rating for the Exchange Act-ABS. Consequently, the Commission believes
the certification should be provided to the appropriate NRSROs as soon
as the third party completes the review so that NRSROs can consider it
in determining a credit rating for the Exchange Act-ABS before the
security is issued and purchased by investors. However, prescribing a
specific timeframe (such as within twenty-four hours or two days) may
result in situations--depending on the circumstances--where the
certification could have been provided sooner than required (for
example, within minutes of it being finalized) or where practical
issues would prevent it from being submitted within the required
timeframe. Therefore, the Commission believes the ``safe harbor'' for
the written certification should incorporate a ``promptly'' standard.
    For all the foregoing reasons, the Commission is establishing a
``safe harbor'' provision in paragraph (c) of Rule 17g-10 pursuant to
which a person employed to provide third-party due diligence services
will be deemed to have satisfied its obligations under section
15E(s)(4)(B) of the Exchange Act if the person promptly delivers an
executed Form ABS Due Diligence-15E after completion of the due
diligence services to: (1) An NRSRO that provided a written request for
the form prior to the completion of the due diligence services stating
that the services relate to a credit rating the NRSRO is producing; (2)
an NRSRO that provides a written request for the form after the
completion of the due diligence services stating that the services
relate to a credit rating the NRSRO is producing; and (3) the issuer or
underwriter of the asset-backed security for which the due diligence
services relate that maintains the Rule 17g-5 Web site with respect to
the asset-backed security.\1505\ Consequently, the third-party provider
of due diligence services can fulfill its obligations under the statute
by responding promptly to specific requests that Form ABS Due
Diligence-15E be delivered to a particular NRSRO and by promptly
delivering the form to the issuer or underwriter of the Exchange Act-
ABS that maintains the Rule 17g-5 Web site. This establishes a process
that can provide certainty to the third party that it has met its
obligation under section 15E(s)(4)(B) of the Exchange Act.
---------------------------------------------------------------------------

    \1505\ See paragraphs (c)(1) through (3) of Rule 17g-10.
---------------------------------------------------------------------------

    The Commission is making a corresponding amendment to Rule 17g-5
that is designed to provide for the

prompt posting of Form ABS Due Diligence-15E to the Rule 17g-5 Web site
so that other NRSROs can have access to it contemporaneously with an
NRSRO that knew the third party was performing due diligence and
requested that the form be delivered upon completion of the
services.\1506\ Specifically, the Commission is adding paragraph
(a)(3)(iii)(E) to Rule 17g-5 to require that an NRSRO hired to rate a
structured finance product must obtain an additional representation
that can reasonably be relied upon from the issuer, sponsor, or
underwriter of the product: Namely, that the issuer, sponsor, or
underwriter will post to the Rule 17g-5 Web site, promptly after
receipt, any executed Form ABS Due Diligence-15E containing information
about the security delivered by a person employed to provide third-
party due diligence services with respect to the structured finance
product.\1507\
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    \1506\ See, e.g., DBRS Letter (``By adding a note to paragraph
(a)(3)(iii)(C) [of Rule 17g-5], the Commission could confirm that
where an issuer or underwriter contracts for the delivery of a due
diligence report to the hired NRSRO, the posted information must
include the related Rule 17g-10 certification.'').
    \1507\ See paragraph (a)(3)(iii)(E) of Rule 17g-5. The
Commission also is amending paragraphs (a)(3)(i) and (a)(3)(iii)(A)
of Rule 17g-5 to add references to new paragraph (a)(3)(iii)(E).
---------------------------------------------------------------------------

    Paragraph (c) of Rule 17g-10, as proposed, contained definitions of
due diligence services, issuer, originator, and securitizer for
purposes of section 15E(s)(4)(B) of the Exchange Act and Rule 17g-10.
As proposed, paragraph (c)(1) defined the term due diligence
services.\1508\ Under the proposed definition, an entity would be
deemed to have provided due diligence services if it engaged in a
review of the assets underlying an Exchange Act-ABS for the purpose of
making findings with respect to any one of the five types of activities
identified in proposed paragraphs (c)(1)(i) through (v) of Rule 17g-
10.\1509\
---------------------------------------------------------------------------

    \1508\ See paragraph (c)(1) of Rule 17g-10, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33544.
    \1509\ See paragraphs (c)(1)(i) through (v) of Rule 17g-10, as
proposed; Nationally Recognized Statistical Rating Organizations, 76
FR at 33472, 33544.
---------------------------------------------------------------------------

    Paragraph (c)(1)(i) of Rule 17g-10, as proposed, would identify the
first category of due diligence services as a review of the assets
underlying an Exchange Act-ABS for the purpose of making findings with
respect to the quality or integrity of the information or data about
the assets provided, directly or indirectly, by the securitizer or
originator of the assets.\1510\ Paragraph (c)(1)(ii), as proposed,
would identify the second category of due diligence services as a
review of the assets underlying an Exchange Act-ABS for the purpose of
making findings with respect to whether the origination of the assets
conformed to stated underwriting or credit extension guidelines,
standards, criteria, or other requirements.\1511\ Paragraph
(c)(1)(iii), as proposed, would identify the third category of due
diligence services as a review of the assets underlying an Exchange
Act-ABS for the purpose of making findings with respect to the value of
collateral securing such assets.\1512\ Paragraph (c)(1)(iv), as
proposed, would identify the fourth category of due diligence services
as a review of the assets underlying an Exchange Act-ABS for the
purpose of making findings with respect to whether the originator of
the assets complied with federal, state, or local laws or
regulations.\1513\
---------------------------------------------------------------------------

    \1510\ See paragraph (c)(1)(i) of Rule 17g-10, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33544.
    \1511\ See paragraph (c)(1)(ii) of Rule 17g-10, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33544.
    \1512\ See paragraph (c)(1)(iii) of Rule 17g-10, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33544.
    \1513\ See paragraph (c)(1)(iv) of Rule 17g-10, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33544.
---------------------------------------------------------------------------

    Paragraph (c)(1)(v) of Rule 17g-10, as proposed, would identify the
fifth category of due diligence services--the catchall--as a review of
the assets underlying an Exchange Act-ABS for the purpose of making
findings with respect to any other factor or characteristic of such
assets that would be material to the likelihood that the issuer of the
Exchange Act-ABS will pay interest and principal according to its terms
and conditions.\1514\ The proposed catchall was intended to apply to
due diligence services used for pools of other asset classes (for
example, commercial loans, corporate loans, student loans, or credit
card receivables) to the extent that providers of third-party due
diligence services currently provide or in the future begin providing
due diligence services with respect to other asset classes and those
services, because of the different nature of the assets, do not fall
into one of the other four categories.\1515\
---------------------------------------------------------------------------

    \1514\ See paragraph (c)(1)(v) of Rule 17g-10, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33544.
    \1515\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33472. In the proposing release, the
Commission stated that the first four prongs of the definition of
due diligence services addressed reviews that persons commonly
understood as due diligence providers conducted with respect to
RMBS. Id.
---------------------------------------------------------------------------

    Paragraph (c)(2), as proposed, defined the term issuer as including
a sponsor, as defined in 17 CFR 229.1011, or depositor, as defined in
17 CFR 229.1011, that participates in the issuance of an Exchange Act-
ABS.\1516\ Paragraphs (c)(3) and (c)(4), as proposed, provided that the
terms originator and securitizer, respectively, have the same meanings
as in section 15G of the Exchange Act.\1517\ Defining these two terms
was intended to provide greater clarity as to the proposed meaning of
due diligence services.\1518\
---------------------------------------------------------------------------

    \1516\ See paragraph (c)(2) of Rule 17g-10, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33544. As explained in the proposing release, the Commission
interprets the term issuer to refer to the depositor of an asset-
backed security. See id. at 33467, n.532, 33473, n.594. This
treatment is consistent with the Commission's historical regulatory
approach to that term, including the Securities Act and the rules
promulgated under the Securities Act and the Exchange Act. See,
e.g., 17 CFR 230.191; 17 CFR 240.3b-19.
    \1517\ See paragraphs (c)(3) through (4) of Rule 17g-10, as
proposed; Nationally Recognized Statistical Rating Organizations, 76
FR at 33544. Section 15G(a)(4) of the Exchange Act defines the term
originator to mean ``a person who--(A) through the extension of
credit or otherwise, creates a financial asset that collateralizes
an asset-backed security; and (B) sells an asset directly or
indirectly to a securitizer.'' See 15 U.S.C. 78o-9(a)(4). Section
15G(a)(3) of the Exchange Act defines the term securitizer to mean:
``(A) an issuer of an asset-backed security; or (B) a person who
organizes and initiates an asset-backed securities transaction by
selling or transferring assets, either directly or indirectly,
including through an affiliate, to the issuer.'' See 15 U.S.C. 78o-
9(a)(3).
    \1518\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33473.
---------------------------------------------------------------------------

    The definitions of due diligence services, issuer, originator, and
securitizer in Rule 17g-10, as adopted, are contained in paragraph (d)
(rather than paragraph (c), as proposed) because of the addition of the
new ``safe harbor'' provision in paragraph (c) as discussed
above.\1519\ The definitions are being adopted substantially as
proposed with modifications, in part, in response to comments.\1520\
---------------------------------------------------------------------------

    \1519\ See paragraphs (d)(1) through (4) of Rule 17g-10.
    \1520\ See paragraphs (d)(1) through (4) of Rule 17g-10. In
addition to the modifications discussed below, the final rule is
modified from the proposal in the following ways. First, the
citation to the definition of asset-backed security in the Exchange
Act is corrected in the prefatory text of paragraph (d) and in
paragraphs (d)(1) and (3). Second, the word ``such'' in third prong
of the definition of due diligence services (paragraph (d)(1)(iii))
has been replaced with the word ``the''. Third, references in the
definition of issuer in paragraph (d)(2) have been corrected by
replacing in two places the phrase ``Sec.  229.1011'' with the
phrase ``Sec.  229.1101''. These modifications are not intended to
substantively change the meaning of the terms as compared to the
proposed definitions.
---------------------------------------------------------------------------

    Commenters focused on the definition of due diligence services
because the requirement to provide the written certification under
section 15E(s)(4)(B) of the Exchange Act is triggered when a third
party is employed to provide these services with respect to an

Exchange Act-ABS.\1521\ A commenter that provides due diligence
services recommended modifying the first prong of the definition by
replacing the phrase ``quality and integrity'' of the data with the
word ``accuracy'' because that would ``more accurately reflects the
role of the due diligence provider and the nature of its objective
review.'' \1522\ The Commission believes that this change will more
accurately describe the nature of the work undertaken by a provider of
third-party due diligence services, as suggested by the commenter.
Consequently, the Commission is making the modification.\1523\
---------------------------------------------------------------------------

    \1521\ See 15 U.S.C. 78o-7(s)(4)(B).
    \1522\ See Clayton Letter.
    \1523\ See paragraph (d)(1)(i) of Rule 17g-10. The commenter
also recommended this modification be made to Item 4 of Form ABS Due
Diligence-15E, which used similar text to describe due diligence
services. See Clayton Letter. As discussed below in section II.H.3.
of this release, the Commission is making a corresponding
modification to Item 4.
---------------------------------------------------------------------------

    Commenters were concerned that the definition of due diligence
services could be interpreted to include services that have not
traditionally been viewed as third-party due diligence services. In
this regard, several commenters focused on the fifth prong of the
definition: The catchall.\1524\ As proposed, this prong included within
the definition a review of the assets underlying an Exchange Act-ABS
for the purpose of making findings with respect to any other factor or
characteristic of such assets that would be material to the likelihood
that the issuer of the Exchange Act-ABS will pay interest and principal
according to its terms and conditions.\1525\ Some commenters
recommended eliminating this catchall provision.\1526\ Two commenters
recommended it be narrowed.\1527\ One of these commenters stated that
the provision should only include ``factors or characteristics that
were material to determining the credit rating.'' \1528\ The other
commenter stated that the provision should be limited to ``factors that
materially impact the likelihood that the assets themselves would pay
interest and principal according to their terms and conditions.''
\1529\
---------------------------------------------------------------------------

