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Monday, 
June  18,  2007  
Part  II  
Securities  and  
Exchange 
Commission 
17  CFR  Parts  240  and  249b  
Oversight  of  Credit  Rating  Agencies  
Registered  as  Nationally  Recognized  
Statistical  Rating  Organizations;  Final  Rule  
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33564 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
1
See, e.g., federal statutes: 15 U.S.C. 78c(a)(41) 
(defining the term ‘‘mortgage related security’’); 15 
U.S.C. 78c(a)(53)(A) (defining the term ‘‘small 
business related security’’); 15 U.S.C. 80a- 
6(a)(5)(A)(iv)(I) (exempting certain companies from 
the provisions of the Investment Company Act of 
1940’’); Gramm-Leach-Bliley Act, Pub. L. No. 106– 
102 (1999); Transportation Equity Act for the 21st 
Century, Pub. L. No. 105–178 (1998); Reigle 
Community Development and Regulatory 
Improvement Act of 1994, Pub. L. No. 103–325 
(1994); Department of Commerce, Justice, and State, 
The Judiciary, and Related Agencies Appropriations 
Act, FY2001, Pub. L. No. 106–553 (2000); Higher 
Education Amendments of 1992, Pub. L. No. 102– 
325 (1992); Housing and Community Development 
Act of 1992, Pub. L. No. 102–550 (1992); Federal 
Deposit Insurance Corporation Improvement Act of 
1991, Pub. L. No. 102–242 (1991); and Financial 
Institutions Reform, Recovery, and Enforcement Act 
of 1989, Pub. L. No. 101–72 (1989); Commission 
rules: 17 CFR 228.10(e), 229.10(c), 230.134(a)(14), 
230.436(g), 239.13, 239.32, 239.33, 240.3a1–1(b)(3), 
240.10b-10(a)(8), 240.15c3–1(c)(2)(vi)(E), (F), and 
(H), 240.15c3–1a(b)(1)(i)(C), 240.15c3–1f(d), 
240.15c3–3a, Item 14, Note G, 242.101(c)(2), 
242.102(d), 242.300(k)(3) and (l)(3), 270.2a-7(a)(10), 
270.3a-7(a)(2), 270.5b-3(c), and 270.10f-3(a)(3); and 
state rule: Cal. Ins. Code 1192.10. 
2
See letter from Nelson S. Kibler, Assistant 
Director, Division of Market Regulation, 
Commission, to John T. Anderson, Esquire, of Lord, 
Bissell & Brook, on behalf of Duff & Phelps, Inc. 
(February 24, 1982); letter from Michael A. 
Macchiaroli, Assistant Director, Division of Market 
Regulation, Commission, to Paul McCarthy, 
President, McCarthy, Crisanti & Maffei, Inc. 
(September 13, 1983); letter from Michael A. 
Macchiaroli, Assistant Director, Division of Market 
Regulation, Commission, to Robin Monro-Davies, 
President, IBCA Limited (November 27, 1990); letter 
from Michael A. Macchiaroli, Assistant Director, 
Division of Market Regulation, Commission, to 
David L. Lloyd, Jr., Dewey Ballentine, Bushby, 
Palmer & Wood (October 1, 1990); letter from 
Michael A. Macchiaroli, Assistant Director, 
Division of Market Regulation, Commission, to 
Gregory A. Root, President, Thomson BankWatch, 
Inc. (August 6, 1991); letter from Michael A. 
Macchiaroli Assistant Director, Division of Market 
Regulation, Commission, to Lee Pickard, Pickard 
and Djinis LLP (January 25, 1999); letter from 
Annette L. Nazareth, Director, Division of Market 
Regulation, Commission, to Mari-Anne Pisarri, 
Pickard and Djinis LLP (February 24, 2003); letter 
from Mark M. Attar, Special Counsel, Division of 
Market Regulation, Commission, to Arthur Snyder, 
President, A.M. Best Company, Inc. (March 3, 
2005); letter from Erik R. Sirri, Director, Division of 
Market Regulation, Commission, to Neal E. 
Sullivan, Bingham McCutchen LLP (May 21, 2007); 
letter from Erik R. Sirri, Director, Division of Market 
Regulation, Commission, to Yoshihiro Saito, 
Perkins Coie LLP (May 23, 2007). 
3
15 U.S.C. 78c. 
4
15 U.S.C. 78o–7. 
5
15 U.S.C. 78q. 
6
See Exchange Act Release No. 55231 (February 
2, 2007), 72 FR 6378 (February 9, 2007) (‘‘Proposing 
Release’’). 
7
These comments are available on the 
Commission’s Internet Web site, located at http:// 
www.sec.gov/comments/s7–04–07/s70407.shtml, 
and in the Commission’s Public Reference Room in 
its Washington, DC headquarters. 
SECURITIES AND EXCHANGE 
COMMISSION 
17 CFR Parts 240 and 249b 
[Release No. 34–55857; File No. S7–04–07] 
RIN 3235–AJ78 
Oversight of Credit Rating Agencies 
Registered as Nationally Recognized 
Statistical Rating Organizations 
AGENCY: Securities and Exchange 
Commission (‘‘Commission’’). 
ACTION: Final rule. 
SUMMARY: The Commission is adopting 
rules to implement provisions of the 
Credit Rating Agency Reform Act of 
2006 (the ‘‘Rating Agency Act’’), enacted 
on September 29, 2006. The Rating 
Agency Act defines the term ‘‘nationally 
recognized statistical rating 
organization,’’ provides authority for the 
Commission to implement registration, 
recordkeeping, financial reporting, and 
oversight rules with respect to registered 
credit rating agencies, and directs the 
Commission to issue final implementing 
rules no later than 270 days after its 
enactment (or by June 26, 2007). The 
rule and form prescribing the process 
for a credit rating agency to apply for 
registration are immediately effective. 
The remaining rules are effective on 
June 26, 2007. 
EFFECTIVE DATES: June 18, 2007, except 
that §§ 240.17g-2, 240.17g-3, 240.17g-4, 
240.17g-5, and 240.17g-6 are effective 
on June 26, 2007. 
FOR FURTHER INFORMATION CONTACT: 
Michael A. Macchiaroli, Associate 
Director, at (202) 551–5525; Thomas K. 
McGowan, Assistant Director, at (202) 
551–5521; Randall W. Roy, Branch 
Chief, at (202) 551–5522; Rose Russo 
Wells, Attorney, at (202) 551–5527; 
Sheila D. Swartz, Attorney, at (202) 
551–5545, Division of Market 
Regulation, Securities and Exchange 
Commission, 100 F Street, NE., 
Washington, DC 20549–6628. 
SUPPLEMENTARY INFORMATION: 
I. Background 
The term nationally recognized 
statistical rating organization 
(‘‘NRSRO’’) is used in federal and state 
statutes and regulations to confer 
regulatory benefits or prescribe 
requirements based on credit ratings 
issued by credit rating agencies 
identified as NRSROs.
1
The process of 
identifying NRSROs has historically 
been undertaken by the Commission 
staff through the issuance of no-action 
letters where the staff has determined, 
among other things, that the credit 
rating agency is recognized nationally 
by the predominant users of credit 
ratings as issuing credible and reliable 
ratings.
2
The Rating Agency Act 
replaces the no-action letter process— 
which has been criticized as lacking 
transparency—with a registration 
program and Commission oversight of 
credit rating agencies that choose to be 
treated as NRSROs. 
The Rating Agency Act implements 
the program for NRSRO registration and 
oversight by adding definitions to 
Section 3 of the Securities Exchange Act 
of 1934 (‘‘Exchange Act’’),
3
creating a 
new Section 15E of the Exchange Act,
4
 
and amending Section 17 of the 
Exchange Act.
5
Under these new 
statutory provisions, a credit rating 
agency seeking to be treated as an 
NRSRO must apply for, and be granted, 
registration with the Commission, make 
public in its application certain 
information to help persons assess its 
credibility, and implement procedures 
to manage the handling of material 
nonpublic information and conflicts of 
interest. In addition, the Rating Agency 
Act provides the Commission with 
rulemaking authority to prescribe: the 
form of the application (including 
requiring the furnishing of additional 
information); the records an NRSRO 
must make and retain; the financial 
reports an NRSRO must furnish to the 
Commission on a periodic basis; the 
specific procedures an NRSRO must 
implement to manage the handling of 
material nonpublic information; the 
conflicts of interest an NRSRO must 
manage or avoid altogether; and the 
practices that an NRSRO must not 
engage in if the Commission determines 
they are unfair, coercive, or abusive. 
II. Timing of Final Rules 
On February 2, 2007, the Commission 
proposed a package of rules pursuant to 
these grants of rulemaking authority.
6
 
