[Federal Register: February 9, 2007 (Volume 72, Number 27)]
[Proposed Rules]
[Page 6377-6431]
[DOCID:fr09fe07-17]

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Part III

Securities and Exchange Commission

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17 CFR Parts 240 and 249b

Oversight of Credit Rating Agencies Registered as Nationally Recognized
Statistical Rating Organizations; Proposed Rule

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249b

[Release No. 34-55231; File No. S7-04-07]
RIN 3235-AJ78

Oversight of Credit Rating Agencies Registered as Nationally
Recognized Statistical Rating Organizations

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

ACTION: Proposed rule.

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SUMMARY: The Commission is proposing for comment rules to implement
provisions of the Credit Rating Agency Reform Act of 2006 (the
``Act''), enacted on September 29, 2006. The Act defines the term
``nationally recognized statistical rating organization,'' provides
authority for the Commission to implement registration, recordkeeping,
financial reporting, and oversight rules with respect to registered
credit rating agencies, and directs the Commission to issue final
implementing rules no later than 270 days after its enactment (or by
June 26, 2007).

DATES: Comments should be received on or before March 12, 2007.

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml.
); or     Send an e-mail to<EMAIL_ADDRESS>Please include

File Number S7-04-07 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov
). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
    All submissions should refer to File Number S7-04-07. This file
number should be included on the subject line if e-mail is used. To
help us process and review your comments more efficiently, please use
only one method. The Commission will post all comments on the
Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml
). Comments are also available for public inspection and

copying in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549. All comments received will be posted without
change; we do not edit personal identifying information from
submissions. You should submit only information that you wish to make
publicly available.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate
Director, at<PHONE_NUMBER>; Thomas K. McGowan, Assistant Director, at
(202) 551-5521; Randall W. Roy, Branch Chief, at<PHONE_NUMBER>; Rose
Russo Wells, Attorney, at<PHONE_NUMBER>; Sheila Swartz, Attorney, at
(202) 551-5545, Division of Market Regulation, Securities and Exchange
Commission, 100 F Street, NE., Washington, DC 20549-6628.

SUPPLEMENTARY INFORMATION:

I. Background

    The credit rating business has expanded significantly over the last
100 years. Credit rating agencies now issue credit ratings for debt
securities of public companies, sovereign governments, and
municipalities, and for structured products such as asset backed
securities. They also issue ratings on money market instruments such as
commercial paper and with respect to obligors (that is, a credit
assessment of an entity as opposed to the entity's securities). Obligor
ratings are issued on, among other entities, public companies,
sovereign governments, and non-public companies such as banks and
insurance companies.
    The scope of the credit rating business reflects the importance of
credit ratings to securities market participants and other creditors.
Investors use credit ratings to make investment decisions. Large public
institutions, such as pension funds, also use credit ratings to
prescribe the types of securities the institution is permitted to hold.
Creditors, such as commercial and investment banks, use credit ratings
to manage credit risk and govern transactional agreements. For example,
credit agreements frequently contain trigger provisions requiring more
collateral if the creditor's credit rating drops.
    In addition, regulatory bodies have come to rely on credit ratings.
In 1975, the Commission adopted the term ``nationally recognized
statistical rating organization'' or ``NRSRO'' as part of amendments to
its broker-dealer net capital rule \1\ under the Securities Exchange
Act of 1934 (``Exchange Act'').\2\ The net capital rule requires a
broker-dealer to maintain a level of net capital generally defined as
net worth plus subordinated debt less illiquid assets and less
percentage deductions on proprietary securities.\3\ The net capital
rule prescribes specific percentage deductions for various classes of
securities based on the liquidity and volatility of the type of
security.\4\ These deductions, known as ``haircuts,'' are intended to
provide a financial buffer against risks arising from the broker-
dealer's business activities, including potential losses arising from
market fluctuations in the prices of, or lack of liquidity in, the
securities.
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    \1\ See Adoption of Amendments to Rule 15c3-1 and Adoption of
Alternative Net Capital Requirement for Certain Brokers and Dealers,
Exchange Act Release No. 11497 (June 26, 1975), 40 FR 29795 (July
16, 1975) and 17 CFR 240.15c3-1.
    \2\ 15 U.S.C. 78a et seq.
    \3\ See 17 CFR 240.15c3-1(c)(2).
    \4\ See 17 CFR 240.15c3-1(c)(2)(vi).
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    The Commission's incorporation of the term ``nationally recognized
statistical rating organization'' into the net capital rule provided a
means to distinguish between different classes of debt securities for
the purpose of prescribing applicable haircuts.\5\ Thus, the net
capital rule permits a broker-dealer to apply lower haircuts to certain
types of debt securities that are rated in one of the four highest
categories (known as the ``investment grade'' categories) by at least
two NRSROs.\6\
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    \5\ See, e.g., 17 CFR 240.15c3-1(c)(2)(vi)(E), (F), and (H).
    \6\ See Id.
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    Although the Commission used the term ``nationally recognized
statistical rating organization'' in the net capital rule, it did not
provide a definition. The Commission staff has identified NRSROs
through no-action letters.\7\ In response to a request for a no-action
letter from a credit rating agency, the Commission staff would review
information and documents submitted by the credit rating agency
concerning its financial and managerial resources, methodologies for
determining ratings, policies for managing activities that could impact
the impartiality of the credit ratings, and recognition in the
marketplace. Based on this review, the Commission staff would determine
whether the credit rating agency had the financial and managerial
resources and appropriate policies and procedures to consistently issue
credible and reliable credit ratings. The Commission staff also would
determine whether the predominant users of credit ratings considered
the credit rating agency to be credible and reliable.
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    \7\ See, e.g., Letter from Gregory C. Yadley, Staff Attorney,
Division of Market Regulation, SEC, to Ralph L. Gosselin, Treasurer,
Coughlin & Co., Inc. (November 24, 1975).

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    If these assessments were both positive, the Commission staff,
after seeking the advice of the Commission, would issue a no-action
letter informing broker-dealers that they could treat the credit rating
agency as an NRSRO for purposes of the net capital rule.\8\ Since 1975,
the Commission staff has identified nine credit rating agencies as
NRSROs. However, as a result of consolidation, only five credit rating
agencies currently are identified as NRSROs--Moody's Investors Service,
Inc., Fitch, Inc., the Standard and Poor's Division of the McGraw-Hill
Companies Inc., A.M. Best Company, Inc., and Dominion Bond Rating
Service Limited.\9\
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    \8\ See Letter from Nelson S. Kibler, Assistant Director,
Division of Market Regulation, Commission, to John T. Anderson,
Esquire, of Lord, Bissell & Brook, on behalf of Duff & Phelps, Inc.
(February 24, 1982); Letter from Michael A. Macchiaroli, Assistant
Director, Division of Market Regulation, Commission, to Paul
McCarthy, President, McCarthy, Crisanti & Maffei, Inc. (September
13, 1983); Letter from Michael A. Macchiaroli, Assistant Director,
Division of Market Regulation, Commission, to Robin Monro-Davies,
President, IBCA Limited (November 27, 1990) and Letter from Michael
A. Macchiaroli, Assistant Director, Division of Market Regulation,
Commission, to David L. Lloyd, Jr., Dewey Ballentine, Bushby, Palmer
& Wood (October 1, 1990); Letter from Michael A. Macchiaroli,
Assistant Director, Division of Market Regulation, Commission, to
Gregory A. Root, President, Thomson BankWatch, Inc. (August 6, 1991)
and Letter from Michael A. Macchiaroli Assistant Director, Division
of Market Regulation, Commission, to Lee Pickard, Pickard and Djinis
LLP (January 25, 1999); Letter from Annette L. Nazareth, Director,
Division of Market Regulation, Commission, to Mari-Anne Pisarri,
Pickard and Djinis LLP (February 24, 2003); and Letter from Mark M.
Attar, Special Counsel, Division of Market Regulation, Commission,
to Arthur Snyder, President, A.M. Best Company, Inc. (March 3,
2005).
    \9\ Moody's and Standard and Poors represent over 80% of the
industry market share as measured by revenues according to the
Report of the Senate Committee on Banking, Housing, and Urban
Affairs to Accompany S. 3850, Credit Rating Agency Reform Act of
2006, S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6, 2006)
(``Senate Report'').
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    Over time, the Commission has imported the NRSRO concept into a
number of other rules.\10\ For example, definitions in Commission Rule
2a-7 under the Investment Company Act of 1940 include the term NRSRO to
prescribe the type of securities a money market fund can hold.\11\ In
addition, regulations adopted by the Commission under the Securities
Act of 1933 permit offerings of certain nonconvertible debt, preferred,
and asset-backed securities that are rated investment grade by at least
one NRSRO to be registered on Form S-3--the Commission's ``short-form''
registration statement--without the issuer satisfying a minimum public
float test.\12\
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    \10\ See Commission rules 17 CFR 228.10(e), 229.10(c),
230.134(a)(14), 230.436(g), 239.13, 239.32, 239.33, 240.3a1-1(b)(3),
240.10b-10(a)(8), 240.15c3-1(c)(2)(vi)(E), (F), and (H), 240.15c3-
1a(b)(1)(i)(C), 240.15c3-1f(d), 240.15c3-3a, Item 14, Note G,
242.101(c)(2), 242.102(d), 242.300(k)(3) and (l)(3), 270.2a-
7(a)(10), 270.3a-7(a)(2), 270.5b-3(c), and 270.10f-3(a)(3).
    \11\ 17 CFR 270.2a-7.
    \12\ Form S-3 (17 CFR 239.13).
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    The term ``NRSRO'' also has been incorporated into a wide range of
federal legislation.\13\ For example, when Congress defined the term
``mortgage related security'' in Section 3(a)(41) of the Exchange Act
as part of the Secondary Mortgage Market Enhancement Act of 1984,\14\
it required, among other things, that such securities be rated in one
of the two highest rating categories by at least one NRSRO.\15\
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    \13\ See, e.g., 15 U.S.C. 78c(a)(41) (defining the term
``mortgage related security''); 15 U.S.C. 78c(a)(53)(A) (defining
the term ``small business related security''); and 15 U.S.C. 80a-
6(a)(5)(A)(iv)(I) (exempting certain companies from the provisions
of the Investment Company Act of 1940''); Gramm-Leach-Bliley Act,
Pub. L. No. 106-102 (1999); Transportation Equity Act for the 21st
Century, Pub. L. No. 105-178 (1998); Reigle Community Development
and Regulatory Improvement Act of 1994, Pub. L. No. 103-325 (1994);
Department of Commerce, Justice, and State, The Judiciary, and
Related Agencies Appropriations Act, FY2001, Pub. L. No. 106-553
(2000); Higher Education Amendments of 1992, Pub. L. No. 102-325
(1992); Housing and Community Development Act of 1992, Pub. L. No.
102-550 (1992); Federal Deposit Insurance Corporation Improvement
Act of 1991, Pub. L. No. 102-242 (1991); and Financial Institutions
Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-72
(1989).
    \14\ Pub. L. No. 98-440, Sec.  101, 98 Stat. 1689 (1984).
    \15\ 15 U.S.C. 78c(a)(41).
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    Further, a number of other federal, state, and foreign laws and
regulations have incorporated the term ``NRSRO.'' For example, the U.S.
Department of Education uses ratings from NRSROs to set standards of
financial responsibility for institutions seeking to participate in
student financial assistance programs under Title IV of the Higher
Education Act of 1965, as amended.\16\ Several state insurance codes
rely, directly or indirectly, on NRSRO ratings in determining
appropriate investments for insurance companies.\17\ Canada and El
Salvador also have employed the concept.\18\
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    \16\ 20 U.S.C. 1070 et seq. and 42 U.S.C. 2751 et seq., 34 CFR
668.15(b)(7)(ii) and (8)(ii).
    \17\ For example, the California Insurance Code relies on NRSRO
ratings in allowing California-incorporated insurers to invest
excess funds in certain types of investments. See Cal. Ins. Code
1192.10.
    \18\ See, e.g., National Instrument 71-101, The Multi-
jurisdictional Disclosure System (Oct. 1, 1998) (Can.) and Law of
the Securities Market, El Salvador, Title VI, Chapter II, Section
88(a). D.L. Not. 374, Published in the Official Newspaper No. 149,
Volume 340 of August 14, 1998.
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II. The Credit Rating Agency Reform Act of 2006