    \1524\ See CRE Letter; Deloitte Letter; Morningstar Letter; S&P
Letter.
    \1525\ See paragraph (c)(1)(v) of Rule 17g-10, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33544.
    \1526\ See CRE Letter; Deloitte Letter; Morningstar Letter; S&P
Letter.
    \1527\ See Morningstar Letter; Deloitte Letter.
    \1528\ See Morningstar Letter.
    \1529\ See Deloitte Letter.
---------------------------------------------------------------------------

    The Commission is not persuaded that the catchall provision should
be eliminated. As the Commission explained in the proposing release,
the first four prongs of the definition were based on the Commission's
understanding of the types of reviews undertaken with respect to the
pools of mortgage loans underlying issuances of RMBS because due
diligence services traditionally have been performed with respect to
RMBS.\1530\ The first four prongs also may cover due diligence services
performed with respect to other types of Exchange Act-ABS. However,
there also may be reviews now or in the future that are more tailored
to the different nature of the assets underlying these other types of
Exchange Act-ABS. The proposed catchall was designed to apply to due
diligence services provided with respect to the assets (for example,
commercial loans, corporate loans, student loans, or credit card
receivables) underlying other types of Exchange Act-ABS to the extent
not covered by the first four prongs of the definition. For these
reasons, the Commission believes it is appropriate to retain the
catchall prong of the definition and, therefore, is adopting it as
proposed.\1531\
---------------------------------------------------------------------------

    \1530\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33472.
    \1531\ See paragraph (d)(1)(v) of Rule 17g-10.
---------------------------------------------------------------------------

    One commenter stated that, if the catchall provision is not
eliminated, ``the final rule should limit the provision's application
to other factors that materially impact the likelihood that [the
underlying] assets themselves would pay interest and principal
according to their terms and conditions'' so that the ``focus of the
diligence services will be on the assets themselves, not the issuer's
ability to pay as is set forth in the proposed definition.'' \1532\ The
Commission agrees that due diligence services typically focus on the
assets underlying an Exchange Act-ABS. Indeed, the prefatory text of
paragraph (d)(1) of Rule 17g-10 provides that the term due diligence
services means a review of the assets underlying an Exchange Act-ABS
for the purpose of making findings with respect to certain
matters.\1533\ Moreover, the catchall provision includes within the
definition of due diligence services a review of any other factor or
characteristic of the assets underlying an Exchange Act-ABS that would
be material to the likelihood that the issuer will pay interest and
principal in accordance with applicable terms and conditions.\1534\
Consequently, in response to the commenter, the Commission confirms
that a review must be of the assets underlying the Exchange Act-ABS in
order to fall within the definition of due diligence services. However,
the performance of the underlying assets (for example, their ability to
pay principal and interest) ultimately will impact whether the Exchange
Act-ABS itself will be able to pay interest and principal because the
payments received on the underlying assets are passed through to the
holders of the Exchange Act-ABS. Moreover, a review of the underlying
assets that is relevant to whether the Exchange Act-ABS will pay
interest and principal according to its terms is the type of
information that would be useful to an NRSRO that is assessing the
creditworthiness of Exchange Act-ABS. The catchall provision is
designed to account for such reviews to the extent they are not
addressed in the other prongs of the definition of due diligence
services.\1535\
---------------------------------------------------------------------------

    \1532\ See Deloitte Letter.
    \1533\ See prefatory text of paragraph (d)(1) of Rule 17g-10.
    \1534\ See paragraph (d)(1)(v) of Rule 17g-10.
    \1535\ See id. One commenter suggested that the Commission
clarify that the catchall definition of due diligence services
includes only the review of the assets in connection with the
issuance of the asset-backed securities as specifically requested by
the issuer, underwriter, or NRSRO. See Clayton Letter. In response,
the Commission notes that the certification under Rule 17g-10 must
be provided by the person who is employed to provide third-party due
diligence services. Accordingly, the catchall definition is not
intended to cover reviews that the third-party provider itself was
not employed to perform by the issuer, underwriter, or NRSRO.
---------------------------------------------------------------------------

    While the catchall provision is not being eliminated, the
definition of due diligence services in Rule 17g-10 (including the
catchall prong) is not intended to bring within the definition's scope
activities that are performed today in connection with the issuance of
an Exchange Act-ABS that are not commonly understood as being third-
party due diligence services. Rather, it is designed to cover reviews
of the assets underlying an Exchange Act-ABS that are commonly
understood in the securitization market to be third-party due
diligences services.\1536\ For

example, it is not intended to cover every type of service that
involves the performance of diligence in the offering process. The
catchall provision is designed to incorporate within the definition
reviews that are commonly understood in the securitization market to be
third-party due diligences services or analogous services that may
develop in the future but are not expressly covered by the first four
prongs of the definition.
---------------------------------------------------------------------------

    \1536\ Generally, third-party due diligence services have been
performed with respect to RMBS. See Nationally Recognized
Statistical Rating Organizations, 76 FR at 33471. Generally, in the
RMBS context, the provider of third-party due diligence services is
hired by the entity (for example, the underwriter, sponsor, or
depositor) purchasing the pool of mortgage loans for the purpose of
securitizing them. In conducting a review, the provider of third-
party due diligence services analyzes a sample (for example, 25%) of
the loans in the pool for one or more of the following purposes: (1)
To assess the quality of the loan-by-loan data in the electronic
file (``loan-tape'') that aggregates the information for the pool by
comparing the information on the loan tape for each loan in the
sample with the information contained on the hard-copy documents in
the loan file; (2) to determine whether each loan in the sample
adheres to the underwriting guidelines of the loan originator; (3)
to assess the validity of the appraised value of the property
indicated on the loan tape that collateralizes each loan in the
sample; and (4) to determine whether the originator complied with
federal, state, and local laws in making each loan in the sample.
Id.
---------------------------------------------------------------------------

    Several commenters argued that agreed-upon procedures engagements
performed by accounting firms should not be considered third-party due
diligence services as contemplated by section 15E(s)(4) of the Exchange
Act.\1537\ Some of these commenters suggested that the proposed
definition should apply only to reports that were prepared specifically
with the intent to provide those reports to an NRSRO or otherwise in
connection with obtaining a credit rating.\1538\ Two of these
commenters stated that accountants would be unlikely to perform any
services that could fall within the proposed definition.\1539\ In
support of the position to exclude agreed-upon procedures engagements
from the definition of due diligence services, commenters noted that
these engagements generally include one or more of the following: (1)
Comparing the loan tape to the loan file; (2) recalculating projected
future cash flows due to investors; and (3) performing procedures that
address other information included in the offering document. Commenters
argued that these procedures are performed primarily to assist issuers
or underwriters in verifying the accuracy of disclosures in
registration statements and prospectuses.
---------------------------------------------------------------------------

    \1537\ See ABA Letter; AICPA Letter; ASF Letter; CRE Letter;
Deloitte Letter; Ernst & Young Letter; FSR Letter; KPMG Letter; PWC
Letter.
    \1538\ See ABA Letter; AICPA Letter; Ernst & Young Letter.
    \1539\ See AICPA Letter; Ernst & Young Letter.
---------------------------------------------------------------------------

    The Commission agrees that the second and third examples performed
as part of an agreed-upon procedure engagement and for the purpose
referenced are not commonly understood as being due diligence services
and should not trigger the requirements of section 15E(s)(4) of the
Exchange Act. However, comparing the information on a loan tape with
the information contained on the hard-copy documents in a loan file is
an activity that falls within the definition of due diligence services
in Rule 17g-10 because the work undertaken involves reviewing of the
accuracy of the information or data about the assets provided, directly
or indirectly, by the securitizer or originator of the assets.\1540\
Consequently, the Commission is not persuaded that it would be
appropriate to exclude this type of review solely because it is being
performed in the context of an agreed-upon procedures engagement. As a
result, comparing information on a loan tape with information contained
on the hard-copy documents in a loan file, even if performed under an
agreed-upon procedure engagement, is a third-party due diligence
service under Rule 17g-10.\1541\
---------------------------------------------------------------------------

    \1540\ See paragraph (d)(1)(i) of Rule 17g-10. See also
Nationally Recognized Statistical Rating Organizations, 76 FR at
33471 (``In conducting a review, the provider of third-party due
diligence services analyzes a sample (for example, 25%) of the loans
in the pool for one or more of the following purposes: (1) To assess
the quality of the loan-by-loan data in the electronic file (`loan-
tape') that aggregates the information for the pool by comparing the
information on the loan tape for each loan in the sample with the
information contained on the hard-copy documents in the loan file. .
.'').
    \1541\ See paragraph (d)(1)(i) of Rule 17g-10.
---------------------------------------------------------------------------

    The Commission understands there may be particular considerations
that would need to be taken into account under applicable professional
standards that govern certain services provided by the accounting
profession.\1542\ The requirements and limitations resulting from
relevant professional standards generally are described within the
reports issued and, to the extent such requirements or limitations are
based upon professional standards, the Commission would not object to
the inclusion of the same description in the written certifications on
Form ABS Due Diligence-15E required under Rule 17g-10.
---------------------------------------------------------------------------

    \1542\ See, e.g., Public Company Accounting Oversight Board,
Interim Attestation Standard, AT Section 201, at ]] .06 and .31.
---------------------------------------------------------------------------

    Commenters suggested that Form ABS Due Diligence-15E should be
required to be provided to NRSROs only at the time the Exchange Act-ABS
is initially issued or rated.\1543\ One of these commenters stated that
the due diligence provider's obligations should ``come to an end''
after providing the certification and suggested that for later rating
actions, the NRSRO should be permitted to ``disclose that it is relying
on'' an earlier report.\1544\ Another of these commenters stated that
the proposed requirements should be limited to services provided
``prior to the issuance of the ABS'' and suggested that the
certification be prepared on a ``one-time basis per report.'' \1545\ A
third commenter stated that the certification should not ``sunset'' and
instead should be provided ``for the life of the transaction/rated
security.'' \1546\
---------------------------------------------------------------------------

    \1543\ See Clayton Letter; DBRS Letter; Deloitte Letter; S&P
Letter.
    \1544\ See Deloitte Letter.
    \1545\ See Clayton Letter.
    \1546\ See S&P Letter.
---------------------------------------------------------------------------

    The Commission recognizes that third-party due diligence services
commonly are performed prior to the issuance of an Exchange Act-ABS.
Consequently, the Commission expects most of the forms will be executed
and provided at this time. However, if an NRSRO, issuer, or underwriter
employs a person to provide third-party due diligence services after
the issuance, the Commission believes that NRSROs monitoring the credit
rating will benefit from obtaining a Form ABS Due Diligence-15E
relating to the due diligence services, as will investors in the
Exchange Act-ABS. Consequently, the Commission is not persuaded that it
would be appropriate to exempt post-issuance performance of due
diligence services from the requirements of section 15E(s)(4) of the
Exchange Act.
    One commenter recommended that the obligations of the third-party
due diligence provider should come to an end after the person provides
the certification.\1547\ As discussed above, the Commission has added a
``safe harbor'' to Rule 17g-10 under which a provider of third-party
due diligence services can meet its obligations under section
15E(s)(4)(B) of the Exchange Act.\1548\ In short, in order to be deemed
to have satisfied those obligations, the provider must promptly deliver
an executed Form ABS Due Diligence-15E after completion of the due
diligence services to each NRSRO that previously requested or that
requests the form and deliver the form to the issuer or underwriter
that maintains the Rule 17g-5 Web site with respect to the Exchange
Act-ABS. At this point, the third party will have met its obligation
under section 15E(s)(4)(B) and Rule 17g-10. However, if the third party
is employed by an NRSRO, issuer, or underwriter to perform subsequent
due diligence services with respect to the Exchange Act-ABS, it will
incur new obligations under section 15E(s)(4)(B) and Rule 17g-10.
---------------------------------------------------------------------------

    \1547\ See Deloitte Letter.
    \1548\ See paragraph (c) of Rule 17g-10.
---------------------------------------------------------------------------