The rules published today incorporate 
many of the proposed provisions but 
also include significant revisions based 
on the comments received.
7
The 
Commission, in adopting these rules 
today, intends that Rule 17g–1 (17 CFR 
240.17g–1), Form NRSRO, and 17 CFR 
249b.300 be issued in final form and be 
effective on the date of their publication 
in the Federal Register. The 
Commission further intends that Rules 
17g–2 (17 CFR 240.17g–2), 17g–3 (17 
CFR 240.17g–3), 17g–4 (17 CFR 
240.17g–4), 17g–5 (17 CFR 240.17g–5), 
and 17g–6 (17 CFR 240.17g–6) be issued 
in final form on June 26, 2007 and 
become effective on that date. 
III. Effective Date 
Section 553(d) of the Administrative 
Procedure Act generally provides that, 
unless an exception applies, a 
substantive rule may not be made 
effective less than 30 days after notice 
of the rule has been published in the 
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33565 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
8
5 U.S.C. 553(d). 
9
Id. 
10
15 U.S.C. 78o–7(p). 
11
15 U.S.C. 78o–7(l). 
12
15 U.S.C. 78o–7(n)(2). 
13
Id. 
14
See Sections 3(a)(62) and 15E(l)(2) of the 
Exchange Act (15 U.S.C. 78c(a)(62) and 15 U.S.C. 
78o–7(l)(2)). 
15
See 17 CFR 240.15c3–1(c)(2)(vi)(F). 
16
See Sections 3(a)(62) and 15E(l)(2) of the 
Exchange Act (15 U.S.C. 78c(a)(62) and 15 U.S.C. 
78o–7(l)(2)). 
17
See letter dated March 12, 2007 from Elizabeth 
Krentzman, General Counsel, Investment Company 
Institute (‘‘ICI Letter’’); letter dated March 12, 2007 
from Stephen A. Keen, Attorney, on behalf of 
Federated Investors, Inc. (‘‘FI Letter’’); letter dated 
April 4, 2007 from Charles S. Morrison, Senior Vice 
President and Money Market Group Leader, Fidelity 
Management and Research Company (‘‘FMRC 
Letter’’). 
18
17 CFR 270.2a–7. 
19
15 U.S.C. 80a–1 et seq. 
20
See ICI Letter; FI Letter; FMRC Letter. 
21
See FI Letter. 
22
See FMRC Letter. 
23
Id. 
24
See FI Letter. 
Federal Register.
8
One exception to the 
30-day requirement is an agency’s 
finding of good cause for providing a 
shorter effective date.
9
 
The Rating Agency Act provides that 
the new program for NRSRO registration 
and oversight shall apply on the earlier 
of the date on which regulations are 
issued in final form under Section 
15E(n) of the Exchange Act, or 270 days 
after the enactment of the Rating Agency 
Act, which will be June 26, 2007.
10
The 
Rating Agency Act voids existing 
Commission staff no-action letters on 
and after the effective date of the new 
program for NRSRO registration and 
oversight, but creates a transitional 
measure allowing credit rating agencies 
with existing no-action letters to 
continue to act as NRSROs ‘‘during 
Commission consideration of the 
application, if such entity has furnished 
an application for registration.’’
11
 
Consequently, as noted above, the 
Commission intends that Rule 17g–1 
and Form NRSRO be effective 
immediately upon publication. Further, 
the Commission intends that the 
remaining rules, Rule 17g–2 through 
Rule 17g–6, be effective on June 26, 
2007, the statutory deadline. 
Immediate effectiveness of Form 
NRSRO and Rule 17g–1 is necessary to 
allow credit rating agencies that are 
currently the subject of staff no-action 
letters identifying them as NRSROs to 
have a period of time to submit 
applications for registration as NRSROs 
before the provisions of the Rating 
Agency Act and the recordkeeping, 
reporting, and conduct rules issued 
under the Rating Agency Act become 
effective, and thus before the no-action 
letters become void. This will avoid a 
gap in time when no NRSROs exist, 
which would disrupt the regulatory use 
of that term in applicable statutes and 
regulations, resulting in uncertainty in 
the marketplace for all persons that rely 
upon credit ratings issued by NRSROs. 
Further, this result would be 
inconsistent with Congressional intent 
in creating the transitional measure. 
Finally, the accelerated effectiveness for 
the remaining rules, Rule 17g–2 through 
Rule 17g–6, is necessary to meet the 
statutory deadline. 
The primary purpose of the 30-day 
delayed effectiveness requirement is to 
give affected parties a reasonable period 
of time to adjust to the new rules. Here, 
the existing NRSROs would not be 
harmed by immediate effectiveness, and 
would in fact benefit from the 
opportunity to utilize the transitional 
measure Congress provided. Further, an 
entity would not be required to comply 
with Rule 17g–2 through Rule 17g–6 
until its voluntary registration has been 
approved. 
The Commission acted expeditiously 
in proposing and adopting these rules 
under a very tight, statutorily-imposed 
deadline. The Rating Agency Act was 
enacted on September 29, 2006. Just 
over four months later, on February 2, 
2007, the Commission voted to propose 
the new rules and form, which were 
designed to comply with the statutory 
mandate to establish an entirely new 
regulatory regime for NRSROs. The 
Commission voted to adopt these rules 
and Form NRSRO on May 23, 2007, over 
a month before the statutory deadline. 
In doing so, the Commission carefully 
responded to industry, user, and 
investor perspectives to ease the 
transition to a new, Congressionally- 
created registration and regulatory 
scheme. 
Failure to accelerate effectiveness of 
Rule 17g–1 through Rule 17g–6 and 
Form NRSRO could interfere with the 
goals of the Rating Agency Act. For 
these reasons, the Commission finds 
that good cause exists for Rule 17g–1 
and Form NRSRO to be immediately 
effective upon publication, and for Rule 
17g–2 through Rule 17g–6 to be effective 
on June 26, 2007. 
IV. Review of Commission Rules 
Section 15E(n)(2) of the Exchange Act 
requires the Commission to review its 
existing rules using the term ‘‘NRSRO’’ 
within 270 days of its enactment.
12
The 
statute further provides that the 
Commission shall amend or revise the 
rules in accordance with Section 
15E(n)(2) of the Exchange Act.
13
The 
Commission has reviewed all of its rules 
using the term ‘‘NRSRO.’’ The 
Commission does not believe these rules 
need to be amended at this time. The 
term ‘‘NRSRO’’ in each rule will refer to 
an ‘‘NRSRO’’ as that term is defined in 
the Rating Agency Act when the 
statutory provisions become effective.
14
 
For example, Commission Rule 15c3–1 
(the broker-dealer net capital rule) uses 
the term ‘‘nationally recognized 
statistical rating organization’’ to 
prescribe the amount a broker-dealer 
must haircut proprietary corporate debt 
securities when computing its 
regulatory capital.
15
The rule does not 
otherwise define the term ‘‘nationally 
recognized statistical rating 
organization.’’ Consequently, after the 
effective date of the NRSRO regulatory 
program, the term, as used in this rule, 
will refer to a credit rating agency that 
is an NRSRO as determined by the 
provisions of the Rating Agency Act.
16
 
The Commission notes that several 
commenters raised potential concerns 
about how other Commission rules may 
operate after the NRSRO registration 
and oversight program takes effect.
17
 
These commenters suggested that 
requirements in Rule 2a–7
18
under the 
Investment Company Act of 1940,
19
 
which regulates the operation of money 
market funds, may need to be modified 
depending on the number of credit 
rating agencies that become registered as 
NRSROs.
20
For example, one 
commenter noted that Rule 2a– 
7(c)(6)(i)(A)(2) requires a money market 
fund to re-assess the minimal credit risk 
of its portfolio whenever it becomes 
aware that any unrated or second tier 
security held by the fund has been given 
a credit rating by any NRSRO below the 
NRSRO’s second highest category.
21
 
Another commenter noted that Rule 2a– 
7 prescribes that money market funds 
determine whether a security is eligible 
for purchase based on whether it has 
received a credit rating in one of the two 
highest categories from any NRSRO.
22
 