    The Act \19\ seeks to address two important issues that have arisen
with respect to credit rating agencies.\20\ First, the practice of
identifying NRSROs through staff no-action letters has been criticized
as a process that lacks transparency and creates a barrier to entry for
credit rating agencies seeking wider recognition and market share.\21\
Second, the importance of credit ratings to the financial markets has
raised the question of whether greater supervision of credit rating
agencies is warranted.\22\ The failures of Enron and WorldCom--which
led to new laws and regulations governing a host of market participants
including public companies, securities analysts, and accountants \23\--
increased concerns that credit rating agencies were operating outside
the scope of any meaningful regulatory supervision.\24\
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    \19\ Pub. L. No. 109-291 (2006).
    \20\ See Section 2 of the Act and the Senate Report.
    \21\ See Senate Report.
    \22\ Id.
    \23\ See e.g., Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204,
116 Stat. 745 (2002).
    \24\ See Senate Report.
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    Over the years, the Commission has made attempts to address these
issues \25\ and has participated in international initiatives to
address similar issues.\26\

However, the Commission's efforts have been hindered by limitations to
its authority.\27\ Congress ultimately found that legislation was
necessary and enacted the Act to provide for voluntary registration and
oversight of NRSROs.\28\
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    \25\ See e.g., Nationally Recognized Statistical Rating
Organizations, Exchange Act Release No. 34616 (August 31, 1994), 59
FR 46314 (September 7, 1994); Capital Requirements for Brokers or
Dealers Under the Securities Exchange Act of 1934, Exchange Act
Release No. 39457 (December 17, 1997), 62 FR 68018 (December 30,
1997); Order In the Matter of the Role of Rating Agencies in the
U.S. Securities Markets Directing Investigation Pursuant to Section
21(a) of the Securities Exchange Act of 1934, and Designating
Officers for Such Designation (March 19, 2002); The Current Role and
Function of Credit Rating Agencies in the Operation of the
Securities Markets, Hearings Before the U.S. Securities and Exchange
Commission (Nov. 15 and 21, 2002) (``Commission 2002 CRA Hearings'')
(Transcripts available on the Commission's Web site at http://www.sec.gov/spotlight/ratingagency.htm
); Report on the Role and

Function of Credit Rating Agencies in the Operation of the
Securities Markets, As Required by Section 702(b) of the Sarbanes-
Oxley Act of 2002, U.S. Securities and Exchange Commission, January
2003 (``Commission CRA Report''); Concept Release: Rating Agencies
and the Use of Credit Ratings Under the Federal Securities Laws,
Securities Act Release No. 8236, 68 FR 35258 (June 12, 2003)
(``Commission CRA Concept Release''); and Proposed Rule: Definition
of Nationally Recognized Statistical Rating Organization, Securities
Act Release No. 8570 (April 22, 2005), 70 FR 21306 (April 25, 2005).
    \26\ See Statement of Principles Regarding the Activities of
Credit Rating Agencies, Technical Committee, International
Organization of Securities Commissions (``IOSCO'') (September 25,
2003); Report on the Activities of Credit Rating Agencies, The
Technical Committee, IOSCO (September 2003); and Code of Conduct
Fundamentals for Credit Rating Agencies, Technical Committee of
IOSCO (December 2004).
    \27\ See Testimony of Commissioner Annette L. Nazareth, then
Director, Division of Market Regulation, Commission, Before the
House Subcommittee on Capital Markets, Insurance, and Government
Sponsored Enterprises, Regarding Credit Rating Agencies (April 12,
2005) (Available on the Commission's Web site at http://www.sec.gov/news/testimony/ts041205aln.htm
).

    \28\ See Section 2 of the Act and Senate Report.
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    In overview, the Act adds definitions to Section 3 of the Exchange
Act,\29\ creates a new Section 15E of the Exchange Act,\30\ and amends
Section 17 of the Exchange Act.\31\ These new statutory provisions, and
the grants of Commission rulemaking authority under these provisions,
establish a registration and regulatory program for credit rating
agencies opting to have their credit ratings qualify for purposes of
laws and rules using the term ``nationally recognized statistical
rating organization.'' These credit rating agencies would be required
to register with the Commission, make public certain information to
help persons assess their credibility, make and retain certain records,
furnish the Commission with certain financial reports, implement
policies to manage the handling of material non-public information and
conflicts of interest, and abide by certain prohibitions against
unfair, coercive, or abusive practices. The Commission notes that
international standards, such as those promulgated by the Technical
Committee of the International Organization of Securities Commissions
(``IOSCO''), are generally consistent with the Act and the rules the
Commission is proposing.\32\
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    \29\ 15 U.S.C. 78c.
    \30\ 15 U.S.C. 78o-7.
    \31\ 15 U.S.C. 78q.
    \32\ See e.g., IOSCO Statement of Principles Regarding the
Activities of Credit Rating Agencies, September 25, 2003; Code of
Conduct Fundamentals for Credit Rating Agencies (IOSCO Technical
Committee), December 2004.
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    The statutory provisions of the Act prohibit reliance on Commission
staff no-action letters identifying NRSROs.\33\ These statutory
provisions become effective on the earlier of June 26, 2007 (270 days
after the date of enactment of the Act) or the date the Commission
issues final rules under the Act.\34\ However, as a transitional
measure, no-action letters issued before the effective date may
continue to be relied upon by regulatory users of credit ratings after
the effective date if the credit rating agency identified in the letter
has a pending application for registration before the Commission.\35\
In this case, the letter becomes void after the Commission has acted on
the application.\36\
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    \33\ See Section 15E(l) of the Exchange Act (15 U.S.C. 78o-
7(l)). This provision of the Act renders moot the Commission's
earlier proposals to define the term ``NRSRO'' by rule and,
consequently, they are withdrawn. See Capital Requirements for
Brokers or Dealers Under the Securities Exchange Act of 1934,
Exchange Act Release No. 39457 (December 17, 1997), 62 FR 68018
(December 30, 1997); Proposed Rule: Definition of Nationally
Recognized Statistical Rating Organization, Securities Act Release
No. 8570, (April 22, 2005), 70 FR 21306 (April 25, 2005).
    \34\ Section 15E(p) of the Exchange Act (15 U.S.C. 78o-7(p)).
The Act was enacted on September 29, 2006 and June 26, 2007 is 270
days after that date.
    \35\ Section 15E(l)(2) of the Exchange Act (15 U.S.C. 78o-
7(l)(2)).
    \36\ Id.
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III. Description of the Proposed Rules

A. Overview

    The Act mandates that the rules adopted to implement its provisions
be ``narrowly tailored'' to meet the Act's requirements.\37\ Moreover,
it provides that the rules adopted by the Commission may not ``regulate
the substance of credit ratings or the procedures or methodologies by
which an NRSRO determines credit ratings.'' \38\
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    \37\ Section 15E(c)(2) of the Exchange Act (15 U.S.C. 78o-
7(c)(2)).
    \38\ Id.
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    Under the proposed rules,\39\ in conjunction with the statutory
provisions of the Act, a credit rating agency seeking to register as an
NRSRO would need to apply to the Commission using Form NRSRO.\40\ The
information furnished to the Commission in the form would fall broadly
into two categories. First, the form would elicit information the
credit rating agency would need to make public upon registration and
thereafter update to keep the information current.\41\ As the Senate
Report noted, making this information public would ``facilitate
informed decisions by giving investors the ratings quality of different
firms.'' \42\ The second category of information would be submitted on
a confidential basis to the extent permitted by law and the credit
rating agency would not need to make it public or update it on the form
(but would have to keep it current through proposed financial reporting
requirements).\43\
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    \39\ The proposed rules would be codified respectively at 17 CFR
240.17g-1 (``Rule 17g-1''); 17 CFR 240.17g-2 (``Rule 17g-2''); 17
CFR 240.17g-3 (``Rule 17g-3''); 17 CFR 240.17g-4 (``Rule 17g-4'');
17 CFR 240.17g-5 (``Rule 17g-5''); and 17 CFR 240.17g-6 (``Rule 17g-
6''). Further specifics of this proposed regulatory program--
including citations to provisions in the proposed rules and
statutory provisions of the Act--are provided in the following
sections describing the proposed rules individually.
    \40\ Proposed Rule 17g-1.
    \41\ See Sections 15E(a)(1)(B) and (b)(1) of the Exchange Act
(15 U.S.C. 78o-7(a)(1)(B) and (b)(1)), Proposed Rule 17g-1, Form
NRSRO, and instructions for the form.
    \42\ See Senate Report.
    \43\ See Sections 15E(a)(1)(B)(viii) and (ix) of the Exchange
Act (15 U.S.C. 78o-7(a)(1)(B)(viii) and (ix)), proposed Rule 17g-3,
Section 24 of the Exchange Act (15 U.S.C. 78x), 17 CFR 240.24b-2, 17
CFR 200.80, and 17 CFR 200.83.
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    After registration, the credit rating agency (now an NRSRO under
the Act) would need to promptly update the information on its Form
NRSRO to the extent an item or exhibit becomes materially inaccurate,
with certain exceptions.\44\ In addition, on a calendar year basis, the
credit rating agency would need to furnish the Commission with an
annual certification on Form NRSRO that the information and documents
in the form continues to be accurate and listing any material changes
that occurred during the year.\45\ The most recently furnished Form
NRSRO (initial, amended, or annual certification) and public exhibits
would be the operative registration application and would need to be
made public by the NRSRO (with exceptions for certain confidential
information).
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    \44\ See Section 15E(b)(1) of the Exchange Act (15 U.S.C. 78o-
7(a)(1)(B) and (b)(1)), proposed Rule 17g-1, Form NRSRO, and
instructions for the form.
    \45\ Section 15E(b)(2) of the Exchange Act (15 U.S.C. 78o-
7(b)(2)), proposed Rule 17g-1, Form NRSRO, and instructions for the
form.
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    After registration, the NRSRO would be subject to several
substantive rules. First, the NRSRO would be subject to a recordkeeping
rule, under which the NRSRO would be required to make and retain
certain records relating to the business of issuing credit ratings.\46\
These records would assist the Commission, through its examination
process, in monitoring whether the NRSRO complies with the requirements
of the Act. Other required records would assist the Commission in
monitoring whether the NRSRO follows its established policies and
procedures.
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    \46\ Proposed Rule 17g-2.
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    On an annual fiscal year basis, an NRSRO would be required to
furnish the Commission with audited financial statements.\47\ This
requirement is designed to assist the Commission in monitoring whether
the credit rating agency continues to maintain adequate financial
resources to consistently produce credit ratings with integrity. The
financial reports also would include a schedule of the NRSRO's largest
customers. This would assist the Commission in monitoring for potential
conflicts of interest arising from

dealings with the NRSRO's largest customers.
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    \47\ Proposed Rule 17g-3.
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    Finally, all NRSROs would be subject to requirements designed to
protect their impartiality with respect to issuing credit ratings.
First, they would be required to establish, maintain, and enforce
specific written policies designed to prevent the misuse of material
non-public information.\48\ Second, they would be subject to
requirements to avoid, manage, and disclose conflicts of interest.\49\
Third, NRSROs would be prohibited from engaging in certain unfair,
coercive, or abusive practices.\50\
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    \48\ Section 15E(g) of the Exchange Act (15 U.S.C. 78o-7(g)),
proposed Rule 17g-4.
    \49\ Section 15E(h) of the Exchange Act (15 U.S.C. 78o-7(h)),
proposed Rule 17g-5.
    \50\ Section 15E(i) of the Exchange Act (15 U.S.C. 78o-7(i)),
proposed Rule 17g-6.
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B. Proposed Rule 17g-1--Registration Requirements