    Commenters also sought clarification of the application of Rule
17g-10, as proposed, to transactions or entities located outside the
United States.\1549\ After considering comments, as discussed above in
section II.G.1. of this release, the Commission has added an

exemption in paragraph (a)(3) of Rule 17g-7. The provision exempts an
NRSRO from the disclosure requirements upon taking a rating action,
including the requirement that the NRSRO publish any Form ABS Due
Diligence-15E it receives or obtains from a Rule 17g-5 Web site, if the
rating action involves a rated obligor or issuer of the rated security
that is not a U.S. person and if the NRSRO has a reasonable basis to
conclude that transactions in the securities issued by the obligor or
the issuer will be effected only outside the United States.\1550\
Further, the Commission has issued a temporary order exempting NRSROs
from the Rule 17g-5 Web site requirements if similar conditions are
met.\1551\ Consequently, if a person is employed by an NRSRO, issuer,
or underwriter to perform third-party due diligence services with
respect to an Exchange Act-ABS that is exempt from the Rule 17g-5 Web
site provisions the person will not need to deliver an executed Form
ABS Due Diligence-15E to the issuer or underwriter of the Exchange Act-
ABS to meet the ``safe harbor'' requirement in paragraph (c)(3) of Rule
17g-10, as adopted.\1552\ Instead, the person only will need to
promptly deliver an executed Form ABS Due Diligence-15E to any NRSRO
that requests it under paragraphs (c)(1) or (c)(2).\1553\
---------------------------------------------------------------------------

    \1549\ See ABA Letter; DBRS Letter.
    \1550\ See paragraph (a)(3) of rule 17g-7.
    \1551\ See Order Extending Temporary Conditional Exemption for
Nationally Recognized Statistical Rating Organizations from
Requirements of Rule 17g-5 Under the Securities Exchange Act of 1934
and Request for Comment, Exchange Act Release No. 68286 (Nov. 26,
2012).
    \1552\ See paragraph (c)(3) of Rule 17g-10.
    \1553\ See paragraphs (c)(1) and (2) of Rule 17g-10.
---------------------------------------------------------------------------

3. New Form ABS Due Diligence-15E
    Section 15E(s)(4)(C) of the Exchange Act provides that the
Commission shall establish the appropriate format and content for the
written certifications required under section 15E(s)(4)(B), to ensure
that providers of due diligence services have conducted a thorough
review of data, documentation, and other relevant information necessary
for an NRSRO to provide an accurate rating.\1554\ The Commission
proposed Form ABS Due Diligence-15E to implement section
15E(s)(4)(C).\1555\ As proposed, the form contained five items and a
signature line with a corresponding representation.\1556\
---------------------------------------------------------------------------

    \1554\ See 15 U.S.C. 78o-7(s)(4)(C).
    \1555\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33474-33476, 33562-33563; Form ABS Due
Diligence-15E, as proposed.
    \1556\ See Form ABS Due Diligence-15E, as proposed.
---------------------------------------------------------------------------

    In the proposing release, the Commission sought comment on matters
such as should proposed Form ABS Due Diligence-15E be more prescriptive
in terms of the steps a provider of third-party due diligence services
would need to take in performing the review.\1557\ Commenters stated
that the proposed Form ABS Due Diligence-15E should not prescribe more
requirements regarding the due diligence review.\1558\ Two NRSROs added
that more prescriptive standards may violate section 15E(c)(2) of the
Exchange Act,\1559\ which prohibits the Commission from regulating the
substance of credit ratings. Another NRSRO stated that the proposed
form should ``follow a more general approach'' rather than prescribe
minimum requirements for the third-party due diligence reviews.\1560\
---------------------------------------------------------------------------

    \1557\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33476.
    \1558\ See ASF Letter; Clayton Letter; CRE Letter; DBRS Letter;
Morningstar Letter.
    \1559\ See DBRS Letter; Morningstar Letter.
    \1560\ See S&P Letter.
---------------------------------------------------------------------------

    The Commission believes for now that the steps to be taken by a
third party-due diligence provider in reviewing the assets underlying
an Exchange Act-ABS should be decided upon by the party engaging the
provider (most commonly the underwriter, sponsor, or depositor). As a
provider of third-party due diligence services noted in its comment
letter, ``[t]raditionally, our services have been used by loan
purchasers to make better decisions about how they price portfolios and
manage risk'' and ``[p]rospectively, we anticipate playing a valuable
role by independently validating the information used by market
participants to make decisions relating to loans being included in
securitization transactions.'' \1561\ The Commission believes that the
parties engaging the services of third-party due diligence providers
should have the flexibility to prescribe the steps they believe are
necessary to help them evaluate the assets underlying an Exchange Act-
ABS. Consequently, the form requires a provider of third-party due
diligence services to disclose information about its review of the
assets underlying an Exchange Act-ABS but does not prescribe how the
review must be conducted. For these reasons, the Commission, as
discussed below, is adopting Form ABS Due Diligence-15E substantially
as proposed, with modifications to the disclosure requirements in Items
3 and 4, a modification to the representation requirement in the
certification, and certain technical modifications.\1562\ The
modifications do not substantively alter the form from the proposal.
---------------------------------------------------------------------------

    \1561\ See Clayton Letter.
    \1562\ See Form ABS Due Diligence-15E.
---------------------------------------------------------------------------

    As proposed, Item 1 of the form elicited the identity and address
of the provider of third-party due diligence services.\1563\ The
Commission is adopting Item 1 as proposed.\1564\ This Item elicits the
identity and address of the provider of third-party due diligence
services.
---------------------------------------------------------------------------

    \1563\ See Item 1 of Form ABS Due Diligence-15E, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33562.
    \1564\ See Item 1 of Form ABS Due Diligence-15E.
---------------------------------------------------------------------------

    As proposed, Item 2 of the form elicited the identity and address
of the issuer, underwriter, or NRSRO that employed the provider of
third-party due diligence services.\1565\ Those disclosures were
intended to notify users of the certification of which third party
conducted the review described in the certification and which person
employed the third party to conduct the review, respectively.\1566\
---------------------------------------------------------------------------

    \1565\ See Item 2 of Form ABS Due Diligence-15E, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33562.
    \1566\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33474.
---------------------------------------------------------------------------

    The Commission is adopting Item 2 with a technical, non-substantive
modification from the proposal.\1567\ Commenters asked whether the form
must be addressed to a specific NRSRO.\1568\ It does not. The form is a
general certification. However, as discussed above in section II.H.2.
of this release, the provider of third-party due diligence services
must deliver the form promptly, to each NRSRO that requests it as well
as to the issuer or underwriter that maintains the Rule 17g-5 Web site
with respect to the Exchange Act-ABS that is the subject of the due
diligence services, to be deemed to have met its obligation under
section 15E(s)(4)(B) of the Exchange Act.
---------------------------------------------------------------------------

    \1567\ See Item 2 of Form ABS Due Diligence-15E. The
modification adds the phrase ``the third-party'' before the phrase
``due diligence services.'' As modified, Item 2 is consistent with
Item 1, as proposed and adopted (which uses the phrase ``third-party
due diligence services''). This modification is not substantive.
    \1568\ See ASF Letter; Clayton Letter.
---------------------------------------------------------------------------

    As proposed, Item 3 of the form provided that if the manner and
scope of the due diligence provided by the third party satisfied the
criteria for due diligence published by an NRSRO, the third party must
identify the NRSRO and the title and date of the published criteria in
a table provided on the form.\1569\ The proposed table and instructions
would permit the

identification of more than one NRSRO, which would allow the third
party to reflect in a single form that it conducted due diligence
services in a manner that satisfied the due diligence requirements of
multiple NRSROs.\1570\ The Commission is adopting Item 3 with one
modification to clarify the instruction for the Item in response to
comments.\1571\
---------------------------------------------------------------------------

    \1569\ See Item 3 of Form ABS Due Diligence 15E, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33562.
    \1570\ See Item 3 of Form ABS Due Diligence 15E, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33562.
    \1571\ See Item 3 of Form ABS Due Diligence-15E.
---------------------------------------------------------------------------

    Specifically, commenters raised concerns about what it would mean
for the third party to certify that it had satisfied the criteria for
due diligence published by an NRSRO.\1572\ For example, one NRSRO
stated that due diligence providers are ``not in a position'' to opine
on ``whether the NRSRO's criteria have been satisfied.'' \1573\ Another
commenter stated that it should be ``up to the NRSRO to determine''
whether the criteria were satisfied.\1574\ A third commenter stated
that the disclosure should only be required where the due diligence
provider is expressly engaged to ``comply with a particular set of
NRSRO-published criteria.'' \1575\ A fourth commenter--an NRSRO--stated
that the disclosure requirement should be limited to criteria published
by the NRSRO involved in the engagement.\1576\ Another NRSRO stated
that it would ``continue to make its own assessment of whether its
criteria are satisfied.'' \1577\
---------------------------------------------------------------------------

    \1572\ See Clayton Letter; DBRS Letter; Deloitte Letter; Moody's
Letter; S&P Letter.
    \1573\ See Moody's Letter.
    \1574\ See Clayton Letter.
    \1575\ See Deloitte Letter.
    \1576\ See DBRS Letter.
    \1577\ See S&P Letter.
---------------------------------------------------------------------------

    In response to the comments, the Commission notes that certain
NRSROs, as part of the rating criteria for RMBS, have specified the
steps a person engaged to perform third-party due diligence services
must take in performing the services in order for them to rate the
RMBS.\1578\ For example, in the RMBS context, the provider of third-
party due diligence services typically is hired by the entity (for
example, the underwriter, sponsor, or depositor) purchasing the pool of
mortgage loans for the purpose of securitizing them. In conducting a
review, the provider of third-party due diligence services typically
analyzes a sample (for example, 25%) of the loans in the pool for one
or more of the following purposes: (1) To assess the quality of the
loan-by-loan data in the electronic file (``loan-tape'') that
aggregates the information for the pool by comparing the information on
the loan tape for each loan in the sample with the information
contained on the hard-copy documents in the loan file; (2) to determine
whether each loan in the sample adheres to the underwriting guidelines
of the loan originator; (3) to assess the validity of the appraised
value of the property indicated on the loan tape that collateralizes
each loan in the sample; and (4) to determine whether the originator
complied with federal, state, and local laws in making each loan in the
sample.\1579\ The NRSROs most active in rating RMBS have incorporated
requirements for the engagement of providers of third-party due
diligence services by the entities requesting such ratings (for
example, the underwriter or sponsor of the RMBS) into their procedures
and methodologies for determining RMBS credit ratings.\1580\ These
engagement requirements prescribe the minimum scope and manner of the
review of the assets underlying an RMBS that the provider of third-
party due diligence services must conduct in order for the NRSRO to
determine a credit rating for the RMBS, including the minimum sample
size of the loans to be selected from the pool.\1581\
---------------------------------------------------------------------------

    \1578\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33471, 33474-33475.
    \1579\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33471.
    \1580\ See, e.g., Fitch, U.S. RMBS Originator Review and Third-
Party Due Diligence Criteria (April 26, 2013) (``Fitch expects
third-party loan-level reviews to be performed on all residential
mortgage pools where the agency has been asked to assign ratings.
The reviews should be conducted by independent due diligence
companies prior to the transaction closing.''); Moody's, Moody's
Criteria for Evaluating Independent Third-Party Loan Level Reviews
for U.S. Residential Mortgage Backed Securities (RMBS) (Sept. 22,
2009) (``Moody's will not rate a U.S. RMBS transaction unless there
has been a [third-party loan level review, (`TPR')] that at least
meets our minimum sample size. If the minimum sample size is met,
but the sample size is still less than Moody's target sample size or
if the TPR findings are poor, Moody's may decide i) that more credit
protection is needed to achieve a given rating level, ii) to assign
a lower rating or iii) to decline to rate the transaction . . .
Moody's will not rate a transaction unless it has received a report
from the TPR firm as to the TPR scope, procedure and findings. The
report must include a narrative summary of the review and an initial
TPR findings report before input from the TPR sponsor.''); S&P,
Incorporating Third-Party Due Diligence Results into the U.S. RMBS
Rating Process (Mar. 14, 2012) (``Standard & Poor's believes that
using third-party due diligence results in its rating analysis will
increase transparency and strengthen the rating process. Our
criteria for due diligence reviews are intended to increase our
insight into the quality and validity of the information used to
originate the mortgage loans pooled into securities.'').
    \1581\ For example, Fitch requires, at a minimum, a randomly
selected minimum sample size to be the greater of 200 loans or 10%
of the pool. See Fitch, U.S. RMBS Originator Review and Third-Party
Due Diligence Criteria. Moody's defines its minimum sample size
through statistical techniques. Specifically, Moody's requires that
the sample size must not be less than that computed using a 95%
confidence level, a 5% precision level, and an assumed error rate
equal to the higher of the historic error rate for the originator or
a Minimum Assumed Error Rate. See Moody's, Moody's Criteria for
Evaluating Independent Third-Party Loan Level Reviews for U.S.
Residential Mortgage Backed Securities (RMBS). S&P requires a sample
that is the greater of either the number of loans needed for a
statistically valid sample, or a 10% random sample for subprime and
5% sample for prime. At a minimum, S&P states that the number of
loans in the sample should be 200 for subprime, and 100 for prime.
S&P defines a statistically valid sample as the number of loans
based on a 5% one-tailed level of significance with a 2% level of
precision. S&P expects that the number of loans in the sample also
will be a function of an estimate of an error rate. See S&P,
Incorporating Third-Party Due Diligence Results into the U.S. RMBS
Rating Process.
---------------------------------------------------------------------------