This commenter was concerned that this 
might lead to money market funds 
filling portfolios that most NRSROs 
consider third tier.
23
One of the these 
commenters also expressed concern that 
the proposal did not require that an 
NRSRO have a particular number of 
credit rating categories or that the 
categories of one NRSRO might not 
correspond to those of another 
NRSRO.
24
Based on the uncertainty of 
how many credit rating agencies 
ultimately will register as NRSROs, the 
Commission intends to monitor for now 
how the NRSRO regulatory program 
impacts Rule 2a–7 and the 
Commission’s other rules using the term 
‘‘NRSRO.’’ As the program develops, the 
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33566 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
25
15 U.S.C. 78o–7. 
26
15 U.S.C. 78o–7(a)(1)(A). 
27
See 15 U.S.C. 78c(a)(62). 
28
See 15 U.S.C. 78c(3)(a)(62)(B). 
29
This provision further implements Section 
15E(a)(1) of the Exchange Act, which requires the 
Commission, by rule, to prescribe the form of an 
application for registration (15 U.S.C. 78o–7(a)(1)). 
30
15 U.S.C. 78o–7(a)(1)(B). 
31
See Section 15E(a)(1)(B)(vii) of the Exchange 
Act (15 U.S.C. 78o–7(a)(1)(B)(vii)). 
32
15 U.S.C. 78c(a)(62)(B). 
33
This provision further implements Section 
15E(a)(1) of the Exchange Act, which requires the 
Commission, by rule, to prescribe the form of an 
application for registration (15 U.S.C. 78o–7(a)(1)). 
34
15 U.S.C. 78o–7. 
35
15 U.S.C. 78o–7(a)(2)(A) and (B). 
36
This provision is being implemented under the 
Commission’s authority in Section 15E(a)(1)(A) of 
the Exchange Act to prescribe the form of the 
application (15 U.S.C. 78o–7(a)(1)(A)). 
Commission will evaluate whether 
modifications to these rules would be 
appropriate. 
V. The Final Rules 
A. Rule 17g–1—Registration 
Requirements 
The Rating Agency Act, through the 
enactment of new Section 15E of the 
Exchange Act, provides the Commission 
with rulemaking authority with respect 
to the process for applying for 
registration as an NRSRO, keeping an 
NRSRO registration current, and 
withdrawing an NRSRO registration.
25
 
The Commission proposed to 
implement its rulemaking authority in 
these areas through a new rule, Rule 
17g–1. The provisions of proposed Rule 
17g–1 would have prescribed: How a 
credit rating agency must apply to be 
registered as an NRSRO; the form of the 
application; how an NRSRO must make 
non-confidential information in the 
application public; how an NRSRO 
must apply to be registered in an 
additional class of credit ratings; how an 
NRSRO must update its application; 
how an NRSRO must annually certify 
that the information and documents in 
its registration continue to be accurate; 
and how an NRSRO must provide notice 
of the withdrawal of its registration. 
As discussed below, the Commission 
is adopting Rule 17g–1 with certain 
modifications that address issues raised 
by commenters, restructure the order of 
the paragraphs, and remove text that 
was unnecessary. Any textual changes 
not specifically discussed are non- 
substantive and designed to make the 
rule text more cohesive and consistent 
both within the rule and across the 
other NRSRO rules published today. 
1. Paragraph (a) of Rule 17g–1 
As adopted, paragraph (a) of Rule 
17g–1 provides that a credit rating 
agency applying to register with the 
Commission as an NRSRO must furnish 
an application on Form NRSRO. Section 
15E(a)(1)(A) of the Exchange Act 
provides that a credit rating agency 
applying for registration must furnish 
the Commission with an application in 
a form prescribed by Commission 
rule.
26
Paragraph (a) of Rule 17g–1, as 
proposed, similarly provided that a 
credit rating agency applying to be 
registered with the Commission as an 
NRSRO must furnish the Commission 
with an application on Form NRSRO 
that follows all instructions for the 
Form. The Commission did not receive 
any comments on the proposed rule text 
of this paragraph and is adopting it 
substantially as proposed with one 
modification. Specifically, there is no 
longer a reference in the text to the 
‘‘credit ratings described in section 
3(a)(62)(B) of the [Exchange] Act (15 
U.S.C. 78c(a)(62)).’’ This reference to a 
component of the statutory definition of 
‘‘NRSRO’’ in the proposed rule was 
redundant and unnecessary. A credit 
rating agency, by statutory definition, 
must apply to be registered in one or 
more of the classes of credit ratings 
identified in section 3(a)(62)(B) of the 
Exchange Act.
27
 
2. Paragraph (b) of Rule 17g–1 
As adopted, paragraph (b) of Rule 
17g–1 provides a mechanism for an 
NRSRO registered for fewer than the 
five classes of credit ratings identified in 
the definition of NRSRO to apply to be 
registered in an additional class.
28
 
Specifically, the NRSRO must apply by 
furnishing an amendment on Form 
NRSRO.
29
This provision was proposed 
in paragraph (e) of Rule 17g–1. 
Section 15E(a)(1)(B) of the Exchange 
Act, prescribes certain minimum 
information the credit rating agency 
must provide in its application for 
registration as an NRSRO.
30
This 
includes information regarding the 
classes of credit ratings set forth in the 
definition of ‘‘NRSRO’’ in Section 
3(a)(62)(B) of the Exchange Act with 
respect to which the credit rating agency 
‘‘intends to apply for registration.’’
31
A 
credit rating agency may apply to be 
registered for fewer than all five classes 
of credit ratings described in Section 
3(a)(62)(B) of the Exchange Act.
32
 
Accordingly, this provision provides a 
mechanism for an NRSRO to apply to be 
registered in an additional class.
33
 
The application to register for an 
additional class will be subject to the 
requirements in Section 15E of the 
Exchange Act
34
applicable to an 
application to be registered as an 
NRSRO. This means the time periods for 
the Commission to act on the 
application set forth in Sections 
15E(a)(2)(A) and (B) of the Exchange Act 
also will apply to an application to be 
registered in an additional class of 
credit ratings.
35
 
Finally, the provisions of paragraphs 
(c) and (h) respectively, regarding the 
requirement to notify the Commission 
and amend the application prior to final 
Commission action and when an 
application is deemed to have been 
furnished to the Commission also apply 
to these applications. 
The Commission did not receive any 
comments on these provisions. The 
Commission is adopting them 
substantially as proposed with several 
technical modifications. The rule text is 
modified to delete language instructing 
the NRSRO to indicate where 
appropriate on the form the additional 
class of credit ratings for which it is 
applying for registration. In its place, 
the rule text provides that the NRSRO 
must follow all applicable instructions 
for the Form, which include an 
instruction to indicate where 
appropriate on the Form the additional 
class of credit ratings for which 
registration is sought. The Commission 
is adopting the provision with the 
modifications discussed above. 
3. Paragraph (c) of Rule 17g–1 
As adopted, paragraph (c) of Rule 
17g–1 provides that an applicant for 
registration and an NRSRO applying to 
be registered in an additional class of 
credit ratings must promptly furnish the 
Commission with a notice if information 
in the application becomes, or is found 
to be, materially inaccurate before the 
Commission has granted or denied the 
application. Thereafter, the applicant 
will be required to update the 
application with complete and accurate 
information by submitting an amended 
application on Form NRSRO.
36
 