    The provisions of proposed Rule 17g-1 would implement rulemaking
authority under the Act with respect to how a credit rating agency must
apply to be registered as an NRSRO, make the non-confidential
information in its application public, apply to add an additional
category of credit ratings to its registration, update its application,
furnish the annual certification, and withdraw its registration.
1. Entities Eligible To Apply for Registration
    The Act, by adding definitions to Section 3 of the Exchange
Act,\51\ identifies the types of entities that may apply for
registration with the Commission as an NRSRO.\52\ First, it defines a
``nationally recognized statistical rating organization'' as a credit
rating agency that:
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    \51\ 15 U.S.C. 78c.
    \52\ See Section 3 of the Act.
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    (A) Has been in business as a credit rating agency for at least the
three consecutive years immediately preceding the date of its
application for registration under section 15E [of the Exchange Act];
    (B) Issues credit ratings certified by qualified institutional
buyers, in accordance with section 15E(a)(1)(B)(ix) [of the Exchange
Act], with respect to
    (i) Financial institutions, brokers, or dealers;
    (ii) Insurance companies;
    (iii) Corporate issuers;
    (iv) Issuers of asset-backed securities (as that term is defined in
[17 CFR 229.1101(c)]);
    (v) Issuers of government securities, municipal securities, or
securities issued by a foreign government; or
    (vi) A combination of one or more categories of obligors described
in any of clauses (i) through (v); and
    (C) Is registered under section 15E [of the Exchange Act].\53\
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    \53\ Section 3(a)(62) of the Exchange Act (15 U.S.C.
78c(a)(62)). Section 3(a)(64) of the Exchange Act defines the
``qualified institutional buyer'' (``QIB'') as having the ``meaning
given such term in [17 CFR 230.144A(a)] or any successor thereto.''
15 U.S.C. 78c(a)(62).
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    Section 3 of the Exchange Act also defines the term ``credit rating
agency'' as any person:
    (A) Engaged in the business of issuing credit ratings on the
Internet or through another readily accessible means, for free or for a
reasonable fee, but does not include a commercial credit reporting
company;
    (B) Employing either a quantitative or qualitative model, or both,
to determine credit ratings; and
    (C) receiving fees from either issuers, investors, or other market
participants, or a combination thereof.\54\
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    \54\ Section 3(a)(61) of the Exchange Act (15 U.S.C.
78c(a)(61)).
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    Finally, Section 3 of the Exchange Act defines the term ``credit
rating'' to mean ``an assessment of the creditworthiness of an obligor
as an entity or with respect to specific securities or money market
instruments.'' \55\
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    \55\ Section 3(a)(60) of the Exchange Act (15 U.S.C.
78c(a)(60)).
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    Taken together, these three definitions limit the type of entity
eligible to be registered with the Commission as an NRSRO. First, the
entity must meet the definition of ``credit rating agency'' in Section
3 of the Exchange Act, which means, among other things, it must issue
``credit ratings'' as that term is defined in the act. Thus, an entity
that issues ``credit ratings'' but does not receive compensation from
issuers, investors, or other market participants would not be eligible
for registration as an NRSRO because it would not meet the third prong
of the definition of ``credit rating agency.'' \56\ Similarly, an
entity would not be eligible for registration based solely on the fact
that it has issued recommendations with respect to equity securities
(for example, buy, sell, or hold) or ratings with respect to the
quality of a company's management. In either case, the entity would not
have been issuing ``credit ratings'' as the term is defined because the
recommendations and ratings are not assessments of the creditworthiness
of an obligor or of specific securities or money market
instruments.\57\
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    \56\ See Section 3(a)(61)(C) of the Exchange Act (15 U.S.C.
78c(a)(61)(C)).
    \57\ See Section 3(a)(60) of the Exchange Act (15 U.S.C.
78c(a)(60)).
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    Another component of the first prong in the definition of ``credit
rating agency'' is that the entity must be engaged in the business of
issuing credit ratings on the Internet or through another readily
accessible means, for free or for a reasonable fee.\58\ The statute
does not define ``reasonable fee.'' As a preliminary matter, the
Commission believes that the fees contemplated by the definition are
those charged by a credit rating agency, if any, for a customer to
access or receive the credit ratings of the credit rating agency. The
fees a credit rating agency charges for other services are not part of
the definition, since regulatory users of credit ratings would not need
access to these other services to comply with statutes and regulations
using the term ``NRSRO.'' These other fees would include fees charged
to issuers, obligors, or underwriters to determine or maintain a credit
rating, fees charged to subscribers for credit analysis reports, and
fees charged for consulting or other services.
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    \58\ See Section 3(a)(61)(A) of the Exchange Act (15 U.S.C.
78c(a)(61)(A).
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    Additionally, the Commission preliminarily believes that the
determination of whether a fee for accessing or obtaining credit
ratings is reasonable would depend on the facts and circumstances. The
Commission requests comment on the issue of determination of the
reasonableness of fees charged by NRSROs for accessing or obtaining
their credit ratings; in particular, the Commission requests comment on
this issue in the context of users of credit ratings for regulatory
purposes.
    Finally, if an entity meets the definition of ``credit rating
agency,'' the entity must have been in the business of issuing credit
ratings for the three years immediately preceding the date of its
application for registration to be eligible to apply to register with
the Commission as an NRSRO.
2. Description of Proposed Registration Rule (Rule 17g-1)
    A credit rating agency that elects to be treated as an NRSRO must
apply to the Commission to be registered as an NRSRO. Section
15E(a)(1)(A) of the Exchange Act provides that a credit rating agency
applying for registration must furnish the Commission with an
application in a form prescribed by Commission rule.\59\ In addition,
Section 15E(a)(1)(B) of the Exchange Act prescribes certain minimum
information the credit rating agency must provide in

the application.\60\ This includes information regarding the categories
of credit ratings set forth in the definition of ``NRSRO'' in Section
3(a)(62)(B) of the Exchange Act with respect to which the credit rating
agency ``intends to apply for registration.'' \61\
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    \59\ 15 U.S.C. 78o-7(a)(1)(A).
    \60\ 15 U.S.C. 78o-7(a)(1)(B).
    \61\ See Section 15E(a)(1)(B)(vii) of the Exchange Act (15
U.S.C. 78o-7(a)(1)(B)(vii)).
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    Paragraph (a) of proposed Rule 17g-1 would implement these
provisions by providing that a credit rating agency applying to be
registered with the Commission as an NRSRO would be required to furnish
the Commission with an application on Form NRSRO. As discussed below, a
credit rating agency would be able to apply to be registered for less
than all five of the categories of credit ratings identified in Section
3(a)(62)(B) of the Exchange Act.\62\ For example, the credit rating
agency might not meet the definitional thresholds discussed above with
respect to a particular category of credit rating because it has not
issued credit ratings in that category for the three years preceding
the date of its application.\63\
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    \62\ 15 U.S.C. 78c(a)(62)(B).
    \63\ See definition of ``NRSRO'' in Section 3(a)(62) of the
Exchange Act (15 U.S.C. 78c(a)(62)).
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    Paragraph (b)(1) of proposed Rule 17g-1 provides that an
application would be considered furnished to the Commission on the date
that the Commission receives a complete and properly executed Form
NRSRO that follows all applicable instructions for the form.\64\ The
requirement that an application must be accurate and complete comports
with the requirements imposed on other classes of registrants under the
Exchange Act.\65\ In addition, Section15E(a)(2)(A) of the Exchange Act
requires the Commission to grant the application for registration or
commence proceedings on whether to deny it within 90 days from the date
the application is furnished to the Commission or a longer period if
the applicant consents.\66\ Moreover, if proceedings are commenced,
Section 15E(a)(2)(B) of the Exchange Act \67\ requires the Commission
to conclude them within 120 days of the date the application was
furnished to the Commission.\68\ As a result, the Commission must have
a complete application before the 90-day and 120-day periods begin to
run.
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    \64\ This provision would be implemented under the Commission's
authority in Section 15E(a)(1)(A) of the Exchange Act to prescribe
the form of the application (15 U.S.C. 78o-7(a)(1)(A)).
    \65\ See e.g., 17 CFR 240.15b1-1 and 17 CFR 240.15b3-1 (broker-
dealers); 17 CFR 240.15Ba2-1 (municipal securities dealers); 17 CFR
240.17Ab2-1 (clearing agencies); and 17 CFR 240.17Ac2-1 (transfer
agents).
    \66\ 15 U.S.C. 78o-7(a)(2)(A).
    \67\ 15 U.S.C. 78o-7(a)(2)(B).
    \68\ Under Section 15E(a)(2)(B)(iii) of the Exchange Act, the
Commission can extend this period for an additional 90 days for good
cause or for such other period as the applicant consents (15 U.S.C.
78o-7(a)(2)(B)(iii)). Practically, an applicant would need to
consent to extend both the period for the Commission to make the
initial determination and the 120-day period to conclude
proceedings, since the 120-day period begins when the application is
furnished to the Commission, not when the Commission determines to
commence proceedings.
---------------------------------------------------------------------------

    Paragraph (b)(1) of proposed Rule 17g-1 also provides that
information submitted with the application on a confidential basis
would be accorded confidential treatment to the extent permitted by
law. As discussed in detail below, the information proposed to be
required in Form NRSRO includes information which an NRSRO would need
to make public after registration and information that is submitted on
a confidential basis to the extent permitted by law. Some of the
confidential information is required by Section 15E(a)(1)(B) of the
Exchange Act.\69\ The Commission also would require certain additional
information under authority conferred by Section 15E(a)(1)(B)(x) of the
Exchange Act.\70\ The Commission believes that it would be appropriate
to provide confidential treatment to some of this information as well.
Because the statute does not specifically grant confidential treatment
to the additional information, the Commission would provide it through
paragraph (b)(1) of proposed Rule 17g-1 to the extent permitted by law.
---------------------------------------------------------------------------

    \69\ See Sections 15E(a)(1)(B)(viii) and (ix) of the Exchange
Act (15 U.S.C. 78o-7(a)(1)(B)(viii) and (ix)).
    \70\ 15 U.S.C. 78o-7(a)(1)(B)(x).
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    Paragraph (b)(2) of proposed Rule 17g-1 would provide a mechanism
for a credit rating agency to withdraw its application before the
Commission takes final action on it.\71\ Specifically, it would require
the credit rating agency to furnish the Commission with a written
notice of withdrawal executed by a duly authorized person. The proposed
requirement for execution by a duly authorized person is designed to
ensure that the withdrawal notice reflects the intent of the credit
rating agency.
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    \71\ The withdrawal of a granted registration is discussed
separately below.
---------------------------------------------------------------------------

    Paragraph (c) of proposed Rule 17g-1 would provide that if
information on the application becomes materially inaccurate before the
Commission has granted or denied the application, the credit rating
agency must promptly notify the Commission and amend the application
with accurate and complete information by submitting an amended initial
application on proposed Form NRSRO.\72\ Because preparing and
furnishing an amended form may take time, this proposed notification
provision is designed to alert the Commission as soon as possible that
the application before it is materially inaccurate or incomplete. The
intent is to avoid situations where the Commission continues to review
an application that is no longer materially accurate.
---------------------------------------------------------------------------

    \72\ This provision would be implemented under the Commission's
authority in Section 15E(a)(1)(A) of the Exchange Act to prescribe
the form of the application (15 U.S.C. 78o-7(a)(1)(A)).
---------------------------------------------------------------------------

    Section 15E(a)(3) of the Exchange Act provides that the Commission,
by rule, shall require an NRSRO, after registration, to make the
information submitted in its completed application and any amendments
publicly available on its Web site or through another comparable,
readily accessible means.\73\ It also permits the Commission to
determine by rule the information that shall be made publicly
available.\74\
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    \73\ 15 U.S.C. 78o-7(a)(3).
    \74\ Section 15E(a)(3) of the Exchange Act (15 U.S.C. 78o-
7(a)(3)). As discussed below, the Commission proposes not to require
an NRSRO to make public certain information required in the
application, including the information about the applicant's 20
largest issuer and subscriber customers and the QIB certifications.
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    Paragraph (d) of proposed Rule 17g-1 would require that the
information be made publicly available within five business days of the
NRSRO being registered or furnishing an amendment or annual
certification. The five business-day period is intended to provide the
NRSRO with sufficient time to make the information public while also
designed to ensure that users of credit ratings would have access to
information within a reasonably short timeframe. Under the proposed
rule, certain additional information submitted pursuant to Commission
rulemaking authority also would not need to be made publicly available
after registration.\75\ In addition, an applicant could seek
confidential treatment for information in the application under
existing law and rules governing confidential treatment.\76\ The
Commission would accord this information confidential treatment to the
extent permitted by law.
---------------------------------------------------------------------------

    \75\ See discussion below with respect to Exhibits 10 through 13
of proposed Form NRSRO.
    \76\ See 17 CFR 200.80 and 17 CFR 200.80a.
---------------------------------------------------------------------------

    While Section 15E(a)(3) of the Exchange Act \77\ does not require
an applicant to make the public information in its application publicly
available until after registration, this information typically would be
made available by the Commission to

members of the public before the application is acted on by the
Commission. As noted above, an applicant could seek confidential
treatment for information in the application under existing laws and
rules governing confidential treatment.\78\ This would be consistent
with how the Commission treats applications of other entities.
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    \77\ 15 U.S.C. 78o-7(a)(3).
    \78\ See Section 24 of the Exchange Act (15 U.S.C. 78x), 17 CFR
240.24b-2, 17 CFR 200.80 and 17 CFR 200.83.
---------------------------------------------------------------------------