    Item 3 was designed to require the third party to record in the
form that the third party had endeavored to perform its due diligence
in accordance with the due diligence criteria an NRSRO had published.
Further, by executing the form, the third party would certify that it
had performed the due diligence in accordance with the NRSRO's
criteria.\1582\
---------------------------------------------------------------------------

    \1582\ See 15 U.S.C. 78o-7(s)(4)(C) (providing that the
Commission shall establish the appropriate format and content for
the written certifications required under section 15E(s)(4)(B), to
ensure that providers of due diligence services have conducted a
thorough review of data, documentation, and other relevant
information necessary for an NRSRO to provide an accurate rating).
---------------------------------------------------------------------------

    The Commission acknowledges that certifying to having followed a
given NRSRO's due diligence criteria does not establish that the third
party in fact followed the criteria. However, the objective of sections
15E(4)(B) and (C) of the Exchange Act is to require third-party due
diligence providers to provide a certification to NRSROs to ``ensure''
that the providers ``have conducted a thorough review of data,
documentation, and other relevant information necessary for [an NRSRO]
to provide an accurate rating.'' \1583\ In the Commission's view, if an
NRSRO has published criteria for performing due diligence reviews and
the third party has sought to follow the criteria, the form should
provide a means for the third party to certify that it sought to follow
the criteria. For these reasons, the Commission is adopting Item 3 to
the form substantially as proposed. However, in response to the
comments, the Commission has modified the instruction for Item 3 so
that it contains the words ``if the due diligence provided by the third
party is intended to satisfy'' the criteria of an NRSRO.\1584\
---------------------------------------------------------------------------

    \1583\ See 15 U.S.C. 78o-7(s)(4)(B) and (C).
    \1584\ See Item 3 to Form ABS Due Diligence-15E. As proposed,
the instruction read, in pertinent part, ``[i]f the manner and scope
of the due diligence provided by the third party satisfied'' the
criteria of an NRSRO. See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33562 (emphasis added).

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

    As proposed, Item 4 of the form required the provider of the third-
party due diligence services to describe the scope and manner of the
due diligence services provided in connection with the review of assets
in sufficient detail to provide an understanding of the steps taken in
performing the review, including: (1) The type of assets that were
reviewed; (2) the sample size of the assets reviewed; (3) how the
sample size was determined and, if applicable, computed; (4) whether
the quality or integrity of information or data about the assets
provided, directly or indirectly, by the securitizer or originator of
the assets was reviewed and, if so, how the review was conducted; (5)
whether the origination of the assets conformed to, or deviated from,
stated underwriting or credit extension guidelines; (6) whether the
value of collateral securing such assets was reviewed and, if so, how
the review was conducted; (7) whether the compliance of the originator
of the assets with federal, state, and local laws and regulations was
reviewed and, if so, how the review was conducted; and (8) any other
type of review conducted with respect to the assets.\1585\ The proposed
disclosure was intended to allow the NRSRO and users of credit ratings
to determine whether the provider of third-party due diligence
services, based on its description, appeared to satisfy published
criteria of the NRSRO if such a claim was made in Item 3.\1586\
Alternatively, if no criteria had been published for the type of
Exchange Act-ABS or no claim to satisfying criteria was made in Item 3,
the proposed disclosure was intended to provide an understanding of the
due diligence performed.\1587\ The instructions for Items 4, as
proposed, required the summary to be provided in an attachment to the
Form, which would be considered part of the form.\1588\
---------------------------------------------------------------------------

    \1585\ See Item 4 of Form ABS Due Diligence-15E, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33563. The proposed instructions would require the third party to
provide this description regardless of whether the third party
represented in Item 3 of the form that its review satisfied
published criteria of an NRSRO. In other words, the third party
would not be able to simply rely on a cross-reference to the NRSRO's
published criteria to explain the work completed in performing the
due diligence.
    \1586\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33475.
    \1587\ See id.
    \1588\ See id. at 33563.
---------------------------------------------------------------------------

    The Commission is adopting Item 4 of Form ABS Due Diligence-15E
with modifications, in part, in response to comments.\1589\ Consistent
with the modification to Item 3 discussed above, the Commission is
modifying the last sentence of the instructions for the Item to replace
the phrase ``satisfied the criteria for minimum due diligence'' with
the phrase ``is intended to satisfy the criteria for due diligence.''
\1590\ As adopted, Item 4 requires the third party to provide a
description of the scope and manner of the due diligence services
provided in connection with the review of assets that is sufficiently
detailed to provide an understanding of the steps taken in performing
the review and to include in the description:
---------------------------------------------------------------------------

    \1589\ See Item 4 to Form ABS Due Diligence-15E.
    \1590\ The Commission also removed the word ``minimum'' before
the phrase ``due diligence'' in the last sentence because it was
unnecessary.
---------------------------------------------------------------------------

     The type of assets that were reviewed;
     The sample size of the assets reviewed;
     How the sample size was determined and, if applicable,
computed;
     Whether the accuracy of information or data about the
assets provided, directly or indirectly, by the securitizer or
originator of the assets was reviewed and, if so, how the review was
conducted; \1591\
---------------------------------------------------------------------------

    \1591\ As discussed above in section II.H.2. of this release, a
commenter that provides due diligence services recommended modifying
this description of due diligence services by replacing the phrase
``quality and integrity'' of the data with the word ``accuracy.''
See Clayton Letter. The Commission believes that this change will
more accurately describe the nature of the work undertaken by a
provider of third-party due diligence services, as suggested by the
commenter, and, therefore, has revised the instruction accordingly.
---------------------------------------------------------------------------

     Whether the conformity of the origination of the assets to
stated underwriting or credit extension guidelines, standards,
criteria, or other requirements was reviewed and, if so, how the review
was conducted; \1592\
---------------------------------------------------------------------------

    \1592\ As proposed, the phrase in the instruction stated
``whether the origination of the assets conformed to stated
underwriting or credit extension guidelines, standards, criteria or
other requirements was reviewed and, if so, how the review was
conducted.'' See Item 4 of Form ABS Due Diligence-15E, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33472. The final instruction was modified to replace the phrase
``origination of the assets conformed'' with the phrase ``conformity
of the origination of the assets.'' See Item 4 to Form ABS Due
Diligence-15E. This modification is intended to provide a clearer
description of the category without substantively changing it.
---------------------------------------------------------------------------

     Whether the value of collateral securing such assets was
reviewed and, if so, how the review was conducted;
     Whether the compliance of the originator of the assets
with federal, state, and local laws and regulations was reviewed and,
if so, how the review was conducted; and
     Any other type of review that was part of the due
diligence services conducted by the person executing the Form.\1593\
---------------------------------------------------------------------------

    \1593\ One commenter stated that the due diligence provider
should only be required to describe ``those of the eight steps that
relate to the services it actually performed'' and suggested that
the requirement to describe ``any other type of review conducted
with respect to the assets'' be omitted. See Deloitte Letter. The
instruction requires the third-party due diligence provider to
describe only the reviews that the provider conducted (that is, not
reviews conducted by other service providers). The instruction has
been modified to clarify this point. Specifically, it now states
``any other type of review that was part of the due diligence
services conducted by the person executing this Form'' (emphasis
added).
---------------------------------------------------------------------------

    One commenter stated that the instruction that the description must
be ``sufficiently detailed'' to provide an understanding of the steps
taken in performing the review should be replaced with a standard that
is not subjective.\1594\ The Commission is not persuaded that this is
necessary. First, this instruction is consistent with the instructions
for Exhibit 2 to Form NRSRO, which has been in use since 2007.\1595\
Second, by identifying the matters that must be included in the
description, the instruction provides objective guidance on the topics
that the description must address. Another commenter suggested that
examples of each of the categories of information would be
helpful.\1596\ The discussion above provides some examples of the
matters that providers of third-party due diligence services review in
the context of RMBS issuances. As discussed above, Form ABS Due
Diligence-15E is designed to account for due diligence services
provided with respect to other types of Exchange Act-ABS (in addition
to RMBS). Consequently, providing specific examples could create
confusion if new types of reviews tailored to non-RMBS Exchange Act-ABS
develop in the future. The description of the types of reviews in Item
4 provides detail on the matters that must be addressed in the form in
a way that is designed to provide

guidance without narrowing the matters to the RMBS context.\1597\
---------------------------------------------------------------------------

    \1594\ See Clayton Letter.
    \1595\ See instructions for Exhibit 2 to Form NRSRO
(instructing, in pertinent part, that an applicant for registration
as an NRSRO or NRSRO submitting the form must provide in the Exhibit
a general description of the procedures and methodologies used by
the applicant or NRSRO to determine credit ratings, including
unsolicited credit ratings within the classes of credit ratings for
which the applicant or NRSRO is seeking registration or is
registered and that the description must be sufficiently detailed to
provide users of credit ratings with an understanding of the
processes employed by the applicant or NRSRO in determining credit
ratings, including, as applicable, descriptions of a number of
matters enumerated in the instructions) (emphasis added).
    \1596\ See Deloitte Letter.
    \1597\ The descriptions in Item 4 correspond to the prongs of
the definition of due diligence services in Rule 17g-10. A provider
of third-party due diligence services noted in its comment letter
that the definition of due diligence services in Rule 17g-10
(subject to certain modification suggested by the commenter)
``captures the scope of due diligence services provided to issuers
or underwriters by third-party due diligence providers in connection
with the rating of an issuance of ABS . . .'' See Clayton Letter. As
discussed above and in section II.H.2. of this release, this
commenter suggested, among other things, that the phrase ``quality
and integrity'' of the data as used in the definition of due
diligence services and in Item 4 should be replaced with the word
``accuracy.'' Id.
---------------------------------------------------------------------------

    As proposed, Item 5 of the form would require the provider of
third-party due diligence services to provide a summary of the findings
and conclusions that resulted from the due diligence services that is
sufficiently detailed to provide an understanding of the findings and
conclusions that were conveyed to the person identified in Item 2 (that
is, conveyed to the issuer, underwriter, or NRSRO that employed the
third party to perform due diligence services).\1598\ As with Item 4,
the instructions for Items 5, as proposed, required the summary to be
provided in an attachment to the form, which would be considered part
of the Form.\1599\
---------------------------------------------------------------------------

    \1598\ See Item 5 of Form ABS Due Diligence-15E, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33563.
    \1599\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33563.
---------------------------------------------------------------------------

    The Commission is adopting Item 5 of Form ABS Due Diligence-15E
with a technical non-substantive modification in response to
comment.\1600\ The Item provides that the person providing due
diligence services must provide a summary of the findings and
conclusions that resulted from the due diligence services that is
sufficiently detailed to provide an understanding of the findings and
conclusions that were conveyed to the person that employed the third
party to perform the services. One commenter stated that the
instruction regarding the summary be ``sufficiently detailed to provide
an understanding of the findings and conclusions'' should be
eliminated.\1601\ The Commission is adopting the ``sufficiently
detailed'' standard in this Item as it is doing with respect to Item
4.\1602\ As stated above, the standard is consistent with the
instructions for Exhibit 2 to Form NRSRO.
---------------------------------------------------------------------------