These provisions were proposed in 
paragraphs (c) and (e) of Rule 17g–1 for 
initial applicants and for NRSROs 
applying to be registered in an 
additional class of credit ratings, 
respectively. The notification provision 
is designed to alert the Commission as 
soon as possible that the application 
under consideration is materially 
inaccurate. The intent is to avoid 
situations where the Commission 
continues to review an application that 
is no longer materially accurate. The 
Commission has modified Form NRSRO 
to further clarify how a pending 
application should be updated using 
Form NRSRO. Specifically, the Form 
now has a check box for ‘‘Application 
Supplement’’ and specific instructions 
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33567 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
37
The withdrawal of a granted registration is 
discussed separately below. 
38
15 U.S.C. 78o–7(b)(1). 
39
The Commission is implementing this 
provision under Section 15E(a)(1) of the Exchange 
Act (15 U.S.C. 78o–7(a)(1)), which requires the 
Commission, by rule, to prescribe the form of an 
application for registration. 
40
15 U.S.C. 78o–7(b)(1). 
41
Id. 
42
Id. 
43
See letter dated March 12, 2007 from William 
G. Connolly, on behalf of A.M. Best Company, Inc. 
(‘‘A.M. Best Letter’’); letter dated March 12, 2007 
from Yasuhiro Harada, President, Ratings & 
Investment Information (‘‘R&I Letter’’); letter dated 
March 12, 2007 from Jeanne M. Dering, Executive 
Vice President, Moody’s Investors Services 
(‘‘Moody’s Letter’’); letter dated March 12, 2007 
from Kent Wideman, Group Managing Director, and 
Mary Keogh, Managing Director, Dominion Bond 
Rating Service (‘‘DBRS Letter’’); letter dated March 
12, 2007 from Charles D. Brown, General Counsel, 
Fitch Ratings (‘‘Fitch Letter’’). 
44
See R&I Letter; A.M. Best Letter; and Fitch 
Letter. 
45
See Moody’s Letter. 
46
See DBRS Letter. 
47
See Moody’s Letter. 
48
15 U.S.C. 78o–7(b)(1). 
49
15 U.S.C. 78o–7(b)(2). 
50
The Commission is implementing this 
provision under Section 15E(b)(2) of the Exchange 
Act (15 U.S.C. 78o–7(b)(2)), which requires the 
Commission, by rule, to prescribe the form of the 
annual certification. 
51
15 U.S.C. 78o–7(b)(2). 
52
Id. 
53
See Fitch Letter. 
54
15 U.S.C. 78o–7(e)(1). 
about how to complete the Form in this 
instance. The Commission did not 
receive any comments on these 
provisions and is adopting them with 
the modifications discussed above. 
4. Paragraph (d) of Rule 17g–1 
As adopted, paragraph (d) of Rule 
17g–1 provides a mechanism for an 
entity that has applied to be registered 
as an NRSRO, or an NRSRO that has 
applied to be registered in an additional 
class of credit ratings, to withdraw the 
registration application before the 
Commission takes final action on the 
application.
37
Specifically, it requires 
the applicant to furnish the Commission 
with a written notice of withdrawal 
executed by a duly authorized person. 
The application provisions were 
proposed in paragraphs (b)(2) and (e) of 
Rule 17g–1 for initial applicants and for 
applications to be registered in an 
additional class of credit ratings, 
respectively. The requirement for 
execution by a duly authorized person 
is designed to ensure that the 
withdrawal notice reflects the intent of 
the credit rating agency. The 
Commission did not receive any 
comments on these provisions and is 
adopting them substantially as 
proposed. 
5. Paragraph (e) of Rule 17g–1 
As adopted, paragraph (e) of Rule 
17g–1 provides that an NRSRO updating 
its application for registration pursuant 
to Section 15E(b)(1) of the Exchange 
Act
38
must promptly furnish the 
amendment to the Commission on Form 
NRSRO.
39
Section 15E(b)(1) of the 
Exchange Act requires an NRSRO to 
promptly update its application for 
registration if, after registration, any 
information or document provided as 
part of the application becomes 
materially inaccurate.
40
The statute 
further provides that the information on 
credit ratings performance statistics 
(discussed below) must only be updated 
on an annual basis and that the 
certifications from qualified 
institutional buyers (QIBs), discussed 
below, are not required to be updated.
41
 
This provision was proposed in 
paragraph (f) of Rule 17g–1. 
The Commission has added in the 
instructions to Form NRSRO a 
description of this statutory requirement 
as a means to alert NRSROs that they 
must promptly update information or a 
document submitted on or with their 
Form NRSRO that has become 
materially inaccurate. 
The Commission is not defining the 
term ‘‘promptly’’ as used in Section 
15E(b)(1) of the Exchange Act.
42
The 
Commission, however, did express its 
view in the proposing release that 
meeting the statutory requirement to 
update a registration when information 
becomes materially inaccurate should 
not take more than two days. In 
response, five commenters stated that it 
would be unreasonable to expect an 
NRSRO to submit an amendment in two 
days.
43
Three commenters proposed 
that the Commission define the term 
‘‘promptly’’ to mean 10 days.
44
One 
commenter suggested 20 days.
45
 
Another commenter suggested the 
Commission use a facts and 
circumstances standard for determining 
whether an amendment was ‘‘promptly’’ 
furnished.
46
The Commission agrees 
that the analysis of whether an 
amendment is furnished promptly will 
depend on the facts and circumstances. 
For example, if an NRSRO changes its 
principal business address, it should not 
take more than a few days to complete 
Form NRSRO (inputting the new 
information), have the Form executed, 
and furnish the Form to the 
Commission. On the other hand, it may 
take a few days longer to complete the 
Form if the information or documents in 
an Exhibit become materially 
inaccurate. 
One commenter also stated that the 
rule should require an update of the 
registration application only when the 
information in the current registration 
application becomes ‘‘materially 
inaccurate.’’
47
In response, the 
Commission notes that the requirement 
to update an application arises from 
Section 15E(b)(1) of the Exchange Act, 
which provides, in pertinent part, that 
an NRSRO shall promptly update its 
application for registration ‘‘if any 
information or document provided 
therein becomes materially 
inaccurate.’’
48
As noted above, the 
instructions to Form NRSRO have been 
modified to include a description of this 
statutory provision. 
In all other respects, the Commission 
is adopting the provision substantially 
as proposed. 
6. Paragraph (f) of Rule 17g–1 
As adopted, paragraph (f) of Rule 17g– 
1 provides that an NRSRO updating its 
application for registration pursuant to 
Section 15E(b)(2) of the Exchange Act
49
 
(the annual certification) must furnish 
the amendment to the Commission on 
Form NRSRO.
50
Section 15E(b)(2) of the 
Exchange Act requires an NRSRO to 
furnish the Commission with an 
amendment to its registration not later 
than 90 days after the end of each 
calendar year.
51
This section further 
provides that the amendment must (1) 
certify that the information and 
documents provided in the application 
for registration (except the QIB 
certifications) continue to be accurate 
and (2) list any material change to the 
information and documents during the 
previous calendar year.
52
 
This provision was proposed in 
paragraph (g) of Rule 17g–1. A 
commenter suggested that the proposed 
provision should be revised to permit 
the filing of the annual certification 
within 90 days after the end of an 
NRSRO’s fiscal year (if different than 
the end of the calendar year).
53
 
However, as noted, the calendar year 
requirement is statutory. The 
instructions to Form NRSRO have been 
modified from those proposed to 
include a description of this statutory 
provision. In all other respects, the 
Commission is adopting the provision 
substantially as proposed. 
7. Paragraph (g) of Rule 17g–1 
As adopted, paragraph (g) of Rule 
17g–1 provides that an NRSRO 
withdrawing its registration pursuant to 
Section 15E(e)(1) of the Exchange Act
54
 
must furnish the Commission with a 
notice of withdrawal on Form NRSRO. 
The rule further provides that the 
withdrawal becomes effective 45 
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33568 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
55
Id. 
56
Id. 
57
See Moody’s Letter. 
58
15 U.S.C. 78o–7(a)(3). 
59
See 17 CFR 240.15b6–1. 
60
15 U.S.C. 78c(a)(4) and (5). 
61
See Section 15 of the Exchange Act (15 U.S.C. 
78o). 
62
15 U.S.C. 78c(a)(61). 
63
This provision is adopted under the 
Commission’s authority in Section 15E(a)(1)(A) of 
the Exchange Act to prescribe the form of the 
application (15 U.S.C. 78o–7(a)(1)(A)). 
64
See, e.g., 17 CFR 240.15b1–1 and 17 CFR 
240.15b3–1 (broker-dealers); 17 CFR 240.15Ba2–1 
(municipal securities dealers); 17 CFR 240.17Ab2– 
1 (clearing agencies); and 17 CFR 240.17Ac2–1 
(transfer agents). 
65
15 U.S.C. 78o–7(a)(2)(A). 
66
15 U.S.C. 78o–7(a)(2)(B). 
67
Under Section 15E(a)(2)(B)(iii) of the Exchange 
Act, the Commission can extend this period for an 
additional 90 days for good cause or for such other 
period as the applicant consents (15 U.S.C. 78o– 
7(a)(2)(B)(iii)). An applicant will be required to 
consent to extend both the period for the 
Commission to make the initial determination and 
the 120-day period to conclude proceedings; since 
the 120-day period begins when the application is 
furnished to the Commission, not when the 
Commission determines to commence proceedings. 
calendar days after the furnishing of the 
form. Section 15E(e)(1) of the Exchange 
Act
55
provides that an NRSRO may 
withdraw from registration, subject to 
such terms and conditions the 
Commission may establish as necessary 
in the public interest or for the 
protection of investors, by furnishing 
the Commission with a written notice of 
withdrawal.
56
The rule text references 
this statutory standard. 
This provision was proposed in 
paragraph (h) of Rule 17g–1 without 
specifying the form of the notice or the 
conditions for withdrawal. A 
commenter suggested that the 
withdrawal provision be modified to 
provide that the withdrawal of the 
registration becomes effective within 90 
days of the notice and that the notice be 
provided through an amendment to 
registration furnished on Form 
NRSRO.
57
The Commission did note in 
the proposing release that the 
conditions for withdrawal potentially 
could include a requirement that the 
NRSRO provide public notice that its 
credit ratings will cease to be eligible for 
regulatory use. 
The Commission agrees with the 
commenter that the notice should be 
furnished on Form NRSRO. This 
provides for public notice of the 
withdrawal, since the current Form 
NRSRO must be made publicly available 
pursuant to Section 15E(a)(3) of the 
Exchange Act
58
and Rule 17g–1(i) 
discussed below. The Commission also 
agrees with the commenter that in the 
normal course an NRSRO’s withdrawal 
of registration should become effective 
within a prescribed time period. This 
will provide a degree of certainty to the 
NRSRO as to when it will no longer be 
subject to the Commission’s regulatory 
program. It also will be consistent with 
withdrawal requests by certain other 
regulated entities. For example, a 
broker-dealer’s request for withdrawal 
of its registration becomes effective 
within 60 days of the filing of the 
appropriate form.
59
The Commission 
also believes users of credit ratings 
should have adequate prior notice of an 
NRSRO’s intent to withdraw its 
application. This will give them notice 
that they will no longer be able to rely 
on the entity’s credit ratings to meet 
statutory or regulatory requirements 
using the term ‘‘NRSRO.’’ It also will 
provide them with notice that the entity 
will no longer be subject to the 
Commission’s oversight, including 
requirements to disclose information 
about its performance, methodologies, 
procedures, and organization. 
The Commission believes the 45 
calendar day time period for the 
withdrawal to become effective is 
necessary in the public interest or for 
the protection of investors for several 
reasons. First, as discussed below, 
pursuant to paragraph (i) of Rule 17g– 
1, an NRSRO must make its current 
Form NRSRO publicly available within 
10 business days of being furnished to 
the Commission. Consequently, notice 
of an NRSRO’s withdrawal will be made 
publicly available at least 30 calendar 
days before becoming effective. This 
notice will provide users of credit 
ratings with time to prepare for the 
NRSRO’s withdrawal. Second, subject to 
certain limited exceptions, an entity 
acting as a ‘‘broker’’ or ‘‘dealer’’ as 
defined in Sections 3(a)(4) and (5) of the 
Exchange Act
60
respectively must 
register with the Commission.
61
 