    As noted, a credit rating agency may apply to be registered for
fewer than all five categories of credit ratings described in Section
3(a)(62)(B) of the Exchange Act.\79\ Paragraph (e) of proposed Rule
17g-1 would create a mechanism for an NRSRO registered for fewer than
the five categories to apply to be registered with respect to an
additional category.\80\ The proposed rule provides that the NRSRO
would need to furnish an amended Form NRSRO and indicate where
appropriate on the form the additional category for which it is
applying to be registered.\81\ The proposed rule also provides that the
application to register for an additional category would be subject to
the requirements in proposed Rule 17g-1 and Section 15E of the Exchange
Act \82\ applicable to an initial application. For example, the
provisions of paragraph (b)(1) of proposed Rule 17g-1 regarding when an
application is deemed to have been furnished to the Commission would
apply, as would the provisions of paragraph (c) with respect to
amending the application prior to registration being granted. The time
periods for the Commission to act on the application set forth in
Sections 15E(a)(2)(A) and (B) of the Exchange Act also would apply to
the amended form.\83\
---------------------------------------------------------------------------

    \79\ Section 15E(a)(1)(B)(vii) of the Exchange Act (15 U.S.C.
78o-7(a)(1)(B)(vii)) provides that a credit rating agency must
submit information with its application regarding the categories of
credit ratings described in Section 3(a)(62)(B) of the Exchange Act
(15 U.S.C. 78c(a)(62)(B)) for which it ``intends to apply for
registration.''
    \80\ This provision further implements Section 15E(a)(1) of the
Exchange Act, which requires the Commission, by rule, to prescribe
the form of an application for registration (15 U.S.C. 78o-7(a)(1)).
    \81\ The specific requirements for completing the Form NRSRO in
this circumstance are described in the next section.
    \82\ 15 U.S.C. 78o-7.
    \83\ 15 U.S.C. 78o-7(a)(2)(A) and (B).
---------------------------------------------------------------------------

    Section 15E(b)(1) of the Exchange Act requires an NRSRO to promptly
amend its application for registration if, after registration, any
information or document provided as part of the application becomes
materially inaccurate.\84\ The statute further provides that the
information on credit ratings performance statistics (discussed more
fully below) need only be updated on an annual basis and that the QIB
certifications need not be updated.\85\ Paragraph (f) of proposed Rule
17g-1 provides that an NRSRO would need to meet the statutory
requirement to amend an application if information becomes materially
inaccurate by promptly furnishing the amendment to the Commission on
Form NRSRO.\86\ The Act does not define the term ``promptly.'' The
Commission believes the amendment should be furnished as soon as
reasonably practicable after the NRSRO determines the information has
become materially inaccurate. In most cases, the Commission believes
that completing Form NRSRO, attaching any amended information and
documents, and submitting the amendment package to the Commission
should not take more than two days
---------------------------------------------------------------------------

    \84\ 15 U.S.C. 78o-7(b)(1).
    \85\ Id.
    \86\ This provision further implements Section 15E(a)(1) of the
Exchange Act (15 U.S.C. 78o-7(a)(1)), which requires the Commission,
by rule, to prescribe the form of an application for registration.
---------------------------------------------------------------------------

    Section 15E(b)(2) of the Exchange Act requires an NRSRO to furnish
the Commission with an amendment to its registration not later than 90
days after the end of each calendar year in a form prescribed by
Commission rule.\87\ This section further provides that the amendment
must (1) Certify that the information and documents provided in the
application for registration (except the QIB certifications) continue
to be accurate and (2) list any material change to the information and
documents during the previous calendar year.\88\ Paragraph (g) of
proposed Rule 17g-1 would implement these statutory provisions by
requiring an NRSRO to furnish the amendment on Form NRSRO.
---------------------------------------------------------------------------

    \87\ 15 U.S.C. 78o-7(b)(2).
    \88\ Id.
---------------------------------------------------------------------------

    Finally, Section 15E(e)(1) of the Exchange Act provides that an
NRSRO may withdraw from registration, subject to terms and conditions
the Commission may establish as necessary in the public interest or for
the protection of investors, by furnishing the Commission with a
written notice of withdrawal.\89\ Paragraph (h) of proposed Rule 17g-1
would provide that the notice must be executed by a person duly
authorized by the NRSRO. The proposed requirement for execution by a
duly authorized person is designed to ensure that the registration
withdrawal notice reflects the intent of the credit rating agency.
Section 15E(e)(1) of the Exchange Act also provides the Commission with
the authority to establish additional terms and conditions with respect
to the withdrawal of a credit rating agency's NRSRO registration as
necessary in the public interest or for the protection of
investors.\90\ Such conditions potentially could include a requirement
that the NRSRO provide public notice that its credit ratings will cease
to be eligible for regulatory use.
---------------------------------------------------------------------------

    \89\ 15 U.S.C. 78o-7(e)(1).
    \90\ 15 U.S.C. 78o-7(e)(1).
---------------------------------------------------------------------------

    The Commission generally requests comment on all aspects of this
proposed rule. The Commission also seeks comment on whether the five-
day time limit for making the non-confidential information in the
application publicly available should be longer or shorter. For
example, the Commission seeks comment on whether five days is a
sufficient amount of time to make an initial application public, given
the volume of information that may need to be posted on a Web site or
made public through another comparable means. Additionally, the
Commission requests comment on ways other than the Internet that the
information could be made public that would be comparable to posting
the information on a Web site, particularly in terms of ensuring that
users of credit ratings would have a comparable ease of access to the
information. Further, the Commission seeks comment on whether it should
define the term ``promptly'' in section 15E(b)(1) of the Exchange Act
\91\ to mean a specific time period such as two, five, or ten business
days or some other period.
---------------------------------------------------------------------------

    \91\ 15 U.S.C. 78o-7(b)(1).
---------------------------------------------------------------------------

C. Proposed Form NRSRO

1. Overview of How the Form Would Be Used
    The Commission is proposing a new form, ``Form NRSRO,'' the
``Application for Registration as a Nationally Recognized Statistical
Rating Organization.'' The form is designed to serve four functions: To
apply for initial registration, to amend the scope of registration, to
amend public information required by the form, and to make an annual
certification. Instructions for the form describe how an applicant, and
after registration, an NRSRO, should complete the form in each of these
circumstances. The Commission construes the Act's requirement that
implementing rules be ``narrowly tailored'' to also apply to proposed
Form NRSRO.\92\
---------------------------------------------------------------------------

    \92\ Section 15E(c)(2) of the Exchange Act (15 U.S.C. 78o-
7(c)(2)).
---------------------------------------------------------------------------

    The Commission believes that having just one form (and one set of
instructions) would reduce the burden on applicants, NRSROs, and

Commission staff. For example, it would reduce the complexity of having
different forms for the application, amendments, and annual
certification. Using one form also would allow NRSROs to more quickly
become familiar with the form and its instructions, which would reduce
the potential for making mistakes in completing the form. It also would
assist users of credit ratings in understanding the form and public
exhibits and where to look on the form for specific information.
    A credit rating agency applying for registration as an NRSRO would
need to complete the form by providing the required information in all
the items (except Item 7) \93\ and attaching all exhibits. The credit
rating agency also would need to attach a minimum of 10 certifications
from QIBs (with at least two addressing each category for which
registration is sought), and a non-resident credit rating agency would
need to attach the undertaking required under proposed Rule 17g-2
(discussed below).
---------------------------------------------------------------------------

    \93\ As discussed below, an NRSRO would need to complete Item 7
when furnishing an amendment to the form or the annual certification
required under Section 15E(b)(2) of the Exchange Act (15 U.S.C. 78o-
7(b)(2)).
---------------------------------------------------------------------------

    The Commission would use the information provided on the form to
make the threshold determination whether the applicant is a ``credit
rating agency'' as defined in section 3(a)(61) of the Exchange Act and
would meet the definition of ``NRSRO'' in section 3(a)(62) of the
Exchange Act.\94\ The Commission also would use the information on the
form to determine whether the applicant meets the statutory
requirements for registration.\95\ Specifically, the Commission would
use the information to determine whether the applicant has adequate
financial and managerial resources to consistently produce credit
ratings with integrity and to comply with its established policies and
methodologies (e.g., policies for determining credit ratings, managing
material non-public information and conflicts of interest, and
complying with applicable laws and regulations).\96\ The Commission
also would use the information to determine whether the credit rating
agency, if granted registration, would not be subject to having its
registration suspended or revoked under section 15E(d) of the Exchange
Act.\97\
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    \94\ See 15 U.S.C. 78c(a)(61) and 15 U.S.C. 78c(a)(62).
    \95\ See Section 15E(a)(2)(C) of the Exchange Act (15 U.S.C.
78o-7(a)(2)(C)).
    \96\ See Section 15E(a)(2)(C)(ii)(I) of the Exchange Act (15
U.S.C. 78o-7(a)(2)(C)(ii)(I)).
    \97\ Section 15E(a)(2)(C)(ii)(II) of the Exchange Act (15 U.S.C.
78o-7(a)(2)(C)(ii)(II)) directs the Commission to deny a credit
rating agency's application for registration as an NRSRO if the
Commission finds that the applicant, if granted registration, would
be subject to suspension or revocation of its registration under
Section 15E(d) of the Exchange Act (15 U.S.C. 78o-7(d)).
---------------------------------------------------------------------------

    After registration, an NRSRO would use Form NRSRO if it sought to
apply for registration with respect to an additional category of credit
ratings. In this case, the NRSRO would not need to update the non-
public exhibits, and it also would not need to update the public
exhibits to the extent that information or documents previously
provided remained materially accurate. However, the fact that the NRSRO
was seeking to expand the scope of its registration to an additional
category of credit ratings likely would mean certain information
provided in the public exhibits would no longer be materially accurate.
For example, the NRSRO may have established new or additional
methodologies to determine credit ratings in the category for which it
was seeking registration. These would need to be provided as an update
to Exhibit 2.\98\ Finally, the NRSRO would need to provide two QIB
certifications for each category of credit rating for which it is
applying to be registered.\99\
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    \98\ As discussed below, Exhibit 2 would elicit the
methodologies used by the credit rating agency to determine credit
ratings.
    \99\ Section 15E(a)(1)(C)(ii) of the Exchange Act requires an
applicant to provide at least 2 QIB certifications for each category
of credit rating for which the credit rating agency seeks to be
registered (78o-7(a)(1)(C)(iii)).
---------------------------------------------------------------------------

    An NRSRO also would use Form NRSRO to amend the information on the
form and in the public exhibits after registration.\100\ The need to
amend the form would arise whenever there was a material change to
information in one of the items on the form (except for Items 6 and 7)
\101\ or to information or a document provided in a public exhibit. For
example, if the NRSRO materially changed its procedures for preventing
the misuse of material non-public information, the NRSRO would be
required to furnish the Commission with an amendment on Form NRSRO and
include the new procedures as an update to Exhibit 3.\102\ It would not
need to update the other public exhibits if the information in them
remained materially accurate.
---------------------------------------------------------------------------

    \100\ See Section 15E(b)(1) of the Exchange Act, which requires
an NRSRO to update certain information provided in its application
for registration (15 U.S.C. 78o-7(b)(1)).
    \101\ As explained below, Item 6 only would be used to provide
information relating to the categories of credit ratings for which a
credit rating agency was applying for registration. Therefore,
unless the amendment is furnished to apply for registration in an
additional category, Item 6 would not need to be completed or
updated after registration. Item 7 requires information relating to
current credit ratings, including information that could change
relatively often such as the number of credit ratings currently
issued. Therefore, this item would not need to be updated when
information in the item materially changed. Instead, an NRSRO would
be required to update it when furnishing a Form NRSRO for another
reason.
    \102\ As discussed below, Exhibit 3 requires policies and
procedures implemented by the NRSRO to prevent the misuse of
material non-public information.
---------------------------------------------------------------------------

    Finally, an NRSRO would use Form NRSRO to furnish the annual
certification required by Section 15E(b)(2) of the Exchange Act.\103\
This section requires the NRSRO to certify on an annual calendar-year
basis that the information and documents provided in its application
continue to be materially accurate (other than the QIB
certifications).\104\ It also requires the NRSRO to identify any
material change to the information or documents that occurred during
the previous calendar year.\105\ In addition, Section 15E(b)(1) of the
Exchange Act provides that the performance statistics about the NRSRO's
credit ratings need only be updated on a yearly basis with the annual
certification.\106\
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    \103\ 15 U.S.C. 78o-7(b)(2).
    \104\ Section 15E(b)(2)(A) of the Exchange Act (15 U.S.C. 78o-
7(b)(2)(A)).
    \105\ Section 15E(b)(2)(B) of the Exchange Act (15 U.S.C. 78o-
7(b)(2)(B)).
    \106\ 15 U.S.C. 78o-7(b)(1)(A).
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    The proposed Form NRSRO is designed to meet these statutory
requirements. First, the certification on the facing page would include
the representations needed for the annual certification; namely, that
the NRSRO's application on Form NRSRO, as amended, continues to be
accurate.\107\ Second, Exhibit 1 would require information on credit
rating performance statistics. The instructions would require this
information to be provided in the initial application and, thereafter,
updated with the annual certification (as opposed to the other public
exhibits that would need to be updated promptly whenever they become
materially inaccurate). The instructions also would require the NRSRO
to include with the annual certification a list of each material change
made during the previous calendar year.\108\
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    \107\ See Section 15E(b)(2)(A) of the Exchange Act (15 U.S.C.
78o-7(b)(2)(A)).
    \108\ See Section 15E(b)(2)(B) of the Exchange Act (15 U.S.C.
78o-7(b)(2)(B)).
---------------------------------------------------------------------------