    \1600\ See Item 5 of Form ABS Due Diligence-15E. One commenter
suggested that the word ``description'' in the second sentence of
the instruction be replaced with the word ``summary.'' See Clayton
Letter. The Commission agrees with this suggestion because Item 5 is
titled ``Summary of findings and conclusions of review'' and the
first sentence of the instruction provides that the person executing
the certification should provide a ``summary'' of the findings and
conclusions.
    \1601\ See Clayton Letter.
    \1602\ See Item 5 of Form ABS Due Diligence-15E.
---------------------------------------------------------------------------

    Finally, as proposed, the individual executing the form on behalf
of a provider of third-party due diligence services would need to make
two representations: (1) That he or she has executed the form on behalf
of, and on the authority of, the third party; and (2) that the third
party conducted a thorough review in performing the due diligence
described in Item 4 and that the information and statements contained
in the form, including Items 4 and 5 attached to the form, are accurate
in all significant respects.\1603\ The proposed representation was
intended to implement section 15E(s)(4)(C) of the Exchange Act, which
provides that the Commission shall establish the appropriate format and
content of the written certifications ``to ensure that providers of due
diligence services have conducted a thorough review of data,
documentation, and other relevant information necessary for [an NRSRO]
to provide an accurate rating.'' \1604\
---------------------------------------------------------------------------

    \1603\ See ``Certification'' on Form ABS Due Diligence-15E, as
proposed; Nationally Recognized Statistical Rating Organizations, 76
FR at 33563.
    \1604\ See 15 U.S.C. 78o-7(s)(4)(C) (emphasis added); Nationally
Recognized Statistical Rating Organizations, 76 FR at 33476.
---------------------------------------------------------------------------

    The Commission is adopting the certification in Form ABS Due
Diligence-15E with one modification. Commenters stated that the
certification should indicate that it is as of the date signed.\1605\
The Commission agrees. As adopted, the certification contains the
representation that the third-party due diligence provider conducted a
thorough review in performing the due diligence described in Item 4 of
the form and that the information and statements contained in the form,
including Items 4 and 5 attached to the form, are accurate in all
significant respects on and as of the date hereof.\1606\
---------------------------------------------------------------------------

    \1605\ See Deloitte Letter; S&P Letter.
    \1606\ See ``Certification'' on Form ABS Due Diligence-15E
(emphasis added to highlight the modification).
---------------------------------------------------------------------------

    One commenter stated that ``professional standards as well as
liability concerns would prevent an accountant from stating that he or
she has performed a `thorough review' of information because that term
is undefined.'' \1607\ Another commenter stated that the words
``thorough review'' should be replaced with ``due care.'' \1608\ This
commenter stated that, ``[b]y their very nature, due diligence
procedures often relate to a sample, rather than the entire population
of assets, and in this sense the review may not be `thorough' as to the
scope of assets reviewed and ``the procedures themselves are limited in
that choices were made to perform certain procedures and not others.''
\1609\ This commenter also suggested that the phrase ``accurate in all
significant respects'' be omitted from the certification.\1610\ Two
commenters stated that the phrase ``accurate in all significant
respects'' should be changed to a ``materiality'' standard.\1611\ One
of these commenters also suggested that the certification should be
``based on objective standards that can be verified by the signer'' and
should state that the due diligence provider did not conduct any
reviews in addition to those expressly requested.\1612\
---------------------------------------------------------------------------

    \1607\ See AICPA Letter.
    \1608\ See Deloitte Letter.
    \1609\ Id.
    \1610\ Id.
    \1611\ See Clayton Letter; DBRS Letter.
    \1612\ See Clayton Letter.
---------------------------------------------------------------------------

    In response to these comments, the Commission notes that, as stated
in the proposing release, including ``thorough review'' in the
certification was designed to implement section 15E(s)(4)(C) of the
Exchange Act, which provides that the Commission shall establish the
appropriate format and content of the written certifications ``to
ensure that providers of due diligence services have conducted a
thorough review of data, documentation, and other relevant information
necessary for [an NRSRO] to provide an accurate rating.'' \1613\
Further, this language will provide some assurance to persons using the
certification to evaluate the underlying assets (including NRSROs
determining credit ratings for the Exchange Act-ABS) that the third-
party due diligence provider undertook the review described in Item 4
in a thorough manner. Also, it should create an incentive for a
provider of third-party due diligence services to perform these reviews
in a competent manner because the third party must certify that the
work was thorough.\1614\ In response to comment, the Commission notes
that the provider of third-party due diligence services must certify
that it ``conducted a thorough review in performing the due diligence
described in Item 4 attached to [the] Form.'' \1615\ Consequently, the
third party need only certify that a ``thorough review'' was conducted
with respect to

the work actually performed as specified in Item 4 of the form (for
example, reviewing a sample of the assets). This limits the scope of
the certification to the matters reflected in Item 4. Consequently, in
response to the comment that the third-party due diligence provider
should state that it did not conduct any reviews in addition to those
expressly requested, Item 4 will reflect the nature and scope of the
review work performed, which will be determined by the engagement.
---------------------------------------------------------------------------

    \1613\ See 15 U.S.C. 78o-7(s)(4)(C) (emphasis added).
    \1614\ As discussed above in section II.H.2. of this release,
the Commission understands that in making the certification there
may be particular considerations that would need to be taken into
account under applicable professional standards that govern certain
services provided by the accounting profession.
    \1615\ See ``Certification'' on Form ABS Due Diligence-15E.
---------------------------------------------------------------------------

    Further, in response to comments, the Commission notes that the
part of the certification as to the accuracy of the information
contained in the report is modeled on the certification NRSROs must
make on Form NRSRO.\1616\ This has proven to be a workable attestation
standard as to the accuracy of information disclosed in a form since it
was implemented in 2007. It also provides an incentive for the person
executing the form to take steps to verify that the information
contained in the form is accurate. In response to comments that the
standard should be changed to a materiality standard, the Commission
notes that the ``accurate in all significant respects'' is a standard
that is intended to incorporate materiality. For all of these reasons,
the Commission is adopting the certification substantially as proposed.
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    \1616\ See ``Certification'' on Form NRSRO.
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4. Economic Analysis
    This section builds on the economic analysis in section I.B. of
this release by presenting a focused analysis of the potential economic
effects that may derive from the specific amendments and new rules
related to disclosing information about third-party due diligence
services.\1617\ In particular, this section addresses the potential
economic effects of Rule 15Ga-2 and Rule 17g-10 and the related
amendments, including effects related to amended Form ABS-15G and new
Form ABS Due Diligence-15E, as well as effects of the amendments to
Rule 17g-7 requiring that NRSROs publish any written certifications
received from third-party due diligence providers when taking certain
rating actions.\1618\ The baseline that existed before today's
amendments and new rules was one in which, under Rule 193, the issuer
of any registered Exchange Act-ABS offering was required to perform due
diligence with respect to the assets underlying the security.\1619\ The
issuer could conduct the review directly or engage one or more third-
party vendors to perform the review. Under Item 1111(a)(7) of
Regulation AB, the nature as well as the findings and conclusions of
the review performed under Rule 193 was required to be disclosed in the
prospectus.\1620\ These requirements applied whether or not the
registered Exchange Act-ABS would be rated by an NRSRO. Commission
rules did not require that issuers review assets or disclose to
investors the nature, findings, and conclusions of any reviews in the
case of unregistered Exchange Act-ABS offerings, whether or not rated
by an NRSRO.
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    \1617\ The economic analysis in section I.B. of this release
discusses the primary economic impacts that may derive from the
amendments and new rules being adopted today.
    \1618\ The new requirements with respect to disclosing
information about due diligence services are discussed in sections
II.G.5., II.H.1., II.H.2., and II.H.3. of this release.
    \1619\ See Public Law 111-203, 945.
    \1620\ See 17 CFR 229.1111(a)(7).
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    Even in the case of registered offerings, information about the
nature, findings, and conclusions of all the third-party due diligence
that was undertaken might not have been disclosed under the existing
rules. Rule 193 requires a review that provides reasonable assurance
that the disclosure in the prospectus regarding the assets is accurate
in all material respects. The rule requires that issuers disclose the
nature of their review but does not require issuers to disclose the
specifics of each report where they have engaged third parties to
perform multiple reviews and/or produce multiple reports, including
interim reports, and does not require that the issuer disclose the
identity of the third party or third parties engaged to perform a
review. Any third party to which the findings and conclusions of the
review disclosed in the prospectus are attributed must be named as an
expert in the prospectus, though the issuer is permitted to attribute
the findings and conclusions of the review to itself.
    In the baseline, the issuer or underwriter of a rated Exchange Act-
ABS, whether registered or unregistered, typically provided some
information about third-party due diligence reports to any NRSROs they
hired to rate the security. Further, some NRSROs, for certain asset
classes of Exchange Act-ABS, have adopted minimum standards for due
diligence that are required to be met in order for a security to be
rated. For example, as discussed above, some NRSROs, as a condition to
rating an RMBS, require that a non-affiliated third party perform a due
diligence review of the assets underlying the RMBS. An NRSRO may also
require that due diligence reviews be performed in accordance with
specified criteria, and/or that due diligence be performed by one of a
specified set of third-party due diligence providers that has been
approved by the NRSRO. Under the baseline requirements, any information
about due diligence provided by an issuer or underwriter to an NRSRO
hired to rate an Exchange Act-ABS also was required to be disclosed on
a password-protected Rule 17g-5 Web site, which could be accessed by
other NRSROs that provided the required certification.\1621\ However,
the information transmitted by issuers and underwriters to NRSROs was
not subject to mandatory disclosure requirements, and any disclosure
may have involved editing or filtering by issuers or
underwriters.\1622\ In addition, issuers and underwriters who received
multiple due diligence reports need not have provided information about
all of the reports to NRSROs. The Commission does not believe that
NRSROs typically hire third-party due diligence providers directly, but
prior to the amendments and new rules, information about third-party
due diligence services employed directly by NRSROs was not required to
be disclosed to other NRSROs.
---------------------------------------------------------------------------

    \1621\ See 17 CFR 240.17g-5.
    \1622\ See, e.g., John C. Coffee, Jr., Adolf A. Berle Professor
of Law, Columbia University Law School, Enhancing Investor
Protection and the Regulation of Securities Markets (Mar. 10, 2009)
(testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs), pp. 64-65, available at http://
www.banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStoreid=d5da9848-ea57-
475a-b6e9-93fc74b85abd (``Coffee Testimony II'') (``An offering
process for structured finance that was credible would look very
different than the process we have recently observed. First, a key
role would be played by the due diligence firms, but their reports
would not go only to the underwriter (who appears to have at times
ignored them). Instead, without editing or filtering, their reports
would also go directly to the credit rating agency.'').
---------------------------------------------------------------------------

    In addition to concerns about due diligence information potentially
being withheld from NRSROs, market participants, academics, and other
observers have expressed concern about decreased standards of due
diligence in Exchange Act-ABS offerings.\1623\ For example, it has been
reported that the percentage of loans in mortgage pools subject to
review dropped from 30% to 5% from the year 2000 to 2005.\1624\ Also,
litigation in the wake of the financial crisis alleged systemic abuses
in due diligence practices with respect to asset-backed
securities.\1625\
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    \1623\ See Coffee Testimony II, pp. 54-56 (describing ``the
rapid decline in due diligence after 2000'' and citing market
participants and journalists raising related concerns).
    \1624\ See Vikas Bajaj and Jenny Anderson, Inquiry Focuses on
Withholding of Data on Loans, New York Times, January 12, 2008, at
A-1.
    \1625\ See Complaint, People of the State of New York, by Eric
T. Schneiderman, against J.P. Morgan Securities LLC, JPMorgan Chase
Bank, EMS Mortgage LLC (Oct. 2012).