Conversely, an entity may act as a 
‘‘credit rating agency’’ as defined in 
Section 3(a)(61) of the Exchange Act
62
 
without being required to register with 
the Commission. In this sense, 
registration as an NRSRO is more 
voluntary than registration as a broker- 
dealer. Therefore, a shorter time period 
to withdraw an NRSRO registration is 
appropriate. 
Form NRSRO has been modified to 
include a checkbox to indicate when the 
Form is being furnished to withdraw a 
registration and the instructions for the 
Form have been modified from those 
proposed to include an explanation of 
how to complete the Form in this case. 
Specifically, an NRSRO would complete 
each Item on the Form, except Item 6, 
and have the Form executed. 
For these reasons, the Commission is 
adopting the provision in Rule 17g–1 
concerning a withdrawal of registration 
with the modifications described above. 
8. Paragraph (h) of Rule 17g–1 
As adopted, paragraph (h) of Rule 
17g–1 provides that a Form NRSRO 
submitted to the Commission pursuant 
to any provision in Rule 17g–1 will be 
deemed furnished to the Commission on 
the date that the Commission receives a 
complete and properly executed Form 
NRSRO that follows all applicable 
instructions for the form.
63
The 
requirement for completeness comports 
with the requirements imposed on other 
types of registrants under the Exchange 
Act.
64
In addition, Section15E(a)(2)(A) 
of the Exchange Act requires the 
Commission to grant an application for 
registration as an NRSRO or commence 
proceedings on whether to deny the 
application within 90 days from the 
date the application is furnished to the 
Commission or a longer period if the 
applicant consents.
65
Further, if 
proceedings are commenced, Section 
15E(a)(2)(B) of the Exchange Act
66
 
requires the Commission to conclude 
them within 120 days of the date the 
application is furnished to the 
Commission.
67
These statutory 
requirements make it necessary for the 
Commission to receive a complete 
initial application before the 90-day and 
120-day periods begin to run. 
Rule 17g–1, as proposed, explicitly 
applied the standard described above 
for when a Form NRSRO would be 
deemed ‘‘furnished’’ for submissions of 
the Form to apply for registration and to 
add a class of credit ratings to an 
existing registration. The Commission 
did not receive any comments on these 
provisions as proposed. 
Rule 17g–1, as adopted, clarifies that 
the ‘‘when furnished’’ standard also 
applies to furnishings of Form NRSRO 
to update a registration, make the 
annual certification, and withdraw a 
registration. As discussed above, 
amendments to update materially 
inaccurate information must be 
furnished promptly, annual 
certifications must be furnished within 
90 days of the end of the calendar year, 
and withdrawals of registration become 
effective in 45 calendar days. Therefore, 
a Form NRSRO submitted for these 
purposes will be deemed ‘‘furnished’’ 
upon the submission of a complete and 
properly executed form. 
Rule 17g–1(h), as adopted, contains a 
provision stating that the Commission 
will, to the extent permitted by law, 
keep confidential information that is 
furnished on a confidential basis and 
requested to be kept confidential. As in 
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33569 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
68
See, e.g., Section 24 of the Exchange Act (15 
U.S.C. 78x), 17 CFR 240.24b–2, 17 CFR 200.80 and 
17 CFR 200.83. 
69
See, e.g., Section 15E(a)(1)(B)(viii) of the 
Exchange Act. 
70
See Sections 15E(a)(1)(B)(viii) and (ix) of the 
Exchange Act (15 U.S.C. 78o–7(a)(1)(B)(viii) and 
(ix)). 
71
See 17 CFR 200.80 and 17 CFR 200.83. 
72
15 U.S.C. 78o–7(a)(3). 
73
See DBRS Letter; Fitch Letter. 
74
See Fitch Letter and DBRS Letter, respectively. 
75
See ICI Letter. 
76
15 U.S.C. 78o–7(a)(3). 
77
See 17 CFR 200.80(b)(4) and 17 CFR 200.80a. 
17 CFR 200.80a contains a compilation of records 
generally available at the public reference room in 
the principal office of the Commission, including, 
for example, applications for registration as a 
broker-dealer or investment adviser. 
78
See DBRS Letter; A.M. Best Letter. 
79
See 17 CFR 200.80 and 17 CFR 200.83. 
80
15 U.S.C. 78o–7(a)(1)(B). 
81
15 U.S.C. 78o–7(a)(1)(B)(x). 
any situation where a person wishes to 
obtain confidential treatment for 
information provided to the 
Commission, an applicant and NRSRO 
must comply with the requirements of 
the Exchange Act governing confidential 
treatment.
68
This provision has been 
added to highlight for credit rating 
agencies and NRSROs the fact that 
information required by Form NRSRO 
includes information that will be 
furnished ‘‘on a confidential basis.’’
69
 
Some of the information to be furnished 
to the Commission ‘‘on a confidential 
basis’’ in the Form is required by 
Section 15E(a)(1)(B) of the Exchange 
Act,
70
and the Commission will 
consider requests for confidential 
treatment for that information. In 
addition, certain other information also 
is required in the Form and it may be 
appropriate for the Commission to 
provide confidential treatment to some 
of this information. The Commission 
will evaluate all requests for 
confidential treatment under the 
existing rules governing confidential 
treatment for information furnished to 
the Commission.
71
 
For these reasons, the Commission is 
adopting the provision in Rule 17g–1 
concerning when a Form NRSRO will be 
deemed to have been furnished with the 
modifications described above. 
9. Paragraph (i) of Rule 17g–1 
As modified, paragraph (i) of Rule 
17g–1 requires that an NRSRO make its 
current Form NRSRO and information 
and documents submitted in Exhibits 1 
though 9 publicly available within 10 
business days of being granted an initial 
registration or registration in an 
additional class of credit ratings and 
within 10 business days of furnishing an 
update to amend information on the 
form, to provide the annual 
certification, and to withdraw a 
registration. Section 15E(a)(3) of the 
Exchange Act provides that the 
Commission, by rule, shall require an 
NRSRO, after registration, to make the 
information submitted in its application 
and any amendments publicly available 
on its Web site or through another 
comparable, readily accessible means.
72
 