2. Items on the Form
    Checkboxes indicating nature of submission. The first entry an
applicant or NRSRO would make on Form NRSRO

would be to indicate, by checking the appropriate box, the reason the
form is being furnished: initial application, amendment, or annual
certification. If an amendment, the NRSRO also would need to briefly
describe the amendment on lines under the amendment check box. For
example, if an NRSRO was filing the amendment because its address and
organizational structure changed, the description of the amendments
should be as brief as ``Item 1C (address change)'' and ``Exhibit 4 (new
organizational structure).''
    Item 1 (Identifying information). Item 1 of proposed Form NRSRO
would elicit the name and address of the credit rating agency, and the
name and address of the contact person for the credit rating agency.
The instructions for proposed Form NRSRO would provide that the
individual listed as the contact person must be authorized to receive
all communications and papers from the Commission and would be
responsible for their dissemination within the credit rating agency.
    Item 2 (Legal status, place of formation, fiscal year end). Item 2
of proposed Form NRSRO would elicit the legal status of the credit
rating agency (for example, corporation or partnership), the place and
date of formation of the entity, and the fiscal year end of the credit
rating agency. The information with respect to the fiscal year end of
the applicant or NRSRO is relevant because Form NRSRO would require
applicants to submit audited financial statements with the application.
Proposed Rule 17g-3 would require NRSROs to annually furnish the
Commission with audited financial statements covering the previous
fiscal year.
    Item 3 (Undertaking by non-resident NRSRO). Paragraph (f) of
proposed Rule 17g-2 would require an NRSRO that does not reside in the
United States to execute a written undertaking, in substantially the
form provided in the proposed rule, to promptly provide books and
records to the Commission in a form requested by the Commission,
including translation into English. The proposed undertaking is
designed to provide a means for the Commission to promptly obtain
records subject to its examination authority located outside the U.S.
without requiring that Commission staff travel to the location. In
addition, because some non-resident NRSROs may maintain original
records in a language other than English, the proposed undertaking
would require a translation if the Commission requested it.
    Item 3 of proposed Form NRSRO would require a non-resident
applicant to attach the required undertaking to its initial
application. If the application is granted, the undertaking would be in
place when the applicant becomes an NRSRO and is subject to the
proposed recordkeeping requirements. The prescribed form of the
undertaking would make it applicable only to books and records a credit
rating agency is required to make, keep current, retain, or produce to
the Commission pursuant to any provision of the Exchange Act \109\ or
any regulation under the Exchange Act.\110\ An applicant becomes
subject to these recordkeeping requirements only after registration is
granted and the applicant becomes an NRSRO.
---------------------------------------------------------------------------

    \109\ 15 U.S.C. 78a et seq.
    \110\ This would include the records required to be retained in
proposed Rule 17g-2.
---------------------------------------------------------------------------

    Item 4 (Compliance officer). Section 15E(j) of the Exchange Act
requires every NRSRO to designate an individual responsible for
administering the policies and procedures of the credit rating agency
to prevent the misuse of nonpublic information, to manage conflicts of
interest, and to ensure compliance with the securities laws and the
rules and regulations under those laws.\111\ Item 4 of proposed Form
NRSRO would elicit the name of and contact information for this person.
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    \111\ 15 U.S.C. 78o-7(j).
---------------------------------------------------------------------------

    Item 5 (Method of making form and public exhibits readily
accessible). Section 15E(a)(3) of the Exchange Act provides that the
Commission shall, by rule, require an NRSRO, upon the granting of
registration, to make the non-confidential information and documents
submitted to the Commission in the initial application, amendments, or
annual certifications publicly available on the NRSRO's Web site or
through another comparable, readily accessible means.\112\ Item 5 of
proposed Form NRSRO would elicit information on how the applicant would
make the public information readily accessible. Providing this
information on proposed Form NRSRO would assist the Commission in
verifying that the NRSRO is complying with this requirement and assist
the public in locating the information to assess the credibility and
integrity of the NRSRO.
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    \112\ 15 U.S.C. 78o-7(a)(3). Paragraph (d) of proposed Rule 17g-
1 (discussed above) would implement this rulemaking authority.
---------------------------------------------------------------------------

    Item 6 (Categories of credit ratings for which registration is
sought and QIB certifications). Item 6 of proposed Form NRSRO would
only need to be completed when a credit rating agency was furnishing an
initial application to be registered as an NRSRO and when an NRSRO was
applying to expand the scope of its registration by adding an
additional class of credit ratings. This item would elicit information
about the categories of credit ratings for which the applicant was
applying for registration. It also would require the applicant to
attach the QIB certifications to the application (unless the applicant
was exempt from this requirement under Section 15E(a)(1)(D) of the
Exchange Act).\113\
---------------------------------------------------------------------------

    \113\ 15 U.S.C. 78o-7(a)(1)(D).
---------------------------------------------------------------------------

    Section 15E(a)(1)(B)(vii) of the Exchange Act requires an applicant
for NRSRO registration to provide information with respect to the
categories of credit ratings for which it is applying to be
registered.\114\ Item 6 of proposed Form NRSRO would require a credit
rating agency applying for registration, and an NRSRO applying to add a
category of credit ratings to its registration, to indicate the
categories of credit ratings for which registration was being sought.
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    \114\ 15 U.S.C. 78o-7(a)(1)(B)(vii).
---------------------------------------------------------------------------

    Item 6 also would elicit the approximate number of credit ratings
issued in each category as of the date of the application, and the
number of consecutive years preceding the date of the application that
the credit rating agency has issued credit ratings with respect to each
category indicated. This information would be used by the Commission in
verifying that the credit rating agency meets the definitional
thresholds for registration as NRSRO, including that the entity has
been in business as a credit rating agency for the three consecutive
years preceding the date of its application.\115\
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    \115\ As discussed above, the definitions of ``credit rating,''
``credit rating agency,'' and NRSRO in, respectively, Sections
3(a)(60), (61) and (62) of the Exchange Act prescribe the type of
entity that is eligible for registration as an NRSRO (15 U.S.C.
78c(a)(60), (61) and (62)).
---------------------------------------------------------------------------

    Item 6 also would elicit a brief description of how the credit
rating agency makes its credit ratings readily accessible. The
Commission would use this information to verify that the applicant
meets another definitional threshold for registration eligibility;
namely, that the applicant issues credit ratings on the Internet or
through another readily accessible means, for free or for a reasonable
fee.\116\ The Act does not define ``readily accessible'' other than to
specify that the method must be comparable to the Internet in terms of
accessibility.\117\ Moreover, as discussed above, the Act does not
define ``reasonable fee.'' However, the Commission believes the ``fee''

contemplated by the statute is the fee charged to access or receive the
credit ratings of the credit rating agency (i.e., not the fees charged
for other services). This information elicited in Item 6 (and after
registration in Item 7) would assist the Commission in monitoring the
cost to regulatory users of credit ratings of accessing or obtaining
NRSRO credit ratings.
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    \116\ Section 3(a)(61)(A) of the Exchange Act (15 U.S.C.
78c(a)(61)(A)).
    \117\ Id.
---------------------------------------------------------------------------

    Finally, Item 6 would require the applicant to provide QIB
certifications. Section 15E(a)(1)(B)(ix) of the Exchange Act requires
an applicant to submit a minimum of ten QIB certifications with the
application.\118\ Sections 15E(a)(1)(C)(i), (ii), and (iii) further
provide, respectively, that: (1) The certifying QIB must not be
affiliated with the applicant; (2) the certification may address more
than one of the categories of credit ratings for which the applicant is
seeking registration; and (3) at least two of the certifications must
address each category of credit ratings for which the applicant is
seeking registration.\119\ Section 15E(a)(1)(C)(iv) provides that the
QIB must state in the certification that it meets the definition of a
``QIB'' in Section 3(a)(64) of the Exchange Act \120\ and that the QIB
has used the credit ratings of the applicant for at least three years
immediately preceding the date of the application in the subject
category or categories of subscribers.\121\ The Senate Report explained
that the term ``used'' was intended to mean the QIB ``seriously
considered the ratings in some of [its] investment decisions.'' \122\
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    \118\ 15 U.S.C. 78o-7(a)(1)(B)(ix).
    \119\ See 15 U.S.C. 78o-7(a)(1)(C)(i), (ii) and (iii),
respectively.
    \120\ 15 U.S.C. 78c(a)(64).
    \121\ 15 U.S.C. 78o-7(a)(1)(C)(iv).
    \122\ The Senate Report further explained that ``a QIB whose
analysts regularly read and consider [a credit rating agency's]
ratings in the course of making investment decisions would have
``used'' them under the meaning of the bill. A QIB whose employees
subscribe to or regularly receive the ratings but do not read them
or, if they read them, rarely or never consider them in making their
investment decisions would not be deemed to have ``used'' the
ratings.''
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    The proposed instructions to Item 6 would prescribe the form of the
QIB certification. For example, consistent with Section
15E(a)(1)(C)(i)(I) of the Exchange Act \123\ and the Senate Report
explaining that section, the QIB certification would be required to
include a representation that the QIB ``has seriously considered the
credit ratings of [the credit rating agency] in the course of making
investment decisions for at least the three years immediately preceding
the date of this certification, in the following classes of credit
ratings.'' \124\ The QIB certification also would be required to be
executed by a person duly authorized by the QIB to make the
certification on behalf of the QIB.\125\ This is designed to ensure
that the certification is that of the QIB and not an employee of the
QIB who may have an interest (distinct from that of the QIB) in
providing the certification to the applicant. In addition, as a measure
designed to ensure the impartiality of the QIB's assessment, the QIB
would need to certify that it had not received compensation for
providing the certification.
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    \123\ 15 U.S.C. 78o-7(a)(1)(C)(i)(I).
    \124\ Instructions to Item 6D of proposed Form NRSRO.
    \125\ Id.
---------------------------------------------------------------------------

    Item 6 of proposed Form NRSRO also would require the applicant to
indicate whether it was submitting the QIB certifications and, if so,
how many certifications were being submitted or that the applicant was
exempt from the requirement to provide the certifications. Under
Section 15E(a)(1)(D) of the Exchange Act, a credit rating agency is not
required to submit the QIB certifications if it was identified as an
NRSRO in a Commission staff no-action letter issued before August 2,
2006.\126\
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    \126\ 15 U.S.C. 78o-7(a)(1)(D).
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    The Commission requests comment on whether there should be a
requirement for an NRSRO to notify the Commission if a QIB withdraws
its certification.
    Item 7 (Categories of credit ratings covered by current
registration). Item 7 would solicit information about the categories of
credit ratings for which the NRSRO was currently registered, the
approximate number of credit ratings currently outstanding in each
category, and the number of years the NRSRO has issued credit ratings
in that category. It also would elicit information about how the NRSRO
makes its credit ratings readily accessible to users of credit ratings.
    Because some of the information in Item 7 may change fairly
regularly, this Item would need to be updated if it became materially
inaccurate only when the NRSRO furnishes the next Form NRSRO either as
an amendment or as an annual certification. Thus, if the information in
Item 7 became materially inaccurate, it would be updated on an annual
basis at a minimum.
    The information requested in Item 7 would allow users of credit
ratings to assess the NRSRO with respect to the number of credit
ratings it has issued and the number of years it has issued credit
ratings in each category for which it is registered.\127\
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    \127\ Because Item 7 would not have been filled out when the
NRSRO applied for registration, it would remain blank for a period
of time between the granting of an initial registration and the time
when the NRSRO furnishes a new Form NRSRO either as an amendment or
annual certification. Item 6, however, would have been filled out as
part of the application for registration. This item requires the
same information as Item 7. Therefore, users of credit ratings would
have the access to the information through Item 6 until the NRSRO
furnished a new Form NRSRO. Thereafter, the information would be
located in Item 7.
---------------------------------------------------------------------------