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

    Relative to the baseline, the amendments and new rules should
benefit NRSROs, the users of credit ratings, and investors and other
Exchange Act-ABS market participants who may or may not be users of
credit ratings. NRSROs that are hired by the issuer or underwriter of
any Exchange Act-ABS to provide a credit rating, and any other NRSROs
that are not hired but are producing credit ratings related to the due
diligence services, should benefit from receiving the information in
Form ABS Due Diligence-15E. Each Form ABS Due Diligence-15E will
contain important details about the third-party due diligence performed
with respect to the Exchange Act-ABS to which the services relate,
including a description of the scope and manner of the due diligence
services provided in connection with the review of the assets
underlying the Exchange Act-ABS and a summary of the findings and
conclusions that resulted from the due diligence services. The form
will be signed by an individual who is duly authorized by the person
providing the third-party due diligence services to make such a
certification, promoting confidence in the accuracy of the content of
the form. To the extent that there are any additional due diligence
reports obtained by an issuer or underwriter subject to Rule 15Ga-2
\1626\ that are not related to credit ratings and therefore are not
required to be disclosed to the NRSROs on Form ABS Due Diligence-15E,
NRSROs will also have access to the findings and conclusions of these
reports, via the Form ABS-15G required to be furnished at least five
business days prior to the first sale in the offering.
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    \1626\ As discussed above, the Commission has excluded issuers
and underwriters of municipal and certain offshore offerings of
Exchange Act-ABS from Rule 15Ga-2. Issuers and underwriters of
municipal Exchange Act-ABS remain subject to the statutory
obligation under section 15E(s)(4)(A) to make publicly available the
findings and conclusions of any third-party due diligence reports
they obtain, and could choose to satisfy their obligation by
voluntarily submitting Form ABS-15G on EMMA.
---------------------------------------------------------------------------

    NRSROs may therefore receive information derived from additional
reports of third-party due diligence providers, and more detail about
the third-party due diligence services, than they would have obtained
under the baseline requirements. Importantly, issuers and underwriters
can no longer select what part of this information to provide to
NRSROs, reducing the possibility of less favorable information being
withheld from NRSROs. Having access to more complete data may allow
NRSROs to generate higher quality credit ratings, both in the case of
solicited credit ratings and in the case of unsolicited credit ratings
by NRSROs. Non-hired NRSROs that choose not to access the Rule 17g-5
Web sites because of the requirement to provide the annual
certification under paragraph (e) of the rule may benefit less from the
amendments and new rules.\1627\ Specifically, though these non-hired
NRSROs can request Form ABS Due Diligence-15E from the provider of
third-party due diligence services, they will not be able to request
this form until they become aware of a given offering and which third-
party has provided services related to that offering, and so they may
not have the required information to provide unsolicited credit ratings
in as timely a manner as NRSROs that do have access to these Web sites.
However, prior to today's amendments and new rules, non-hired NRSROs
that did not have access to the Rule 17g-5 Web sites were already
disadvantaged in providing unsolicited credit ratings given that they
likely lacked timely access to other information about the Exchange
Act-ABS.
---------------------------------------------------------------------------

    \1627\ See 17 CFR 240.17g-5(e) (requiring, among other things,
that the NRSRO certify that it will determine and maintain credit
ratings for at least 10% of the issued securities and money market
instruments for which it accesses information pursuant to the rule,
if it accesses such information for ten or more issued securities or
money market instruments in the calendar year covered by the
certification).
---------------------------------------------------------------------------

    Users of credit ratings, as well as investors and other market
participants who may or may not be users of credit ratings, may also
benefit from the Form ABS-15G and Form ABS Due Diligence-15E
disclosures, particularly in cases where information that was not
previously disclosed to these persons becomes available as a
consequence of the amendments and new rules. As noted above, the
findings and conclusions of all third-party due diligence reports
obtained by issuers and underwriters of rated Exchange Act-ABS will be
made public through disclosures on Form ABS-15G, except in the case of
municipal Exchange Act-ABS for which the issuer or underwriter chooses
to make such information publicly available through some other means
and in the case of certain offshore transactions.\1628\ In the case of
registered rated Exchange Act-ABS, the Form ABS-15G disclosures may
include findings and conclusions of reports (for example, interim
reports) other than the report(s) supporting the results reported in
the prospectus under Rule 193 and Item 1111(a)(7) of Regulation AB.
Consequently, information that would not have been available to the
public under the baseline requirements may now be disclosed publicly.
In the case of unregistered rated Exchange Act-ABS, because Rule 193
and Item 1111(a)(7) of Regulation AB do not apply to such offerings,
all of the information about the findings and conclusions of third-
party due diligence reports disclosed in Forms ABS-15G should be
information that may not have been available to potential investors,
and would not have been disclosed to the broader public, under the
baseline requirements.
---------------------------------------------------------------------------

    \1628\ As discussed above, in light of the practical and legal
considerations raised by commenters, the Commission adopted
revisions to the proposal to provide that Rule 15Ga-2, as well as
section 15E(s)(4)(A), will not apply to certain offshore offerings
of Exchange Act-ABS. The criteria for exemption include, among other
things, that the security issued will be offered and sold upon
issuance, and that any underwriter or arranger linked to the
security will effect transactions of the security after issuance,
only in transactions that occur outside the United States. It is
therefore possible that the rule may result in foreign issuers
seeking to avoid the disclosure requirement by limiting certain
offerings of Exchange Act-ABS to transactions outside the United
States, thus potentially depriving U.S. investors of diversification
and related investment opportunities.
---------------------------------------------------------------------------

    In addition, any disclosures on Form ABS Due Diligence-15E will be
published by NRSROs with their credit ratings when taking rating
actions covered by Rule 17g-7 with respect to the Exchange Act-ABS. The
Forms ABS Due Diligence-15E will contain additional detailed
information about third-party due diligence with respect to an Exchange
Act-ABS for which the NRSRO is producing a credit rating beyond the
findings and conclusions that must be disclosed by issuers and
underwriters, including a description of the scope and manner of the
due diligence services provided in connection with the review of the
assets underlying an Exchange Act-ABS. In the case of any review that
is also discussed in the prospectus pursuant to Rule 193, the
description of such review disclosed in Form ABS Due Diligence-15E may
include information that is not already disclosed as part of the
``nature of the review'' discussed in the prospectus. Also, Form ABS
Due Diligence-15E information with respect to any due diligence
services employed by an NRSRO rating the security will also be
published together with each NRSRO's credit rating, for credit rating
actions subject to Rule 17g-7.
    In particular, in the case of registered and certain unregistered
Exchange Act-ABS with issuer-paid credit ratings, any disclosures on
Form ABS Due Diligence-15E will be made publicly

available by the issuer-paid NRSRO pursuant to Rule 17g-7, perhaps, for
example, on its corporate Internet Web site. However, if Exchange Act-
ABS, whether registered or unregistered, is rated only by subscriber-
paid NRSROs, then the Form ABS Due Diligence-15E information is only
required by Rule 17g-7 to be made available to subscribers of these
NRSROs. Finally, a commenter indicated that in some unregistered
offerings of Exchange Act-ABS, credit ratings are distributed only to
potential investors in the offering.\1629\ Because Rule 17g-7 requires
that Forms ABS Due Diligence-15E are made available to the same persons
who can receive or access the credit rating, the information in these
forms about the scope and manner of the due diligence services provided
in connection with the review of assets may then only be made available
to these potential investors.
---------------------------------------------------------------------------

    \1629\ See DBRS Letter.
---------------------------------------------------------------------------

    In the above cases in which, relative to the baseline, new
information becomes available to users of credit ratings and investors
and other market participants who may or may not be users of credit
ratings, many of these persons should benefit from the information. The
information on the findings and conclusions of reviews disclosed using
Form ABS-15G may be of particular use in understanding the quality of
the asset pool underlying the Exchange Act-ABS, and possibly may
represent a more balanced view of such quality than would have been
provided in the absence of the amendments and new rules, since the
findings and conclusions of all reviews obtained by issuers and
underwriters must be reported. The information from Form ABS Due
Diligence-15E may be of particular use in determining the adequacy and
the level of due diligence services provided by the third parties. The
information in both forms may be of use to users of credit ratings and
investors and market participants who may or may not be users of credit
ratings in evaluating rated Exchange Act-ABS, both in isolation and in
comparison to other rated Exchange Act-ABS. The additional information
available relative to the baseline--because it provides insights into
the quality of the asset pool and the due diligence procedures of the
parties involved--also may help these persons in evaluating the NRSROs,
issuers and underwriters of Exchange Act-ABS, third-party due diligence
providers, and other parties involved in the issuance process.
Consequently, the additional information may be of use in current and
future investment decisions as well as other interactions among the
various parties involved. The benefits of this information may be
constrained, however, by the fact that Form ABS Due Diligence-15E
disclosures for different securities which may be rated by different
NRSROs are not consolidated in a single location, potentially
increasing the effort required to collect and compare these
disclosures.
    Users of credit ratings and investors and other market participants
who may or may not be users of credit ratings may also benefit from
other effects of the adopted rules. To the extent that NRSROs obtain
more complete information about Exchange Act-ABS that they rate, users
of credit ratings may benefit from the higher quality credit ratings
that may result. The new information available to investors and other
market participants, together with these higher quality credit ratings,
may result in more informed investment decisions--potentially improving
individual portfolio efficiency as well as market efficiency--and may
benefit capital formation by encouraging more participation in the
Exchange Act-ABS market. Also, the detailed disclosures and the
accompanying certification requirements may promote greater rigor and
discipline of due diligence procedures and thus benefit investors and
other market participants who may or may not be users of credit
ratings. In particular, the detailed disclosures and the identification
of the third parties involved may enhance the ability of third-party
due diligence providers to form a market reputation for providing
thorough and accurate due diligence reviews, increasing the competition
among these third parties on the basis of quality. In addition, the
increased comparability of the quality of due diligence across
transactions may enhance competition among issuers.\1630\
---------------------------------------------------------------------------

    \1630\ See section I.B.3. of this release (providing a broader
discussion of the potential impacts of the amendments and new rules
on efficiency, competition, and capital formation).
---------------------------------------------------------------------------

    Relative to the baseline, the amendments and new rules will result
in compliance costs to issuers and underwriters in offerings of
Exchange Act-ABS, third-party due diligence providers, and NRSROs. Rule
15Ga-2 will result in costs to issuers and underwriters in offerings of
rated Exchange Act-ABS, whether registered or unregistered (other than
municipal Exchange Act-ABS and certain offshore Exchange Act-ABS).
Although they are excluded from Rule 15Ga-2, issuers and underwriters
of municipal Exchange Act-ABS will still incur costs to comply with
their statutory disclosure obligation under section 15E(s)(4)(A) of the
Exchange Act, and the Commission has estimated costs to these issuers
and underwriters based on the assumption that they will satisfy the
disclosure obligation by furnishing Form ABS-15G on EMMA.\1631\ The
Commission believes that the entities that will furnish Form ABS-15G
pursuant to Rule 15Ga-2 and/or section 15E(s)(4)(A) of the Exchange Act
generally will already have processes and protocols in place to file
Form ABS-15G in order to disclose repurchase activity as required by
Rule 15Ga-1.\1632\ However, they will bear any costs of adapting their
current processes and protocols to provide the information required to
comply with the new disclosure requirements, including modifying their
existing Form ABS-15G processes and protocols to accommodate these
requirements. They also will incur ongoing costs to prepare and furnish
Form ABS-15G to the Commission through EDGAR or, in the case of
municipal Exchange Act-ABS, potentially through EMMA. Based on analysis
for purposes of the PRA, the Commission estimates that Rule 15Ga-2 and
the amendments to Form ABS-15G will result in total industry-wide one-
time costs to issuers and underwriters of approximately $9,509,000 and
total industry-wide annual costs to issuers and underwriters of
approximately $202,000.\1633\
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    \1631\ To the extent that issuers and underwriters of municipal
Exchange Act-ABS use another means to make the required information
publicly available, such as through an Internet Web site, the
compliance costs to these parties could be greater or less than the
Commission's estimates, depending on the method chosen to disclose
the information.
    \1632\ As discussed above, the Commission has revised the final
rule to clarify that a single Form ABS-15G may be furnished when the
issuer and/or one or more underwriters have obtained the same third-
party due diligence report. The Commission thus expects that the
securitizer responsible for filing Rule 15Ga-1 disclosures on Form
ABS-15G will most likely also file the Rule 15Ga-2 disclosures.
    \1633\ See section V.I. of this release (discussing
implementation and annual compliance considerations). The one-time
and annual costs are determined by monetizing internal hour burdens
and adding external costs identified in the PRA analysis in section
IV.D.10. of this release.
---------------------------------------------------------------------------