The 10 business day period is intended 
to provide the NRSRO with sufficient 
time to make the information public and 
designed to ensure that users of credit 
ratings have access to the information 
within a reasonably short timeframe. 
This provision was proposed in 
paragraph (d) of Rule 17g–1, except that 
the time period to make the information 
publicly available was proposed to be 
five business days. The Commission 
received three comments on the five 
business day time period. Two 
commenters stated that five business 
days was not enough time to make their 
application information publicly 
available, given the volume of 
information.
73
They commented that the 
time period should be 15 and 20 
business days, respectively.
74
The third 
commenter stated that the five business 
day time period should not be 
lengthened as the information is an 
important way for users of credit ratings 
to become familiar with a new 
NRSRO.
75
 
The Commission agrees with the third 
commenter that making the information 
publicly available as soon as possible 
will be an important means for users of 
credit ratings to understand the 
methodologies, procedures, and 
business models of new NRSROs. At the 
same time, the Commission agrees with 
the two other commenters that larger 
more complex NRSROs could have 
substantial amounts of information in 
their applications, which may make it 
difficult to provide all this information 
in a publicly available format in five 
business days. Therefore, the 
Commission is lengthening the time 
period to ten business days. This is 
shorter than the 15 and 20 day periods 
advocated by the two commenters. 
However, as discussed below, Form 
NRSRO has been modified in ways that 
reduce the volume of information that 
must be made publicly available. 
Consequently, the Commission believes 
10 business days will be a sufficient 
amount of time. 
Finally, while Section 15E(a)(3) of the 
Exchange Act
76
does not address 
whether an application to register as an 
NRSRO shall be made publicly available 
prior to registration, this type of 
information typically would be made 
available by the Commission to 
members of the public before the 
application is acted on by the 
Commission.
77
Two commenters, both 
current NRSROs, stated that the 
Commission should not make 
information in the application available 
to the public until after registration was 
granted.
78
The Commission notes that 
an applicant can seek confidential 
treatment for information in the 
application under existing laws and 
rules governing confidential 
treatment.
79
The Commission will 
accord this information confidential 
treatment to the extent permitted by 
law. This is consistent with how the 
Commission treats applications of other 
entities. 
B. Form NRSRO 
The Commission proposed Form 
NRSRO to serve four functions: For a 
credit rating agency to apply for 
registration as an NRSRO; for an NRSRO 
to apply to be registered in an additional 
class of credit ratings; for an NRSRO to 
update public information required to 
be disclosed and kept accurate on the 
Form; and for an NRSRO to make an 
annual certification. Proposed 
instructions for the Form described how 
an applicant, and after registration, an 
NRSRO, should complete the Form in 
each of these circumstances. 
The Commission believes that having 
just one form (and one set of 
instructions) will reduce the burden on 
applicants, NRSROs, and Commission 
staff. For example, it will reduce the 
complexity of having different forms for 
the application, amendments, and 
annual certification. Using one form 
also will allow NRSROs to more quickly 
become familiar with the Form and its 
instructions, which will reduce the 
potential for making mistakes in 
completing the Form. It also will assist 
users of credit ratings in understanding 
the Form and public Exhibits and where 
to look on the Form for specific 
information. 
As discussed below, the Commission 
is adopting Form NRSRO with 
substantial modifications that address 
issues commenters raised and allow the 
Form to be used to furnish a notice of 
withdrawal of registration. Much of the 
information elicited in the Form is 
required to be submitted to the 
Commission pursuant to Section 
15E(a)(1)(B) of the Exchange Act.
80
The 
Commission, under authority in Section 
15E(a)(1)(B)(x), is requiring certain 
additional information.
81
The 
Commission believes this additional 
information elicited in the Form is 
necessary or appropriate in the public 
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33570 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
82
15 U.S.C. 78o–7(a)(2)(C). 
83
15 U.S.C. 78o–7(d). 
84
15 U.S.C. 78o–7. 
85
See DBRS Letter. 
86
See Form BD—Uniform Application for Broker- 
Dealer Registration. 
87
See, e.g., letter dated March 12, 2007 from 
Vickie A. Tillman, Executive Vice President, 
Standard & Poors (‘‘S&P Letter’’); DBRS Letter; Fitch 
Letter; Moody’s Letter. 
88
See 15 U.S.C. 80b–2 for a similar definition of 
separately identifiable departments or divisions of 
banks. 
89
15 U.S.C. 78o–7. 
interest or for the protection of investors 
because, as discussed below, it will: (1) 
Assist the Commission in making the 
findings required in Section 15E(a)(2)(C) 
of the Exchange Act with respect to 
whether an applicant should be granted 
registration as an NRSRO;
82
(2) assist 
the Commission in making the findings 
required in Section 15E(d) of the 
Exchange with respect to whether the 
Commission should censure, place 
limitations on the activities, functions 
or operations of, suspend for a period 
not exceeding 12 months, or revoke the 
registration of an NRSRO;
83
(3) assist 
the Commission in reviewing whether 
an NRSRO is complying with Section 
15E of the Exchange Act
84
and the 
Commission’s rules thereunder; and (4) 
provide users of credit ratings with 
information that will assist them in 
comparing NRSROs and understanding 
how a given NRSRO conducts its 
activities. 
1. Checkboxes Indicating Nature of 
Submission 
The first entry an applicant or NRSRO 
must make on Form NRSRO is to 
indicate, by checking the appropriate 
box, the reason the form is being 
furnished: To apply for registration as 
an NRSRO; to apply to be registered in 
an additional class of credit ratings; to 
supplement either type of application 
while the application is pending; to 
update public information on the Form 
that has become materially inaccurate; 
to make the annual certification; and to 
provide notice of a withdrawal of 
registration. If the Form is furnished to 
supplement an application or update a 
registration, the NRSRO also must 
identify by number the specific items or 
Exhibits on the form that are being 
supplemented or amended. For 
example, if the NRSRO is furnishing an 
update to its registration because its 
address and organizational structure 
have changed, the NRSRO is required to 
enter ‘‘Item 1C’’ and ‘‘Exhibit 4’’ in the 
appropriate field on the Form. The 
Form, as proposed, required a brief 
description of the nature of the 
amendment. This requirement has been 
eliminated to simplify the process of 
completing the Form. 
The Commission also has added two 
checkboxes that were not on the 
proposed version of the Form. The first 
new checkbox—‘‘Application 
Supplement’’—is for when a credit 
rating agency applying for registration 
as an NRSRO or an NRSRO applying to 
be registered in an additional class of 
credit ratings must furnish an 
amendment to its application because 
information submitted in the 
application is or has become materially 
inaccurate. As proposed, an NRSRO 
would have checked the more generic 
‘‘Amendment’’ checkbox. The 
Commission added a separate checkbox 
to distinguish amendments relating to a 
pending application from other 
amendments, which will make the 
reason for the furnishing of the Form 
more transparent. 
Second, the Commission added a 
checkbox to indicate when the Form is 
being furnished to withdraw a 
registration in light of the change to 
Rule 17g–1 requiring the notice of 
withdrawal to be furnished on Form 
NRSRO. 
2. Item 1 (Identifying Information) 
As adopted, Item 1 requires an 
applicant and NRSRO to enter on to 
Form NRSRO identifying information 
about itself and its contact person. The 
instructions for Form NRSRO provide 
that the individual listed as the contact 
person must be authorized to receive all 
communications and papers from the 
Commission and will be responsible for 
their dissemination within the NRSRO. 
One commenter suggested that Item 1 
require the telephone number, fax, and 
email address of the contact person.
85
 