    Item 8 (Potential statutory disqualifications). Section
15E(a)(2)(C)(ii)(II) of the Exchange Act \128\ directs the Commission
to deny a credit rating agency's application for registration as an
NRSRO if the Commission finds that the applicant, if granted
registration, would be subject to suspension or revocation of its
registration under Section 15E(d) of the Exchange Act.\129\ Section
15E(d) of the Exchange Act \130\ provides that the Commission, by
order, shall censure, place limitations on the activities, functions,
or operations of, suspend for a period not exceeding 12 months, or
revoke the registration of an NRSRO, if the Commission finds that the
NRSRO or a person associated with the NRSRO has committed certain acts
described in Sections 15(b)(4)(A), (D), (E), (G), or (H) of the
Exchange Act,\131\ been convicted of certain offenses described in
Section 15(b)(4)(B) of the Exchange Act,\132\ been convicted of certain
other offenses, or if a person associated with the NRSRO is subject to
a Commission order suspending or barring the person from being
associated with an NRSRO. Item 8 of proposed Form NRSRO would ask
whether the acts, convictions or orders described in Section 15E(d) of
the Exchange Act \133\ applied to the credit rating agency or any
person associated with the credit rating agency.
---------------------------------------------------------------------------

    \128\ 15 U.S.C. 78o-7(a)(2)(C)(ii)(II).
    \129\ 15 U.S.C. 78o-7(d).
    \130\ 15 U.S.C. 78o-7(d).
    \131\ 15 U.S.C. 78o-7(b)(4)(A), (D), (E), (G) and (H).
    \132\ 15 U.S.C. 78o(b)(4).
    \133\ 15 U.S.C. 78o-7(d).
---------------------------------------------------------------------------

    If a question in Item 8 was answered ``yes,'' the credit
ratingagency would be required to provide additional information on a
Disclosure Reporting Page (DRP) NRSRO as set forth in the instructions
for Form NRSRO. The Commission would then need to evaluate whether an
applicant's registration could be granted in light of the disclosure.
After registration, an NRSRO would need to update the information in
Item 8 if there was a change. The Commission would then evaluate
whether it would be appropriate to issue an order censuring,

placing limitations on the activities, functions, or operations of,
suspending for a period not exceeding 12 months, or revoking the
registration of the NRSRO as provided for under Section 15E(d) of the
Exchange Act.\134\
---------------------------------------------------------------------------

    \134\ 15 U.S.C. 78o-7(d).
---------------------------------------------------------------------------

    Certification. Proposed Form NRSRO would require the signature of
an authorized person of the credit rating agency representing that the
information and statements contained in the form are current, accurate,
and complete or, if the NRSRO is submitting an annual certification,
that the application, as amended, is current, accurate, and complete.
3. Exhibits to the Form
    Proposed Form NRSRO would have 13 exhibits. Sections
15E(a)(1)(B)(i), (ii), (iii), (iv), (v), (vi), and (viii) of the
Exchange Act require the furnishing of some of this information.\135\
The Commission is proposing to require the furnishing of the remainder
of the information pursuant to its authority under Section
15E(a)(1)(B)(x) of the Exchange Act.\136\ The proposed exhibits are an
important part of the program for NRSRO oversight. Therefore, the
information and documents proposed to be provided in the exhibits must
be sufficiently detailed to allow the Commission to evaluate and verify
the information and, with respect to the public exhibits, assist users
of credit ratings in understanding how the NRSRO manages its
activities.
---------------------------------------------------------------------------

    \135\ 15 U.S.C. 78o-7(a)(1)(B)(i), (ii), (iii), (iv), (v), (vi),
and (viii).
    \136\ 15 U.S.C. 78o-7(a)(1)(B)(x).
---------------------------------------------------------------------------

    Exhibits 1 through 9 would be public exhibits that the NRSRO would
be required to keep current through furnishing updated information and
make readily accessible to the public. The information in these public
exhibits would be useful to the users of credit ratings in assessing
the ratings quality of the NRSRO and in comparing the NRSRO to other
NRSROs.
    Exhibits 10 through 13 would be accorded confidential treatment by
the Commission, to the extent permitted by law, under provisions of
Section 15E of the Exchange Act \137\ in conjunction with proposed Rule
17g-1.\138\ The information in the public and confidential exhibits
would be used by the Commission to make the determination whether the
credit rating agency has adequate financial and managerial resources to
consistently produce credit ratings with integrity and to materially
comply with the methodologies, policies, and procedures it discloses in
the public exhibits.\139\
---------------------------------------------------------------------------

    \137\ See Sections 15E(a)(1)(B)(viii), (a)(1)(B)(ix), and (k) of
the Exchange Act (15 U.S.C. 78o-7(a)(1)(B)(viii), (a)(1)(B)(ix), and
(k).
    \138\ See also Section 24 of the Exchange Act (15 U.S.C. 78x),
17 CFR 240.24b-2, 17 CFR 200.80 and 17 CFR 200.83.
    \139\ See Sections 15E(a)(2)(C) and (d) of the Exchange Act (15
U.S.C. 78o-7(a)(2)(C) and (d)).
---------------------------------------------------------------------------

    The information in Exhibits 10 through 13 would not need to be
updated by furnishing amendments on proposed Form NRSRO after
registration is granted. Instead, this information would be updated
through the proposed financial reporting rule (proposed Rule 17g-3).
Section 15E(b)(1) of the Exchange Act \140\ provides that information
submitted with an application must be updated promptly when the
information becomes materially inaccurate, except information submitted
under Sections 15E(a)(1)(B)(i) and (ix) of the Exchange Act
(respectively, the performance statistics, which must be updated
annually, and the QIB certifications, which need not be updated).\141\
Thus, under the statute, the information provided in Exhibits 10
through 13 would need to be updated promptly if it became materially
inaccurate. However, the Commission is not proposing that an NRSRO
update these exhibits by furnishing the information to the Commission
in Form NRSRO amendments. Rather, the Commission is proposing that the
NRSRO would update this information as part of the financial statements
that would be required to be furnished under proposed Rule 17g-3.
---------------------------------------------------------------------------

    \140\ 15 U.S.C. 78o-7(b)(1).
    \141\ 15 U.S.C. 78o-7(a)(1)(B)(i) and (ix).
---------------------------------------------------------------------------

    Exhibit 1 (Public). Section 15E(a)(1)(B)(i) of the Exchange Act
requires that an application for registration as an NRSRO contain
credit ratings performance measurement statistics over short-term, mid-
term, and long-term periods (as applicable).\142\ This information
would be required as Exhibit 1 to proposed Form NRSRO. The Exchange Act
does not otherwise define or identify the particular credit rating
performance statistics to be provided with the application. The
Commission believes credit rating agencies typically generate
statistical reports showing historical default and downgrade rates
within each credit rating notch or grade.\143\ Further, the Commission
believes these types of statistics are important indicators of the
performance of a credit rating agency in terms of its ability to assess
the creditworthiness of issuers and obligors and, consequently, would
be useful to users of credit ratings in evaluating an NRSRO.
---------------------------------------------------------------------------

    \142\ 15 U.S.C. 78o-7(a)(1)(B)(i).
    \143\ The credit rating notches or grades of a credit rating
agency generally are represented by symbols, numbers or other
designations that are used to distinguish the creditworthiness of
the obligors, securities and money market instruments the credit
rating agency rates. For example, some credit rating agencies use
symbols such as AAA, AA, A, BBB, BB, B, CCC, and CC to distinguish
the creditworthiness of corporate debt securities. AAA would be the
highest rating and CC would be the lowest rating above the default
or regulatory supervision of the issuer.
---------------------------------------------------------------------------

    In addition to historical default and downgrade rates, the
instructions to proposed Form NRSRO also would provide that an
applicant or NRSRO include in the exhibit definitions of the credit
ratings (i.e., an explanation of each grade or notch) and explanations
of the performance measurement statistics, including the metrics used
to derive the statistics. The Commission believes that requiring this
information would be necessary or appropriate in the public interest or
for the protection of investors because it would assist users of credit
ratings in understanding how the measurements were derived and in
making comparisons with the measurement statistics of other
NRSROs.\144\
---------------------------------------------------------------------------

    \144\ Section 15E(a)(1)(B)(x) of the Exchange Act provides that
the Commission can require additional information that it finds is
necessary or appropriate in the public interest or for the
protection of investors (15 U.S.C. 78o-7(a)(1)(B)(x)).
---------------------------------------------------------------------------

    The definitions of the notches and grades also would assist the
Commission in assessing whether the NRSRO's ratings, as a practical
matter, can be used for certain Commission rules. For example,
paragraph(c)(2)(vi)(F) of Commission Rule 15c3-1 specifies lower
haircuts for debt securities that are rated in one of the ``four
highest rating categories'' (i.e., notches) of at least two
NRSROs.\145\ The current NRSROs generally have at least eight notches
for their debt securities with the top four commonly referred to as
``investment grade.'' If an NRSRO decided to use less than eight
notches, the Commission would need to evaluate whether, based on the
NRSRO's definitions, securities that would be included in the top four
notches would be suitable for the lower haircuts specified in
paragraph(c)(2)(vi)(F) of Rule 15c3-1.\146\
---------------------------------------------------------------------------

    \145\ 17 CFR 240.15c3-1(c)(2)(vi)(F).
    \146\ Id.
---------------------------------------------------------------------------

    The Commission generally requests comment on Exhibit 1. The
Commission also requests comment on whether the performance measurement
statistics should use standardized inputs, time horizons and metrics to
allow for greater comparability. Commenters are requested to provide
specific details as to how these statistical measures could

be standardized. The Commission further requests comment on whether
credit rating agencies or other persons currently use other performance
measurement statistics or whether other performance measurement
statistics would be appropriate as an alternative, or in addition, to
historical default and downgrade rates. For example, the Commission
requests comment on whether Exhibit 1 should require measurement of the
performance of a given credit rating by comparing or mapping it to the
market value of the rated security or to extreme declines in the market
value of the security after the rating. The Commission additionally
requests comment on whether the requirement to include definitions and
explanations in Exhibit 1 would achieve its stated purpose.
    Exhibit 2 (Public). Section 15E(a)(1)(B)(ii) of the Exchange Act
requires that an application for registration as an NRSRO contain
information regarding the procedures and methodologies used by the
credit rating agency to determine credit ratings.\147\ This information
would be required as Exhibit 2 to proposed Form NRSRO. The Exchange Act
does not otherwise define or identify the procedures and methodologies
that must be provided under this section.\148\ However, the definition
of ``credit rating agency'' in Section 3(a)(61) of the Exchange Act
provides that a ``credit rating agency'' is an entity that, among other
things, ``employ[s] either a quantitative or qualitative model, or
both, to determine credit ratings.'' \149\
---------------------------------------------------------------------------

    \147\ 15 U.S.C. 78o-7(a)(1)(B)(ii).
    \148\ See 15 U.S.C. 78a et seq.
    \149\ See particularly, Section 3(a)(61)(B) of the Exchange Act
(15 U.S.C. 78c(a)(61)(B)).
---------------------------------------------------------------------------

    The Commission believes that entities meeting the definition of
``credit rating agency'' in Section 3(a)(61) of the Exchange Act \150\
generally establish procedures and methodologies for determining credit
ratings in the following areas: the determination of whether to
initiate a credit rating; the use of public and non-public sources of
information to perform credit rating analysis, including information
and analysis provided by third-party vendors; the use of quantitative
and qualitative models and metrics to determine credit ratings; the
interaction with the management of a rated obligor or issuer of rated
securities; the establishment of the structure and voting process of
committees that review or approve credit ratings; the notification of
rated obligors or issuers of rated securities about credit rating
decisions and for appeals of final or pending credit rating decisions;
monitoring, reviewing, and updating of credit ratings; and the
withdrawal, or suspension of the maintenance, of a credit rating.
---------------------------------------------------------------------------

    \150\ 15 U.S.C. 78c(a)(61).
---------------------------------------------------------------------------

    This list identifies areas where a credit rating agency could
establish procedures and methodologies for determining credit ratings.
The applicability of certain areas to a particular credit rating agency
may depend on whether it uses subjective qualitative analysis, purely
quantitative models or a combination of both.\151\ Consequently, an
applicant and NRSRO may not establish a procedure or methodology in a
given area because doing so would not be relevant to how the credit
rating agency determines credit ratings.
---------------------------------------------------------------------------

    \151\ See Section 3(a)(61) of the Exchange Act defining the term
``credit rating agency'' (15 U.S.C. 78c(a)(61)).
---------------------------------------------------------------------------