    Rule 17g-10 will result in one-time and recurring costs for
providers of third-party due diligence services. Initially, they will
need to develop processes and protocols for preparing the information
required, certifying, and promptly delivering Form ABS Due Diligence-
15E to NRSROs and to issuers and underwriters maintaining Rule 17g-5
Web sites. They also may engage outside counsel, and/or consult with
in-house counsel, to advise them on how to comply with the new
requirements. Providers of third-party due diligence

services also will bear recurring costs. Each time they are employed by
an issuer, underwriter, or NRSRO to perform due diligence services,
they will need to prepare and execute the Form. Based on analysis for
purposes of the PRA, the Commission estimates that Rule 17g-10 and Form
ABS Due Diligence-15E will result in total industry-wide one-time costs
to third-party due diligence providers of approximately $1,405,000 and
total industry-wide annual costs of approximately $67,000.\1634\ Third-
party due diligence providers and the individuals executing the forms
on behalf of the third parties may also bear the risk of future
liability and associated costs due to the certification requirements in
the rule.
---------------------------------------------------------------------------

    \1634\ See section V.J. of this release (discussing
implementation and annual compliance considerations). The one-time
and annual costs are determined by monetizing internal hour burdens
and adding external costs identified in the PRA analysis in section
IV.D.9. of this release.
---------------------------------------------------------------------------

    The amendments and new rules related to Form ABS Due Diligence-15E
also will result in one-time costs for NRSROs to amend their standard
agreement forms with issuers and underwriters of Exchange Act-ABS to
include the new representation required under Rule 17g-5. Further, the
amendments and new rules will result in recurring costs for issuers and
underwriters to promptly post the form on their Rule 17g-5 Web sites.
Based on analysis for purposes of the PRA, the Commission estimates
that these compliance efforts will result in total industry-wide costs
of approximately $1,902,000 in one-time costs to NRSROs and
approximately $34,000 in annual costs to issuers and
underwriters.\1635\ NRSRO compliance costs with respect to attaching
Forms ABS Due Diligence-15E to the forms that they must publish when
taking certain credit rating actions are addressed above in section
II.G.6. of this release.
---------------------------------------------------------------------------

    \1635\ See section V.J. of this release (discussing
implementation and annual compliance considerations). These costs
are derived by monetizing internal hour burdens and adding external
costs identified in the PRA analysis in section IV.D.5. of this
release.
---------------------------------------------------------------------------

    Rule 17g-10 and the associated amendments may also lead to other
costs. One commenter stated that it ``remains possible that certain
third-party due diligence providers may refuse to provide these
certifications'' or ``it may make it more difficult for certain
relatively smaller transactions to come to market, since third-party
due diligence providers may only be willing to provide these
certifications for the largest of transactions, where fees are at
levels high enough to justify the associated costs and legal risks.''
\1636\ The Commission acknowledges that the required certification by
third-party due diligence providers may increase the litigation risk
and liability of these providers, particularly for those third party
providers that do not already bear expert liability under Rule 193. The
required certification therefore may increase the fees charged by these
providers--which may be borne by issuers, underwriters, or investors--
and may diminish competition by reducing the number of providers who
are willing to provide due diligence in these offerings. These effects
could impact capital formation, in that it may be more costly or
difficult to issue Exchange Act-ABS to the extent that the performance
of third-party due diligence services is necessary to bring these
securities to market. Also, though the Commission believes that NRSROs
have not generally employed third-party due diligence services, the
disclosures related to any third-party due diligence services employed
by NRSROs may reduce any incentives NRSROs have to employ such
services, given that the details about, and the results of, such due
diligence will be disclosed to competing NRSROs.\1637\
---------------------------------------------------------------------------

    \1636\ See Morningstar Letter.
    \1637\ See section I.B.3. of this release (providing a broader
discussion of the potential impacts of the amendments and new rules
on efficiency, competition, and capital formation).
---------------------------------------------------------------------------

    Together, all of the adopted rules regarding third-party due
diligence services may result in additional costs. The required
disclosures may be detrimental to capital formation by delaying market
access by issuers.\1638\ There also may be other costs to investors and
other market participants. The disclosure requirements with respect to
any third-party due diligence report obtained may incentivize issuers
and underwriters to decrease the number and scope of due diligence
reviews undertaken in order to decrease the likelihood that they reveal
problems that would have to be disclosed to market participants. If
fewer or more limited reviews are undertaken, the information available
directly or indirectly (such as through credit ratings) to investors
and other market participants may ultimately be reduced. Alternatively,
the required disclosures with respect to third-party due diligence
reports may cause issuers and underwriters to undertake their own due
diligence internally or via related subsidiaries, rather than by
employing third parties, in order to avoid making the required
disclosure or because third-party due diligence providers increase
their fees or become unwilling to provide these services. These
potential changes in issuer and underwriter behavior could result in a
reduced quality of due diligence undertaken with respect to Exchange
Act-ABS because of the lack of independent reviews. The possibility of
less comprehensive or less independent due diligence being undertaken
may be mitigated by market pressures because, as noted above, some
NRSROs require that due diligence be undertaken by an independent third
party and that this due diligence meet certain criteria before they
will produce a credit rating for certain types of Exchange Act-ABS.
Also, if no Form ABS-15G disclosure is made, investors will be put on
notice that the issuer or underwriter did not employ a provider of
third-party due diligence services in connection with the offering of
an Exchange Act-ABS, and thus these investors may be less likely to
participate in the offering or may demand a lower offering price.
---------------------------------------------------------------------------

    \1638\ See id.
---------------------------------------------------------------------------

    The Commission has considered the costs and benefits of reasonable
alternatives relative to the amendments and new rules, including
certain alternatives that have been raised by commenters and discussed
above. As noted above, the Commission considered alternative approaches
to the required timing of the disclosures, namely a greater or fewer
number of days before the first sale in an offering by which Forms ABS-
15G must be furnished or a more explicit requirement than the
``promptly'' standard governing the provision of Form ABS Due
Diligence-15E.\1639\ If Forms ABS-15G are furnished closer in time to
the first sale in an offering, the informational benefits of the
disclosures may be reduced, because NRSROs and market participants may
not have enough time to thoroughly and accurately analyze the included
information before investment or credit rating decisions are made.
However, the longer the delay between the required furnishing of Forms
ABS-15G and the first sale in the offering, the more of an impediment
the requirement may be to prompt market access by issuers and
underwriters. The Commission believes it has appropriately balanced
these considerations in requiring that Forms ABS-15G be furnished five
business days prior to the first sale in the offering. In the case of
Form ABS Due Diligence-15E, it is possible that prescribing a required
timeframe for provision of the form could provide more assurance that
NRSROs are able to

thoroughly review the information and incorporate it into their credit
ratings. However, an explicit timeframe does not seem appropriate given
the variation and uncertainty in how quickly the disclosures will be
able to be provided in practice.
---------------------------------------------------------------------------

    \1639\ See sections II.H.1. and II.H.3. of this release.
---------------------------------------------------------------------------

    The Commission also considered whether, as suggested by a
commenter,\1640\ only information about final due diligence reports
should have to be disclosed on Form ABS-15G. Limiting the disclosure
requirement to final reports may reduce compliance costs to issuers and
underwriters. However, as discussed above, the Commission believes that
NRSROs, users of credit ratings, and investors and market participants
who may or may not be users of credit ratings should benefit from the
information derived from interim as well as final due diligence
reports.\1641\ In particular, requiring that all reports, including
interim reports, received by issuers or underwriters be disclosed
further limits the possibility that issuers and underwriters can
prevent less favorable information from being revealed (for example, by
requesting a change in the due diligence methodology or hiring a
different third party due diligence provider after viewing a less
favorable interim report).
---------------------------------------------------------------------------

    \1640\ See Clayton Letter.
    \1641\ See section II.H.1. of this release.
---------------------------------------------------------------------------

    Another alternative would be to require NRSROs to publish each Form
ABS Due Diligence-15E on EDGAR and allow them to incorporate the forms
by reference when publishing a related credit rating. This approach
would, in some cases, increase the persons that have access to the
information in the form. Also, it may increase the benefits of the
disclosure by including all third-party due diligence disclosures in a
consolidated location, rather than a combination of EDGAR (with respect
to Form ABS-15G information) and each of the various means by which
each NRSRO publishes their ratings (with respect to Form ABS Due
Diligence-15E information). However, this approach would increase the
total compliance costs borne by NRSROs.

I. Standards of Training, Experience, and Competence

    Section 936 of the Dodd-Frank Act provides that the Commission
shall issue rules that are reasonably designed to ensure that any
person employed by an NRSRO to perform credit ratings: (1) Meets
standards of training, experience, and competence necessary to produce
accurate ratings for the categories of issuers whose securities the
person rates; and (2) is tested for knowledge of the credit rating
process.\1642\ The Commission proposed new Rule 17g-9 and adding
paragraph (b)(15) to Rule 17g-2 to implement section 936 of the Dodd-
Frank Act.\1643\
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    \1642\ Public Law 111-203, 936. A related provision, section
939E of the Dodd-Frank Act, requires the GAO to conduct a study on
the feasibility and merits of creating an independent professional
organization for rating analysts employed by NRSROs that would be
responsible for: (1) Establishing independent standards for
governing the profession of rating analysts; (2) establishing a code
of ethical conduct; and (3) overseeing the profession of rating
analysts. A report on the results of the study must be submitted to
Congress not later than one year after the publication of Commission
rules pursuant to section 936 of the Dodd-Frank Act. Public Law 111-
203, 939E. In this regard, a commenter stated that it ``looks
forward to a robust discussion on the merits and feasibility of
creating an independent professional organization for ratings
analysts once the [GAO] issues its report on the matter.'' See
AFSCME Letter.
    \1643\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33476-33480.
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1. New Rule 17g-9
    Rule 17g-9, as proposed, had three paragraphs: (a), (b) and
(c).\1644\ Paragraph (a), as proposed, contained a requirement that an
NRSRO design and administer standards of training, experience, and
competence.\1645\ Paragraph (b), as proposed, identified factors an
NRSRO would need to consider in designing the standards.\1646\
Paragraph (c), as proposed, set forth two requirements--one relating to
periodic testing and the other relating to minimum experience--that an
NRSRO would need to incorporate into the standards.\1647\ The
Commission is adopting Rule 17g-9 substantially as proposed but with
modifications in response to comments.\1648\
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    \1644\ See id. at 33476-33480.
    \1645\ See id. at 33476-33477.
    \1646\ See id. at 33477-33478.
    \1647\ See id. at 33478-33480.
    \1648\ See Rule 17g-9.
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    As discussed below, some commenters raised concerns that the
proposed rule provided too much flexibility to an NRSRO to design its
standards of training, experience, and competence. The Commission
intended the proposed rule to provide flexibility because, among other
reasons, the NRSROs vary significantly in the size and the scope of
their activities. The Commission reiterates its view, as stated in the
proposing release, that the standards established by an NRSRO with more
than a thousand credit analysts and that produces tens of thousands of
credit ratings across a wide range of asset classes may need to be
different from the standards of an NRSRO with fewer than ten credit
analysts and that focuses on a particular class of credit
ratings.\1649\ Moreover, the rating methodologies used by NRSROs and
potential NRSRO applicants to determine credit ratings may vary
significantly. For these and other reasons, as discussed below, Rule
17g-9, as adopted, provides flexibility to NRSROs to customize their
standards, provided they consider the factors in proposed paragraph (b)
and incorporate the standards required under proposed paragraph (c) of
Rule 17g-9.
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    \1649\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33476.
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    As proposed, paragraph (a) of Rule 17g-9 provided that an NRSRO
must establish, maintain, enforce, and document standards of training,
experience, and competence for the individuals it employs to determine
credit ratings that are reasonably designed to achieve the objective
that such individuals produce accurate credit ratings in the classes
and subclasses of credit ratings for which the NRSRO is
registered.\1650\ Under the proposal, an NRSRO would be permitted to
design standards for its credit analysts that are customized to its
size, business model, and procedures and methodologies for determining
credit ratings, which vary widely across NRSROs.\1651\ At the same
time, the proposed rule specified an objective for the standards which
was consistent with section 936 of the Dodd-Frank Act.\1652\ In
particular, the standards needed to be reasonably designed to achieve
the objective that the individuals employed by the NRSRO to determine
credit ratings produce accurate credit ratings in the classes and
subclasses of credit ratings for which the NRSRO is registered.\1653\
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    \1650\ See paragraph (a) of Rule 17g-9, as proposed; Nationally
Recognized Statistical Rating Organizations, 76 FR at 33476-33477,
33543.
    \1651\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33476.
    \1652\ See id. at 33476-33477.
    \1653\ See Public Law 111-203, 936 (providing, in pertinent
part, that the Commission shall issue rules that are reasonably
designed to ensure that any person employed by an NRSRO to perform
credit ratings meets standards of training, experience, and
competence necessary to produce accurate ratings for the categories
of issuers whose securities the person rates).
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    The Commission is adopting paragraph (a) of Rule 17g-9
substantially as proposed but with modifications in response to
comments.\1654\ As adopted, the paragraph provides that an NRSRO must
establish, maintain, enforce, and document standards of training,
experience, and competence for the individuals it employs to
participate in the determination of credit ratings that