The Commission elicits the telephone 
number for broker-dealer contact 
persons.
86
The number of NRSROs will 
be substantially smaller than the 
number of registered broker-dealers. The 
Commission believes at this time it will 
be able to easily obtain the contact 
information for the contact person 
without the necessity of having the 
information disclosed on the Form. 
The instructions to Item 1 of Form 
NRSRO indicate that the name entered 
on Line A of Item 1 must be the 
‘‘person’’ that is applying for 
registration or registered as the NRSRO. 
The instructions further clarify through 
the definition of ‘‘person’’ that a 
separately identifiable department or 
division of a corporation or company 
may be registered as an NRSRO. This 
clarification had been made because 
certain credit rating agencies provide 
their credit rating services through 
operating divisions that may be a part of 
a larger legal entity or encompass 
several different legal entities located 
throughout the world.
87
In an effort to 
more narrowly tailor the requirements 
for registration, the Commission 
believes it is appropriate in these 
circumstances to permit the operating 
division to register as the NRSRO as 
opposed to the larger legal entity that 
may engage in activities not intended to 
be regulated under the Rating Agency 
Act. Similarly, the Commission believes 
it is appropriate that the registered 
operating division include each separate 
legal entity that provides credit rating 
services, provided the operating 
division treats the credit ratings of the 
separate legal entities as its own and has 
global procedures, methodologies, 
policies, and controls that apply to the 
separate legal entities. 
The instructions to Form NRSRO now 
include a definition of ‘‘separately 
identifiable department or division’’ 
that is designed with these goals in 
mind.
88
The first component of the 
definition is that the operating division 
must be a unit of a corporation or 
company that is under the direct 
supervision of an officer or officers 
designated by the board of directors of 
the corporation as responsible for the 
day-to-day conduct of the corporation’s 
credit rating activities for one or more 
affiliates, including the supervision of 
all employees engaged in the 
performance of such activities. The 
second component of the definition is 
that all of the records relating to the 
operating division’s credit rating 
activities must be separately created or 
maintained in or extractable from its 
own facilities or the facilities of the 
corporation, and such records must be 
maintained or otherwise accessible to 
permit independent examination for, 
and enforcement by, the Commission of 
Section 15E of the Exchange Act
89
and 
rules and regulations promulgated 
thereunder. 
In all other respects, Item 1 to Form 
NRSRO is being adopted substantially 
as proposed. 
3. Certification 
The applicant or NRSRO must have a 
duly authorized individual execute a 
certification that the information and 
statements furnished in the Form 
NRSRO are accurate in all significant 
respects. The Commission added the ‘‘in 
all significant respects’’ language to the 
certification in response to comments 
that the certification, as proposed, could 
have been construed to hold the 
certifying individual to an unrealistic 
standard of having to ensure the Form 
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33571 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
90
See Letter dated March 26, 2007 from Vickie A. 
Tillman, Executive Vice President, Standard & 
Poors (‘‘S&P 2nd Letter’’); Moody’s Letter. 
91
See DBRS Letter; Fitch Letter. 
92
15 U.S.C. 78o–7. 
93
15 U.S.C. 78o–7(j). 
94
15 U.S.C. 78o–7(a)(3). 
95
Id. 
96
See, e.g., A.M. Best Letter. 
97
See letter dated March 8, 2007 from Majorie E. 
Gross (‘‘Gross Letter’’). 
did not include even trivial 
inaccuracies.
90
The additional language 
is intended to allay these concerns. In 
light of this new language, the 
instructions for the Form now clarify 
that the Chief Executive Officer or the 
President of the applicant or NRSRO, or 
an individual with similar 
responsibilities, must execute the 
certification. This is designed to ensure 
that the person executing the 
certification has responsibilities that 
will make the person aware of the basis 
for the information being provided in 
the form. 
In all other respects, the language of 
the certification is being adopted 
substantially as proposed. 
4. Item 2 (Legal Status, Place of 
Formation, Fiscal Year End) 
As adopted, Item 2 requires an 
applicant and NRSRO to enter on to 
Form NRSRO information about its legal 
status (for example, corporation or 
partnership), the place and date of its 
formation, and its fiscal year end. The 
information with respect to the fiscal 
year end of the applicant or NRSRO is 
relevant because Form NRSRO requires 
applicants to submit audited financial 
statements with the application and 
Rule 17g–3 requires NRSROs to 
annually furnish the Commission with 
audited financial statements covering 
the previous fiscal year. The 
Commission did not receive any 
comments on this provision and is 
adopting it substantially as proposed. 
5. Item 3 (Credit Rating Affiliates) 
As discussed above, commenters with 
global operations stated that a credit 
rating agency with separate legal entities 
in different countries should be able to 
include them in a single NRSRO 
registration.
91
The Commission agrees 
that permitting a single registration is 
appropriate in that it will lessen the 
burden of having a parent company 
register multiple legal entities that make 
up the parent company’s credit rating 
division. Consequently, an applicant 
with affiliates that would be, or an 
NRSRO with affiliates that are, a part of 
its registered separately identifiable 
department or division must identify 
and provide the address of each such 
affiliate. The instructions to Form 
NRSRO clarify that any credit rating 
issued by a credit rating affiliate will be 
considered a credit rating issued by the 
NRSRO for purposes of Section 15E of 
the Exchange Act
92
and the regulations 
thereunder. For example, the provisions 
in Rule 17g–5 with respect to issuing or 
maintaining credit ratings while having 
certain conflicts of interest will apply. 
The instructions also provide that an 
applicant and NRSRO in completing 
Form NRSRO must incorporate 
information about the credit ratings, 
methodologies, procedures, policies, 
financial condition, results of 
operations, and organizational structure 
of each credit rating affiliate identified 
in Item 3 in the other items and 
Exhibits. For example, the description 
of the procedures and methodologies for 
determining credit ratings in Exhibit 2 
must include the procedures and 
methodologies used by the credit rating 
affiliates. 
For these reasons, the Commission is 
adopting Item 3 to Form NRSRO as 
described above. 
6. Item 4 (Compliance Officer) 
As adopted, Item 4 requires an 
applicant and NRSRO to provide the 
name and address of its designated 
compliance officer required under 
Section 15E(j) of the Exchange Act.
93
 
This person is responsible for 
administering the policies and 
procedures of the credit rating agency to 
prevent the misuse of nonpublic 
information, to manage conflicts of 
interest, and to ensure compliance with 
the securities laws and the rules and 
regulations under those laws. The 
Commission did not receive any 
comments on this provision and is 
adopting it substantially as proposed. 
7. Item 5 (Method of Making Form and 
Exhibits Publicly Available) 
As adopted, Item 5 requires an 
applicant and NRSRO to describe how 
it will make, or makes, its current Form 
NRSRO and Exhibits 1 through 9 
publicly available pursuant to Section 
15E(a)(3) of the Exchange Act
94
and 
Rule 17g–1(i) thereunder. As discussed 
above, paragraph (i) of Rule 17g–1 is 
being adopted under Section 15E(a)(3) 
of the Exchange Act, which provides 
that the Commission shall, by rule, 
require an NRSRO, upon the granting of 
its registration, to make the information 
submitted to the Commission in the 
initial application, amendments, or 
annual certifications publicly available 
on the NRSRO’s Web site or through 
another comparable, readily accessible 
means.
95
As discussed above, paragraph 
(i) of Rule 17g–1 requires an NRSRO to 
make its current Form NRSRO and 
Exhibits 1 through 9 publicly available 
within 10 business days after the date of 
the Commission order granting an initial 
application and an application to be 
registered in an additional class of 
credit ratings and within 10 business 
days after furnishing the Commission 
with an amendment on Form NRSRO 
(including an annual certification and 
withdrawal of registration). This 
information elicited in Item 5 will assist 
the Commission in reviewing whether 
the NRSRO is complying with this 
requirement and assist the public in 
locating the information. 
The Commission did not receive any 
comments on this provision and is 
adopting it substantially as proposed. 
8. Item 6 (Classes of Credit Ratings for 
Which Registration Is Sought and QIB 
Certifications) 
An applicant for registration as an 
NRSRO or an NRSRO applying to add 
another class of credit ratings to its 
registration must complete Item 6 of 
Form NRSRO. This item elicits 
information about the classes of credit 
ratings for which the applicant is 
applying to be registered. It also requires 
the applicant to attach the requisite 
number of QIB certifications (two for 
each class of credit rating for which 
registration is sought and at least 10 
with an initial application). 
Item 6 elicits the approximate number 
of credit ratings issued in each class as 
of the application date. Commenters 
objected to the requirement to provide 
the number of credit ratings in a 
particular class because it could make it 
more difficult for new entrants to obtain 
business.
96
The Commission believes 
that users of credit ratings will find this 
information useful in understanding an 
NRSRO. For example, it will provide 
information as to how broad an 
NRSRO’s coverage is with respect to 
issuers and obligors within a particular 
class of credit ratings. 
Item 6 also elicits the date the 
applicant first began issuing credit 
ratings in that class on a continuous 
basis without interruption. The Form, as 
proposed, required the applicant to 
provide the number of years it has been 
issuing credit ratings on a continuous 
basis. One commenter suggested that an 
NRSRO be required to provide the date 
of first issuance, instead of the number 
of years, to avoid the necessity of having 
to frequently update the information.
97
 