    In addition, credit rating agencies that issue ``unsolicited''
credit ratings may establish procedures and methodologies in the areas
described above that are unique to such ratings. An ``unsolicited''
credit rating is one the credit rating agency decides to initiate
without being requested to do so by an issuer, obligor, underwriter, or
other interested party. Credit rating agencies that use a subscription
fee based business model may only issue unsolicited ratings because
that business model does not rely on fees from issuers, obligors, and
underwriters to determine specific credit ratings (issuers, obligors,
and underwriters, however, may subscribe to receive the credit ratings
of such credit rating agencies). The procedures and methodologies these
credit rating agencies employ, in some respects, may be unique to this
business model.
    Credit rating agencies that are paid by issuers, obligors, and
underwriters to determine specific credit ratings sometimes also issue
unsolicited ratings. As discussed below with regard to proposed Rule
17g-6, this practice has led to concerns that unsolicited ratings may
be used to coerce issuers and obligors into ultimately paying the
credit rating agency to determine and maintain the credit rating.
Consequently, the Commission believes that credit rating agencies that
rely on fees from issuers, obligors, and underwriters to determine
specific credit ratings, but also issue unsolicited ratings, often have
established procedures and methodologies for determining unsolicited
credit ratings that are designed to address this concern and the fact
that the issuer or obligor may not have participated in the
determination of the credit rating (as is frequently the case with a
solicited credit rating).
    The Commission believes that information regarding the procedures
and methodologies established by an NRSRO in the areas described above,
including those with respect to unsolicited credit ratings, as
applicable, would be useful to users of credit ratings. The information
would provide an understanding of the nature of the credit rating
agency (i.e., a user of quantitative models, qualitative analysis, or a
combination of both) and how the credit rating agency produces credit
ratings. This would provide a basis for comparing NRSROs. The
disclosure also would provide the Commission with an understanding of
the managerial and financial resources required to produce the credit
ratings. This would assist the Commission in evaluating whether an
applicant or NRSRO has adequate financial and managerial resources to
consistently produce credit ratings with integrity and to materially
comply with its procedures and methodologies.\152\
---------------------------------------------------------------------------

    \152\ See Sections 15E(a)(2)(C) and 15E(d) of the Exchange Act
(15 U.S.C. 78o-7(a)(2)(C) and (d)).
---------------------------------------------------------------------------

    The Commission generally requests comment on Exhibit 2, as
proposed. The Commission also requests comment on whether the areas
identified above are the areas where credit rating agencies establish
procedures and methodologies for determining credit ratings. A
commenter that believes one or more of the areas identified above is
not one where any type of credit rating agency establishes procedures
and methodologies should identify each area and explain the reason for
such conclusion. The Commission also requests comment on whether there
are additional areas where credit rating agencies establish procedures
and methodologies for determining credit ratings and, if so, requests
that commenters identify them.
    Exhibit 3 (Public). Section 15E(a)(1)(B)(iii) of the Exchange Act
\153\ requires that an application for registration as an NRSRO contain
information regarding policies or procedures adopted and implemented by
the credit rating agency to prevent the misuse, in violation of
Exchange Act \154\ provisions and rules, of material, non-public
information. Exhibit 3 would require an applicant and NRSRO to furnish
its policies and procedures to prevent the misuse of material,
nonpublic information established

under Section 15E(g) of the Exchange Act \155\ and proposed Rule 17g-4.
---------------------------------------------------------------------------

    \153\ 15 U.S.C. 78o-7(a)(1)(B)(iii).
    \154\ 15 U.S.C. 78a et seq.
    \155\ 15 U.S.C. 78o-7(g).
---------------------------------------------------------------------------

    Section 15E(g)(1) of the Exchange Act \156\ requires an NRSRO to
establish, maintain, and enforce written policies and procedures to
prevent the misuse of material, nonpublic information in violation of
the Exchange Act.\157\ Section 15E(g)(2) of the Exchange Act provides
that the Commission shall adopt rules requiring an NRSRO to establish
specific policies and procedures to prevent the misuse of material,
non-public information.\158\ As discussed below, proposed Rule 17g-4
would implement this statutory provision by requiring an NRSRO's
policies and procedures established pursuant to Section 15E(g)(1) of
the Exchange Act \159\ to include certain specific types of procedures.
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    \156\ 15 U.S.C. 78o-7(g)(1).
    \157\ 15 U.S.C. 78a et seq.
    \158\ 15 U.S.C. 78o-7(g)(2).
    \159\ 15 U.S.C. 78o-7(g)(1).
---------------------------------------------------------------------------

    The Commission generally requests comment on Exhibit 3, as
proposed.
    Exhibit 4 (Public). Section 15E(a)(1)(B)(iv) of the Exchange Act
requires that an application for registration as an NRSRO contain
information regarding the organizational structure of the
applicant.\160\ This information would be required as Exhibit 4 to
proposed Form NRSRO. The Exchange Act does not otherwise define or
identify the specific type of organizational information that should be
provided under Section 15E(a)(1)(B)(iv) of the Exchange Act.\161\ The
Commission believes that companies typically create, as applicable, an
organizational chart showing ultimate and sub-holding companies,
subsidiaries, and material affiliates; an organizational chart showing
divisions, departments, and business units within the entity; and an
organizational chart showing the management structure and senior
management reporting lines within the entity.
---------------------------------------------------------------------------

    \160\ 15 U.S.C. 78o-7(a)(1)(B)(iv).
    \161\ Id, see also, 15 U.S.C. 78a et seq.
---------------------------------------------------------------------------

    The Commission believes that, if a credit rating agency is part of
a holding company structure, users of credit ratings and the Commission
would benefit from an organizational chart showing the entity's
ultimate and sub-holding companies, subsidiaries, and material
affiliates. This chart would provide an understanding of where
potential conflicts of interest relating to the business activities of
related companies might arise. Also, the fact that a credit rating
agency has a holding company that potentially could provide financial
support would be relevant to the Commission's evaluation of whether an
applicant or NRSRO has adequate financial resources as required under
the Exchange Act.\162\
---------------------------------------------------------------------------

    \162\ See Sections 15E(a)(2)(C) and 15E(d) of the Exchange Act
(15 U.S.C. 78o-7(a)(2)(C) and (d)).
---------------------------------------------------------------------------

    The Commission further believes that, if a credit rating agency
engages in business activities in addition to determining credit
ratings, users of credit ratings and the Commission would benefit from
an organizational chart showing the entity's divisions, departments,
and business units. This chart would provide an understanding of where
potential conflicts of interest relating to ancillary business
activities might arise.
    Finally, the Commission believes that users of credit ratings and
the Commission would benefit from an organizational chart showing an
NRSRO's management structure and senior management reporting lines.
This chart would assist the Commission in evaluating whether an
applicant and NRSRO has adequate managerial resources as required under
the Exchange Act.\163\ Users of credit ratings also would be able to
use this information to compare the managerial resources of different
NRSROs.
---------------------------------------------------------------------------

    \163\ See Sections 15E(a)(2)(C) and 15E(d) of the Exchange Act
(15 U.S.C. 78o-7(a)(2)(C) and (d)).
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    Additionally, the instructions to proposed Form NRSRO would provide
that this managerial chart include the compliance officer designated by
the NRSRO pursuant to Section 15E(j) of the Exchange Act.\164\ The
Commission believes that including the compliance officer in the chart
would be necessary or appropriate in the public interest or for the
protection of investors because it would assist the Commission and
users of credit ratings in understanding the degree of the compliance
officer's independence from the business managers.\165\ The Commission
believes users of credit ratings would find the compliance officer's
reporting lines relevant in assessing the integrity of the credit
rating process of a particular NRSRO, since the officer is responsible
for administering the credit rating agency's policies and procedures
required by Sections 15E(g) and (h) of the Exchange Act \166\ and for
ensuring the NRSRO's compliance with the securities laws and rules and
regulations thereunder.\167\ In carrying out these responsibilities, a
compliance officer would need to review activities overseen by senior
business managers. The ability of the compliance officer to objectively
review an area could be impacted by whether the officer reported to the
senior manager responsible for the area. Thus, the relative
independence of the compliance officer would be relevant to assessing
the NRSRO's ability to ensure compliance with its policies and
procedures.
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    \164\ 15 U.S.C. 78o-7(j).
    \165\ See Section 15E(a)(1)(B)(x) of the Exchange Act (15 U.S.C.
78o-7(a)(1)(B)(x)).
    \166\ 15 U.S.C. 78o-7(g) and (h).
    \167\ Section 15E(j) of the Exchange Act (15 U.S.C. 78o-7(j)).
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    For these reasons, Exhibit 4 would provide that the information
about the organizational structure of the applicant or NRSRO required
to be furnished and made public under Section 15E(a)(1)(B)(iv) of the
Exchange Act \168\ consist of charts showing the managerial structure
and senior management reporting lines, and, if applicable, the ultimate
and sub-holding companies, subsidiaries, and material affiliates of the
entity, and the divisions, departments, and business units within the
entity. The exhibit also would require that the management chart
include the designated compliance officer.
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    \168\ Id.
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    The Commission generally requests comment on Exhibit 4, as
proposed. The Commission specifically also requests comment on whether
including the compliance officer in the chart would achieve the stated
purpose of the requirement. The Commission further requests comment on
whether other organizational information should be provided, or whether
some of the information proposed to be required should be eliminated or
modified. Commenters who believe that other information should be
provided are asked to describe the information and explain why it would
be appropriate under Section 15E of the Exchange Act.\169\
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    \169\ 15 U.S.C. 78o-7.
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    Exhibit 5 (Public). Section 15E(a)(1)(B)(v) of the Exchange Act
requires that an application for registration as an NRSRO contain
information regarding whether the applicant has a code of ethics in
effect or an explanation of why the applicant has not established a
code of ethics.\170\ Exhibit 5 to proposed Form NRSRO would elicit this
information by requiring an applicant and NRSRO to attach its code of
ethics or an explanation of why it does not have a code of ethics. The
Exchange Act does not otherwise define or identify the ``code of
ethics'' that should be provided under Section