are reasonably designed to achieve the objective that the NRSRO
produces accurate credit ratings in the classes of credit ratings for
which the NRSRO is registered.\1655\
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    \1654\ See paragraph (a) of Rule 17g-9.
    \1655\ Id.
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    Commenters addressed paragraph (a), as proposed.\1656\ Several
commenters stated that in general it was not appropriate to permit
NRSROs to design their own credit analyst training and testing programs
and that, for example, the Commission or a private certification
program should provide standards and requirements.\1657\ One commenter
stated that ``the Commission should provide a set of minimum
standards'' and that the standards ``should include individual sector
experience, minimum education such as an MBA, and certifications such
as a CFA, which includes a strong ethics standard.'' \1658\ A second
commenter stated that ``[t]he standards must include a system for
periodically reviewing ratings for `accuracy,' specifically for the
purpose of adjusting'' the standards for credit analysts based on the
results of such reviews.\1659\ A third commenter stated that the
Commission should prescribe the minimum content for training, to
include topics such as ethics, conflicts of interest, and regulations
on the ratings process, as well as the proper development of
methodologies.\1660\
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    \1656\ See Better Markets Letter; CFA/AFR Letter; Clark Letter;
COPERA Letter; Davis Letter DBRS Letter; Morningstar Letter; S&P
Letter.
    \1657\ See Better Markets Letter; CFA/AFR Letter; Clark Letter;
COPERA Letter; Davis Letter.
    \1658\ See COPERA Letter.
    \1659\ See Better Markets Letter.
    \1660\ See id.
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    On the other hand, several NRSROs stated that it was appropriate
that the rule provide flexibility to NRSROs in designing the standards
required under the proposed rule.\1661\ One NRSRO stated that credit
rating agencies ``come in many shapes and sizes and they determine
credit ratings in many different ways'' and, therefore, ``[i]mposing
prescriptive analyst standards on such a diverse group would diminish
the value of the rule.'' \1662\
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    \1661\ See DBRS Letter; Morningstar Letter; S&P Letter.
    \1662\ See DBRS Letter.
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    In response to comments that NRSROs should not have flexibility to
design their own standards and that the rule should prescribe specific
requirements, the Commission believes at this time, as discussed above,
that the proposed approach achieves an appropriate balance between
prescribing objectives, factors that must be considered, and specific
standards that must be included and allowing NRSROs to tailor the
standards to their business models, size, and rating methodologies,
which vary significantly across NRSROs and potential NRSRO applicants.
For example, prescribing minimum education requirements (such as an
MBA) and certification requirements (such as a CFA)--as suggested by
one commenter--may not be appropriate for all NRSROs because, for
example, it could disqualify an analyst that has substantial experience
in conducting credit analysis but does not have the requisite degree or
certification.\1663\ Further, this could burden smaller NRSROs to the
extent they would need to hire new analysts to meet the requirements or
need to pay for their analysts to obtain the necessary degrees or
certifications.
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    \1663\ See COPERA Letter.
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    An NRSRO stated that ``as forward-looking statements of opinion,
ratings should not be categorized as `accurate' or `inaccurate''' and
that the Commission should instead focus on whether the ratings have
been derived in a manner consistent with the NRSRO's policies and
procedures.\1664\ In response, the Commission re-iterates that section
936 of the Dodd-Frank Act requires the Commission to issue rules that
are reasonably designed to ensure that any person employed by an NRSRO
to perform credit ratings meets standards of training, experience, and
competence necessary to produce ``accurate'' credit ratings for the
categories of issuers whose securities the person rates.\1665\
Paragraph (a) of Rule 17g-9, as proposed and adopted, implements this
requirement by providing that the standards must be reasonably designed
to achieve the objective of producing accurate credit ratings.\1666\
The Commission acknowledges that there is no consensus as to whether or
how credit ratings can be measured for accuracy.\1667\ The Commission
also recognizes that the credit rating assigned to an obligor or
obligation today may need to be revised in the future if circumstances
change and that even the most creditworthy obligors or obligations may
default. Consequently, for the purposes of Rule 17g-9, as adopted, an
``accurate'' credit rating does not mean a credit rating that once
issued will never need to be upgraded or downgraded or classified as a
default. Instead, to be accurate under the rule, the credit rating
should be a credible assessment of the relative creditworthiness of an
obligor or obligation.\1668\ To be a credible assessment at the time of
issuance, the credit rating, among other things, should be determined
in accordance with the applicable rating methodology of the NRSRO; take
into account all relevant information as specified by the rating
methodology; not be influenced by conflicts of interest; be based
solely upon the merits of the obligor, security, or money market
instrument being rated; and be an independent evaluation of the credit
risk and merits of the obligor, security, or money market
instrument.\1669\ Historical performance statistics can play a role in
evaluating whether an NRSRO's credit ratings over time are providing
credible assessments of the relative creditworthiness of obligors and
obligations.
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    \1664\ See S&P Letter.
    \1665\ See Public Law 111-203, 936(1).
    \1666\ See paragraph (a) of Rule 17g-9.
    \1667\ See, e.g., Staff 2012 Staff Report on Assigned Credit
Ratings, pp. 52-53.
    \1668\ See id. at 14-21 (describing credit rating symbols and
their definitions).
    \1669\ See, e.g., section 15E(q)(2)(F) of the Exchange Act
(providing that the Commission's rules must require an NRSRO to
include an attestation with any credit rating it issues affirming
that no part of the rating was influenced by any other business
activities, that the rating was based solely on the merits of the
instruments being rated, and that such rating was an independent
evaluation of the risks and merits of the instrument). As discussed
above in section II.G.4. of this release, the Commission is
implementing section 15E(q)(2)(F) through paragraph (a)(1)(iii) of
Rule 17g-7, as adopted. This paragraph, as adopted, provides that
the NRSRO must attach to the form accompanying a credit rating a
signed statement by a person within the NRSRO stating that the
person has responsibility for the rating action and, to the best
knowledge of the person: (1) No part of the credit rating was
influenced by any other business activities; (2) the credit rating
was based solely upon the merits of the obligor, security, or money
market instrument being rated; and (3) the credit rating was an
independent evaluation of the credit risk of the obligor, security,
or money market instrument.
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    An NRSRO suggested that NRSROs should not be required to comply
with Rule 17g-9 ``to the extent the NRSRO reasonably believes it is
prohibited by applicable law or binding agreements in the relevant
jurisdiction from doing so.'' \1670\ In response, the Commission notes
that the rule as adopted gives NRSROs the flexibility to design their
standards of training and testing for credit analysts. Consequently, an
NRSRO can tailor its standards to accommodate local laws. These
standards, must, however, meet the requirements of Rule 17g-9. The
Commission does not believe a blanket

exemption would be appropriate, but if laws or binding agreements in
certain jurisdictions prohibit the NRSRO from complying with certain
provisions of Rule 17g-9, the NRSRO can seek appropriate targeted
relief.
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    \1670\ See Moody's Letter (``[I]in some jurisdictions it might
not be possible to require an existing employee to meet new
competence, experience, training, or testing requirements unless he
or she agrees to such requirements in an amended employment
agreement or collective bargaining agreement. If the employee, union
or works council declines to sign the amended agreement, it might
not be possible for the NRSRO to modify unilaterally the employment
relationship.'').
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    Finally, one NRSRO suggested that the words ``and subclasses'' be
removed from paragraph (a) of proposed Rule 17g-9 because ``NRSROs are
registered only for various credit rating classes; there is no subclass
registration.'' \1671\ A second NRSRO stated that it determines
``credit ratings by committee and no one individual is responsible for
any credit rating.'' \1672\ Another commenter stated that
``[i]ndividuals do not `produce . . . credit ratings,' accurate or
otherwise.'' \1673\
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    \1671\ See DBRS Letter.
    \1672\ See S&P Letter.
    \1673\ See Harrington Letter.
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    While the use of the term ``subclasses'' was designed to account
for the different types of obligors and obligations assigned credit
ratings within a class of credit ratings, the Commission agrees with
the comment that the use of the term in paragraph (a) was potentially
confusing because NRSROs do not register in subclasses of credit
ratings.\1674\ Accordingly, the Commission has modified proposed
paragraph (a) of Rule 17g-9 to remove the reference to ``subclasses,''
and paragraph (a) as adopted refers only to ``the classes of credit
ratings'' for which the NRSRO is registered.\1675\ In response to
comments that individuals generally do not ``determine'' credit ratings
(the language in the proposed rule),\1676\ paragraph (a) of Rule 17a-9
has been modified from the proposal to refer to credit analysts as
individuals an NRSRO employs ``to participate in the determination of
credit ratings'' instead of individuals who ``produce'' credit ratings,
and the rule as adopted refers to the NRSRO as producing credit
ratings.\1677\
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    \1674\ See DBRS Letter.
    \1675\ See paragraph (a) of Rule 17g-9. However, paragraphs (b)
and (c) of Rule 17g-9, as adopted, refer to classes and subclasses
of credit ratings. The references to ``subclasses'' are designed to
account for the fact that rating methodologies used within a class
of credit ratings (for example, structured finance) may be
substantially different for certain subclasses (for example, a CDO
as compared to an RMBS).
    \1676\ See S&P Letter; Harrington Letter.
    \1677\ See paragraph (a) of Rule 17g-9.
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    As proposed, paragraphs (b)(1) through (4) of Rule 17g-9 identified
certain factors that the NRSRO would need to consider when establishing
standards of training, experience, and competence.\1678\ Specifically,
the NRSRO would have been required to consider:
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    \1678\ See paragraphs (b)(1) through (4) of Rule 17g-9, as
proposed; Nationally Recognized Statistical Rating Organizations, 76
FR at 33477-33478, 33543.
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     If the credit rating procedures and methodologies used by
the individual involve qualitative analysis, the knowledge necessary to
effectively evaluate and process the data relevant to the
creditworthiness of the obligor being rated or the issuer of the
securities or money market instruments being rated; \1679\
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    \1679\ See paragraph (b)(1) of Rule 17g-9, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33543.
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     If the credit rating procedures and methodologies used by
the individual involve quantitative analysis, the technical expertise
necessary to understand any models and model inputs that are a part of
the procedures and methodologies; \1680\
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    \1680\ See paragraph (b)(2) of Rule 17g-9, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33543.
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     The classes and subclasses of credit ratings for which the
individual participates in determining credit ratings and the factors
relevant to such classes and subclasses, including the geographic
location, sector, industry, regulatory and legal framework, and
underlying assets, applicable to the obligors or issuers in the classes
and subclasses; \1681\ and
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    \1681\ See paragraph (b)(3) of Rule 17g-9, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33543.
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     The complexity of the obligors, securities, or money
market instruments being rated by the individual.\1682\
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    \1682\ See paragraph (b)(4) of Rule 17g-9, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33543.
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    The proposed factors were intended to provide guidance to NRSROs
about the Commission's expectations for the design of the standards of
training, experience, and competence.\1683\
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    \1683\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33477.
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    The Commission is adopting paragraph (b) of Rule 17g-9
substantially as proposed but with modifications in response to
comments.\1684\ As adopted, paragraph (b) requires an NRSRO to consider
the following factors when establishing the standards required under