission believes that the requirement that Forms NRSRO and
the Rule 17g-3 annual reports be submitted through the EDGAR system may
promote efficiency. As stated above, the availability of the public
portions of Forms NRSRO on EDGAR will provide a centralized location
for users of credit ratings to access these disclosures. The electronic
submission of Forms NRSRO, including the confidential portions of these
forms, and the annual reports, which will not be made public, will also
assist the Commission staff in storing and accessing these records in
furtherance of the Commission's NRSRO oversight function. To the extent
that the ready access to the public portions of the current and, in the
future, previous Forms NRSRO on EDGAR improves the ability of users of
credit ratings to evaluate and compare NRSROs, the electronic
submission requirement may also indirectly enhance competition.\1906\
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    \1906\ See section I.B.3. of this release (providing a broader
discussion of the potential impacts of the amendments and new rules
on efficiency, competition, and capital formation).
---------------------------------------------------------------------------

    These amendments will result in compliance costs to NRSROs,
including costs to gain access to and become familiar with the EDGAR
system. In the proposing release, the Commission stated that it
believed that the initial costs to become familiar with the EDGAR
system and adopt processes for using the system would be minimal and
that the annual costs would be no greater than the costs attributable
to paper submissions.\1907\ One NRSRO commented that the Commission
understated the initial costs of the proposal as ``an NRSRO will have
to familiarize itself with the roughly 35 Rules of Regulation S-T as
well as the first two volumes of the EDGAR Filer Manual (which
currently total more than 600 pages) and related EDGAR technical
guidance.'' \1908\ However, the commenter did not provide a different
estimate of the cost associated with the proposal.\1909\ In response to
this comment, the Commission notes that not all of Regulation S-T or
the EDGAR Filer Manual applies to NRSRO submissions. In addition, the
Commission has published on its Web site staff guidance for EDGAR
filers and staff answers to frequently asked questions that may reduce
the time required for NRSROs to familiarize themselves with the EDGAR
system. Nonetheless, as discussed in section IV.D.1. of this release,
the Commission has revised its estimate of the time required for an
NRSRO to become familiar with the EDGAR system. The same commenter also
stated that the Commission failed to consider the significant annual
costs of monitoring changes in EDGAR filing requirements, but the
commenter did not provide an estimate of these costs.\1910\ In
response, the Commission has added an estimated annual burden
attributable to monitoring changes in EDGAR filing requirements.\1911\
The Commission's estimates of these costs are provided below.
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    \1907\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33531.
    \1908\ See DBRS Letter.
    \1909\ See id.
    \1910\ See id.
    \1911\ See section IV.D.1. of this release.
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    As discussed above, the Commission has also modified the
requirement to submit certain Forms NRSRO and annual reports under Rule
17g-3 to the Commission electronically. One NRSRO described documents
in PDF format as ``the most preferred and simplest'' way to provide the
information.\1912\ Another NRSRO commented that submission formats
other than PDF would require ``very expensive'' reformatting and,
because NRSROs post PDF versions of Form NRSRO on their Web sites,
would result in costs of ``producing two sets of these documents in two
different electronic formats on an ongoing basis.'' \1913\ In response
to these comments, the Commission has modified the proposed amendments
to require that the electronic submissions be made on EDGAR as PDF
documents.
---------------------------------------------------------------------------

    \1912\ See S&P Letter.
    \1913\ See DBRS Letter.
---------------------------------------------------------------------------

    Based on analysis for purposes of the PRA, the Commission estimates
that the amendments to Rule 17g-1, Form NRSRO, Rule 17g-3, and
Regulation S-T regarding electronic submission of certain Forms NRSRO
and NRSRO annual reports under Rule 17g-3 will result in total
industry-wide one-time costs to NRSROs of approximately $46,000 and
total industry-wide annual costs to NRSROs of approximately
$6,000.\1914\
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    \1914\ See section V.N. of this release (discussing
implementation and annual compliance considerations). The one-time
and annual costs are determined by monetizing internal hour burdens
and adding external costs identified in the PRA analysis in section
IV.D.1. and section IV.D.12. of this release.
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    As discussed above, the Commission has modified the proposal to
make the temporary hardship exemption available to NRSROs. Because the
temporary hardship exemption process is self-executing, the Commission
expects that any costs borne by NRSROs when availing of the temporary
hardship exemption, including the cost to make the submission in paper
form under the cover of Form TH, will be de minimis. Also, given that
the Commission has simplified the technical requirements for the
submissions by requiring PDF rather than XML or XBRL documents, and
that the temporary hardship exemption will be available if an NRSRO
nonetheless experiences unanticipated technical difficulties that
prevent the timely preparation and submission of an electronic filing,
the Commission does not expect NRSROs to apply for continuing hardship
exemptions.
    As discussed above, one reasonable alternative to the Commission's
approach would be to require that the electronic submissions be made in
XBRL or XML format. Two NRSROs stated that such formats would not
provide incremental benefits, while one of these commenters stated that
requiring such formats ``would substantially increase an NRSRO's
costs'' and the other noted that ``a detailed technical analysis would
need to be performed to determine the impact and any associated
costs.'' \1915\ However, one commenter suggested that requiring Exhibit
1 to Form NRSRO in particular to be submitted in XML or XBRL format
would benefit investors, regulators, and other market
participants.\1916\ While the Commission agrees that submissions in
these formats may benefit certain users of credit ratings by
facilitating the comparative analysis of the quantitative data in the
forms over time and across NRSROs, the Commission is sensitive to the
concerns raised by NRSROs and has determined not to impose at this time
a requirement that the submissions be made in XML or XBRL formats, in
part to limit the additional compliance costs that would be borne by
NRSROs. One NRSRO suggested that PDF copies of the required submissions
should be transmitted via email, with the confidential submissions
being encrypted before transmission.\1917\ While such an approach may
reduce the compliance costs associated with electronic submission, the
Commission

believes that the costs of using the EDGAR system are balanced by the
benefits discussed above of using this system not only for delivery of
electronic submissions to the Commission, but also for the
dissemination and storage of these submissions.
---------------------------------------------------------------------------

    \1915\ See DBRS Letter; S&P Letter.
    \1916\ See CFA II Letter.
    \1917\ See DBRS Letter.
---------------------------------------------------------------------------

M. Other Amendments

    The Commission proposed additional amendments to several NRSRO
rules in response to amendments the Dodd-Frank Act made to sections of
the Exchange Act that authorize or otherwise are relevant to these
rules and to clarify certain provisions of the NRSRO rules.\1918\ The
Commission is adopting these amendments as proposed.\1919\
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    \1918\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33485-33489.
    \1919\ The Commission is also making a technical amendment to
paragraphs (e) and (f) of Rule 17g-1 to replace the phrase