15E(a)(1)(B)(v).\171\ The Commission believes credit rating agencies
should have the flexibility to establish a code of ethics appropriate
for their business model and organizational structure and,
consequently, is not proposing any specific elements that should be in
the code of ethics, if any, furnished in this exhibit.
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    \170\ 15 U.S.C. 78o-7(a)(1)(B)(v).
    \171\ Id.
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    The Commission generally requests comment on Exhibit 5, as
proposed. The Commission also requests comment on whether it should
propose specific elements to be included in the code of ethics provided
in Exhibit 5. Commenters who believe the Commission should propose
specific elements are asked to describe them. The Commission further
seeks comment on whether it should require in Exhibit 5 that NRSROs
disclose whether they comply with international principles and codes of
conduct related to credit rating agencies.
    Exhibit 6 (Public). Section 15E(a)(1)(B)(vi) of the Exchange Act
requires that an application for registration as an NRSRO contain
information regarding any conflict of interest relating to the issuance
of credit ratings by the applicant and NRSRO.\172\ Exhibit 6 to
proposed Form NRSRO would require an applicant and NRSRO to identify,
in general terms, the types of conflicts of interest that arise from
its business as a credit rating agency.
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    \172\ 15 U.S.C. 78o-7(a)(1)(B)(vi).
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    The Exchange Act does not otherwise define or identify the types of
conflicts of interest that should be disclosed under Section
15E(a)(1)(B)(vi) of the Exchange Act.\173\ The Commission believes that
credit rating agencies that rely on fees from issuers, obligors and
underwriters to determine specific credit ratings are exposed to a
unique set of conflicts, as are credit rating agencies that operate
under a subscriber fee based business model. Moreover, certain
conflicts, such as those arising from owning securities of a rated
entity, can arise under either business model.
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    \173\ Id, see also 15 U.S.C. 78a et seq.
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    The Commission believes that the types of conflicts of interest
arising from the activities of credit rating agencies include, as
applicable: receiving compensation from rated obligors, issuers of
rated securities and money market instruments, and underwriters of
rated securities and money market instruments to determine or maintain
a credit rating and for other services; owning securities of, or having
any other form of ownership interest in, a rated obligor, issuer of
rated securities and money market instruments, or underwriter of rated
securities and money market instruments; receiving compensation for any
service from subscribers that use credit ratings for regulatory
purposes; owning securities of, or having any other form of ownership
interest in, a subscriber that uses credit ratings for regulatory
purposes; and having another material business relationship (e.g., a
loan) or affiliation (e.g., being an officer or director) with a rated
obligor, issuer of rated securities and money market instruments,
underwriter of rated securities and money market instruments, or entity
that uses credit ratings for regulatory purposes.
    The Commission believes the above list covers the range of general
conflicts of interest that arise from the activities of credit rating
agencies.\174\ However, as noted, based on a particular credit rating
agency's business model, some of these conflicts would not be evident.
The Commission further believes that an applicant and NRSRO subject to
any of these types of conflicts would need to disclose that fact in a
general manner in order to comply with Section 15E(a)(1)(B)(vi) of the
Exchange Act.\175\ Furthermore, the disclosure would assist the
Commission in evaluating whether an applicant has sufficient financial
and managerial resources to comply with the procedures for managing
conflicts of interest required under Section 15E(h) of the Exchange
Act,\176\ given the conflicts of interest identified by the
applicant.\177\ The information also would be useful to users of credit
ratings in assessing an NRSRO by, for example, comparing the types of
conflicts disclosed by the entity in Exhibit 6 with the procedures for
managing conflicts of interest disclosed by the entity in Exhibit 7
(discussed next). As noted above, the disclosure of the type of
conflict only would need to be general in nature. For example, an NRSRO
that receives compensation from issuers for rating their securities
would only need to disclose that fact. It would not need to disclose
separately each time it was compensated by an issuer or the identity of
each such issuer.
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    \174\ The section below describing proposed Rule 17g-5 provides
a further discussion of conflicts of interest generally and how the
types of activities described in this list can give rise to
conflicts of interest.
    \175\ 15 U.S.C. 78o-7(a)(1)(B)(vi).
    \176\ 15 U.S.C. 78o-7(h).
    \177\ See Section 15E(a)(2)(C) Exchange Act (15 U.S.C. 78o-
7(a)(2)(C)).
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    The instructions to Form NRSRO also would provide that an applicant
and NRSRO include in Exhibit 6 the identity of any affiliated entity
that acts as an underwriter or uses credit ratings for regulatory
purposes.\178\ The Commission believes that requiring a credit rating
agency to disclose this information would be necessary or appropriate
in the public interest or for the protection of investors because it
would apprise users of credit ratings to a potential conflict of
interest arising from the fact that the affiliate could exercise undue
influence on the credit rating agency to issue a credit rating that
assists in the marketing of the security or that provides a regulatory
benefit.\179\ Users of credit ratings would be able to review the
NRSRO's procedures made public in Exhibit 7 to understand how the
credit rating agency addresses these potential conflicts.
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    \178\ As discussed below, proposed Rule 17g-5 would prohibit an
NRSRO from having a conflict with respect to issuing or maintaining
a credit rating with respect to an affiliate. Thus, this type of
conflict would need to be avoided rather than disclosed and managed.
    \179\ See Section 15E(a)(1)(B)(x) of the Exchange Act (15 U.S.C.
78o-7(a)(1)(B)(x)).
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    The Commission generally requests comment on Exhibit 6, as
proposed. The Commission also requests comment on whether there are
conflicts of interest that should be disclosed in addition to those
identified above, or whether some of the information proposed to be
required should be eliminated or modified. Commenters who believe that
other conflicts exist should describe how they arise from the business
of credit rating agencies. The Commission further requests specific
comment on whether requiring the identification of affiliates that are
underwriters and regulatory users of credit ratings would achieve the
stated purpose of the requirement.
    Exhibit 7 (Public). Section 15E(h) of the Exchange Act requires an
NRSRO to establish, maintain, and enforce written policies and
procedures to address and manage conflicts of interest.\180\ These
policies and procedures would be required as Exhibit 7 to proposed Form
NRSRO. The Commission believes that requiring these policies and
procedures would be necessary or appropriate in the public interest or
for the protection of investors.\181\ First, their disclosure would
assist the Commission in monitoring whether an NRSRO is complying with
Section 15E(h) of the Exchange Act.\182\ Second, the disclosure would
assist the Commission in evaluating whether an applicant or NRSRO has
sufficient financial and managerial resources to manage the conflicts
of interest disclosed by the

credit rating agency in Exhibit 6. Third, the disclosure would allow
users of credit ratings to compare an NRSRO's policies and procedures
for managing conflicts of interest with the types of conflicts
disclosed in Exhibit 7.
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    \180\ 15 U.S.C. 78o-7(h).
    \181\ See Section 15E(a)(1)(B)(x) of the Exchange Act (15 U.S.C.
78o-7(a)(1)(B)(x)).
    \182\ 15 U.S.C. 78o-7(h).
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    The Commission requests general comment on Exhibit 7, as proposed,
including on whether including this information would achieve the
stated purpose of the requirement.
    Exhibits 8 (Public). The ability of a credit rating agency to
assess the credit worthiness of an issuer and obligor depends on the
competence of the personnel responsible for determining the entity's
credit ratings (``credit analysts''). This is true regardless of
whether the credit rating agency uses quantitative models or
qualitative analysis or a combination of both. A credit rating agency
that solely uses quantitative models would be relying on credit
analysts to understand the model inputs and metrics and back test the
model's results to judge whether the model is producing credible credit
ratings. A credit rating agency that uses qualitative analysis would be
relying on credit analysts to understand and interpret relevant
information about an obligor or issuer and use the information to
render a credible assessment of the issuer or obligor's
creditworthiness.
    The Commission believes that requiring an applicant and NRSRO to
disclose information about the responsibilities, experience and
employment history of its credit analysts and supervisors would be
necessary or appropriate in the public interest or for the protection
of investors.\183\ First, it would assist users of credit ratings in
assessing the competence of an NRSRO's credit analysts and, thereby,
provide a means for users to compare NRSROs. Second, this information
would assist the Commission in evaluating whether the applicant has
adequate managerial resources to consistently produce credit ratings
with integrity and to materially comply with its procedures and
methodologies.\184\
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    \183\ See Section 15E(a)(1)(B)(x) of the Exchange Act (15 U.S.C.
78o-7(a)(1)(B)(x)).
    \184\ See Sections 15E(a)(2)(C) and (d) of the Exchange Act (15
U.S.C. 78o-7(a)(2)(C) and (d)).
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    The Commission requests comment on Exhibit 8, as proposed. Comment
is specifically sought on whether the information would be helpful to
users of credit ratings in comparing the NRSRO to other NRSROs. The
Commission also requests comment on whether other information should be
provided, or whether some of the information proposed to be required
should be eliminated or modified. For example, comment is sought on
whether Exhibit 8 should be limited to eliciting information about the
supervisors of the credit analysts. Commenters who believe other
information should be provided should describe the information and
explain why it would be appropriate.
    Exhibit 9 (Public). As discussed above, Section 15E(j) of the
Exchange Act requires every NRSRO to designate an individual
responsible for administering the policies and procedures of the credit
rating agency to prevent the misuse of nonpublic information, to manage
conflicts of interest, and to ensure compliance with the securities
laws and the rules and regulations under those laws.\185\ The ability
of the compliance officer to carry out these statutorily mandated
responsibilities would depend, in part, on the officer's experience and
qualifications. Additionally, based on the size of the credit rating
agency, it may depend also on the experience and qualifications of
persons who assist the designated compliance officer in these
responsibilities.
---------------------------------------------------------------------------

    \185\ 15 U.S.C. 78o-7(j).
---------------------------------------------------------------------------

    The Commission believes that requiring information about the
experience and employment history of the designated compliance officer
and persons assisting the officer would be necessary or appropriate in
the public interest or for the protection of investors. It would assist
the Commission in evaluating whether the applicant has adequate
managerial resources to consistently produce credit ratings with
integrity and to materially comply with its procedures and
methodologies.\186\ It also would be useful to users of credit ratings
because it would provide information regarding the resources an NRSRO
devotes to ensuring, among other things, that credit ratings are
determined in accordance with the procedures and methodologies the
NRSRO makes public in Exhibit 1.
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    \186\ See Sections 15E(a)(2)(C) and (d) of the Exchange Act (15
U.S.C. 78o-7(a)(2)(C) and (d)).
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    The Commission requests comment on Exhibit 9, as proposed. The
Commission also requests comment on whether other information should be
provided, or whether some of the information proposed to be required
should be eliminated or modified. Commenters should describe the
additional information and why it would be appropriate.
    Exhibit 10 (Confidential). Section 15E(a)(1)(B)(viii) of the
Exchange Act requires that an application for registration as an NRSRO
include, on a confidential basis, a list of the 20 largest issuers and
subscribers that use the credit rating services provided by the credit
rating agency by amount of net revenue received by the credit rating
agency in the fiscal year immediately preceding the date of submission
of the application.\187\ This information would be required as Exhibit
10 to proposed Form NRSRO. An NRSRO would not be required to make this
information public (to the extent permitted by law) or update the
exhibit after registration. However, an NRSRO would be required to
update this information in the audited financial statements provided to
the Commission under proposed Rule 17g-3.
---------------------------------------------------------------------------

    \187\ 15 U.S.C. 78o-7(a)(1)(B)(viii).
---------------------------------------------------------------------------

    The statute refers to the ``20 largest issuers and subscribers.''
The instructions to Exhibit 10 would provide that an applicant add
certain large obligors (i.e., persons who are rated as an entity as
opposed to having their securities rated) and underwriters to the list.
Specifically, these types of customers would need to be added to the
list if they are determined to have provided at least as much net
revenue as the 20th largest issuer or subscriber. Consequently, a
credit rating agency would be required to identify the 20 largest
issuers and subscribers as required by Section 15E(a)(1)(B)(viii) of
the Exchange Act \188\ and add any obligor and underwriter customers
that met the above criteria.
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    \188\ Id.
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    The Commission believes that adding large obligor and underwriter
customers to the list of the 20 largest issuer and subscriber customers
would be necessary or appropriate in the public interest or for the
protection of investors.\189\ The Commission views the list as a means
to identify customers that could potentially have undue influence on an
NRSRO given the amount of revenue the customer provides the NRSRO.
Obligors and securities underwriters would have as much of an interest
in potentially influencing a credit rating as issuers and subscribers.
---------------------------------------------------------------------------

    \189\ 15 U.S.C. 78o-7(a)(1)(B)(x).
---------------------------------------------------------------------------

    Section 15E(a)(1)(B)(viii) of the Exchange Act limits the customers
required to be included in the list to users of the ``credit rating
services'' of the applicant and NRSRO.\190\ The Exchange Act \191\ does
not define the term ``credit rating services.'' The Commission would
interpret this term to mean any of the following: Rating an

obligor (regardless of whether the obligor or any other person paid for
the credit rating); rating an issuer's securities or money market
instruments (regardless of whether the issuer, underwriter, or any
other person paid for the credit rating); and providing credit ratings
to a subscriber. The intent of this interpretation is to include--along
with customers that pay for credit ratings and subscriptions--customers
that are rated, or whose securities or money market instruments are
rated, but that did not pay for the credit rating. Even though these
customers may not have paid for the credit rating, they potentially
could have undue influence on the credit rating agency if they provide
substantial net revenue for other services or products.
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    \190\ See 15 U.S.C. 78o-7(a)(1)(B)(viii).
    \191\ 15 U.S.C. 78a et seq.
---------------------------------------------------------------------------

    Section 15E(a)(1)(B)(viii) of the Exchange Act provides that the
determination of the 20 largest issuers and subscribers is to be based
on ``net revenue'' received from the issuer or subscriber.\192\ The
Exchange Act \193\ does not define the term ``net revenue.'' The
Commission proposes to interpret the term ``net revenue'' for the
purposes of Section 15E(a)(1)(B)(viii) of the Exchange Act \194\ to
mean all fees, sales proceeds, commissions, and other revenue received
by the applicant and its affiliates for any type of service or product,
regardless of whether related to credit ratings, and net of any fees,
sales proceeds, rebates, commissions, and other monies paid to the
customer by the credit rating agency and its affiliates. The risk is
that a large customer may be in a position to influence the
determination of the credit rating. Limiting the interpretation of net
revenue to revenues relating to ``credit rating services'' may not
capture the largest customers of the NRSRO or its affiliates as these
customers may use credit rating services of the NRSRO and other
services of the NRSRO and its affiliates. The instructions for proposed
Form NRSRO would implement this proposed interpretation by providing
that the calculation of net revenue should include all revenue received
from the customer.
---------------------------------------------------------------------------

    \192\ 15 U.S.C. 78o-7(a)(1)(B)(viii).
    \193\ 15 U.S.C. 78a et seq.
    \194\ 15 U.S.C. 78o-7(a)(1)(B)(viii).
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    The Commission requests comment on Exhibit 10, as proposed. The
Commission specifically requests comment on its proposal to include
large obligor and underwriter customers in the list. The Commission
further requests comment on the proposed interpretations of ``credit
rating services'' and ``net revenue.'' Specifically, the Commission
requests comment on how these interpretations affect the determination
of large customers. If a commenter believes they are not practicable,
the commenter should provide alternative interpretations and explain
how they would achieve the goal of identifying large customers that
could potentially exercise undue influence on the NRSRO.
    Exhibit 11 (Confidential). Exhibit 11 would require the applicant
to furnish audited financial statements for the past three fiscal or