The Commission agrees with the 
commenter that this will make the 
information submitted on the Form less 
subject to change and reduce the 
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33572 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
98
Because Item 7, discussed below, will not be 
filled out when the NRSRO applies for registration, 
it will remain blank for a period of time between 
the granting of an initial registration and the time 
when the NRSRO furnishes a new Form NRSRO 
either as an amendment or annual certification. 
Item 6, however, will have been filled out as part 
of the application for registration. This item 
requires the same information as Item 7. Therefore, 
users of credit ratings will have the access to the 
information through Item 6 until the NRSRO 
furnishes an annual certification. Thereafter, the 
information will be located in Item 7 and updated 
annually with each new annual certification. 
99
Section 3(a)(61)(A) of the Exchange Act (15 
U.S.C. 78c(a)(61)(A)). 
100
See letter dated March 12, 2007 from Cate 
Long, Multiple Markets (‘‘MM Letter’’); letter dated 
March 12, 2007 from Lawrence J. White, Professor 
of Economics, Stern School of Business (‘‘White 
Letter’’); Letter dated March 12, 2007 from Alex J. 
Pollack, Resident Fellow, American Enterprise 
Institute (‘‘AEI Letter’’); Gross Letter. 
101
See Gross Letter. 
102
15 U.S.C. 78o–7(a)(1)(B)(ix). 
103
15 U.S.C. 78o–7(a)(3). 
104
An applicant can request that this information 
be kept confidential to the extent permitted by law. 
See 17 CFR 200.80 and 17 CFR 200.83. 
105
See 15 U.S.C. 78o–7(a)(1)(C)(i), (ii) and (iii), 
respectively. 
106
15 U.S.C. 78c(a)(64). 
107
15 U.S.C. 78o–7(a)(1)(C)(iv). 
108
See Report of the Senate Committee on 
Banking, Housing, and Urban Affairs to Accompany 
S. 3850, Credit Rating Agency Reform Act of 2006, 
S. Report No. 109–326, 109th Cong., 2d Sess. (Sept. 
6, 2006) (‘‘Senate Report’’). The Senate Report 
further explained that a QIB whose employees 
subscribe to or regularly receive the ratings but do 
not read them or, if they read them, rarely or never 
consider them in making their investment decisions 
would not be deemed to have ‘used’ the ratings.’’ 
109
Id (emphasis added). 
requirement to, and burden of, updating 
the Form. Consequently, the 
Commission has modified Items 6 and 
7 accordingly. The information on how 
long an NRSRO has issued credit ratings 
in a particular class will assist users of 
credit ratings in assessing the NRSRO’s 
level of experience.
98
Section 
15E(a)(1)(C) of the Exchange Act also 
requires that the QIB certifications 
include a representation that the QIB 
has used the credit ratings of the 
applicant in the class of credit ratings 
for at least the three years immediately 
preceding the date of the application. 
The instructions provide that an 
applicant cannot tack on periods when 
a credit rating affiliate issued credit 
ratings in the particular class if the 
entity was not an affiliate during that 
time period. This provision is designed 
to avoid the submission of misleading 
information by providing that only 
credit ratings issued by, or on behalf of, 
the NRSRO are used in determining the 
start date. 
Item 6 also elicits a brief description 
of how the credit rating agency issues its 
credit ratings on the Internet or through 
another readily accessible means, for 
free or for a reasonable fee. The 
Commission will use this information to 
review whether the applicant is in the 
business of issuing credit ratings on the 
Internet or through another readily 
accessible means, for free or for a 
reasonable fee.
99
The Rating Agency Act 
does not define ‘‘readily accessible.’’ 
The information about how an applicant 
issues credit ratings on the Internet or 
through another readily accessible 
means, for free or for a reasonable fee 
also will inform the public about where 
and, if applicable, the cost to access an 
NRSRO’s credit ratings. 
Further, the Rating Agency Act does 
not define ‘‘reasonable fee.’’ In the 
proposing release, the Commission 
sought comment on whether it should 
define ‘‘reasonable fee.’’ In response, 
four commenters stated that the 
Commission should not in any way 
regulate the fees an NRSRO charges for 
its credit ratings.
100
The Commission 
has determined not to define 
‘‘reasonable fee’’ at this time in order to 
gain experience on the issue. Item 6 is 
designed to assist the Commission in 
gaining this experience. 
One commenter stated that Item 6, as 
proposed, does not elicit information 
that would be helpful in understanding 
the fees charged for obtaining or 
accessing credit ratings.
101
The 
Commission notes that, to the extent 
that several NRSROs indicate that they 
make their credit ratings available for 
free, the Commission will have 
assurance that regulatory users have 
ready access to NRSRO credit ratings. 
However, the Commission believes the 
form should elicit more information 
about fees so that the information will 
be disclosed to users of credit ratings. 
This will improve price transparency, 
which may lead to greater competition. 
Accordingly, the instructions for Item 6 
and Item 7 now provide that an 
applicant that charges a fee for accessing 
its credit ratings must describe the fee 
or include a fee schedule in the form. 
Finally, Item 6 requires the applicant 
to provide the QIB certifications 
mandated pursuant to Section 
15E(a)(1)(B)(ix) of the Exchange Act.
102
 
Under this provision, an applicant must 
submit a minimum of ten QIB 
certifications. An NRSRO will not be 
required to make the QIB certifications 
publicly available pursuant to Section 
15E(a)(3) of the Exchange Act
103
and 
Rule 17g–1(i) thereunder or update 
them after registration.
104
Sections 
15E(a)(1)(C)(i), (ii), and (iii) further 
provide, respectively, that: (1) The 
certifying QIB must not be affiliated 
with the applicant; (2) the certification 
may address more than one of the 
categories of obligors identified in the 
definition of NRSRO; and (3) at least 
two of the certifications must address 
each category of obligor.
105
Section 
15E(a)(1)(C)(iv) provides that the QIB 
must state in the certification that it 
meets the definition of a ‘‘QIB’’ in 
Section 3(a)(64) of the Exchange Act
106
 
and that the QIB has used the credit 
ratings of the applicant for at least three 
years immediately preceding the date of 
the application in the subject category 
or categories of obligors.
107
The Senate 
report (‘‘Senate Report’’) accompanying 
the Rating Agency Act explained that 
the term ‘‘used’’ was intended to mean 
the QIB ‘‘seriously considered the 
ratings in some of [its] investment 
decisions.’’
108
The Senate Report 
further explained that ‘‘a QIB whose 
analysts regularly read and consider [a 
credit rating agency’s] ratings in the 
course of making investment decisions 
would have ‘‘used’’ them under the 
meaning of the bill.’’
109
The required 
representation for the QIB certification 
is that the QIB ‘‘has seriously 
considered the credit ratings of [the 
credit rating agency] in the course of 
making some of its investment decisions 
for at least the three years immediately 
preceding the date of this certification, 
in the following classes of credit 
ratings.’’ In addition, as a measure 
designed to ensure the impartiality of 
the QIB’s representation, the QIB must 
certify that it has not received 
compensation for providing the 
certification. 
The certification must be executed by 
a person duly authorized by the QIB to 
make the certification on behalf of the 
QIB. This is designed to ensure that the 
certification is that of the QIB and not 
an employee of the QIB who may have 
an interest (distinct from that of the 
QIB) in providing the certification to the 
applicant. The form of the certification 
now requires that the printed name and 
title of the person be provided under the 
signature. This will clarify the identity 
and level of responsibility of the person 
executing the certification. 
The Commission did not receive any 
comments on the form of the QIB 
certification and is adopting it 
substantially as proposed with the two 
modifications described above. 
Item 6 of proposed Form NRSRO also 
requires the applicant to indicate 
whether it is submitting the QIB 
certifications and, if so, how many 
certifications are being submitted or that 
the applicant is exempt from the 
requirement to provide the 
certifications. Under Section 
15E(a)(1)(D) of the Exchange Act, a 
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33573 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
110
15 U.S.C. 78o–7(a)(1)(D). 
111
15 U.S.C. 78o–7(a)(2)(C)(ii)(II). 
112
15 U.S.C. 78o–7(d). 
113
Id. 
114
15 U.S.C. 78o(b)(4)(A), (D), (E), (G) and (H). 
115
15 U.S.C. 78o(b)(4). 
116
15 U.S.C. 78o(b)(4)(C). 
117
15 U.S.C. 78o(b)(4)(B). 
118
15 U.S.C. 78o–7(d). 
119
Id. 
120
15 U.S.C. 78o–7(a)(3). 
121
An applicant can request that this information 
be kept confidential to the extent permitted by law. 
See 17 CFR 200.80 and 17 CFR 200.83. 
122
15 U.S.C. 78o–7(d). 
123
See S&P Letter; Moody’s Letter. 
124
15 U.S.C. 78o–7(a)(2)(C)(ii)(II). 
125
15 U.S.C. 78o–7(d). 
126
See R&I Letter. 
127
15 U.S.C. 78o–7(d). 
128
See A.M. Best Letter. 
credit rating agency is not required to 
submit the QIB certifications if it was 
identified as an NRSRO in a 
Commission staff no-action letter issued 
before August 2, 2006.
110
 
For these reasons, the Commission is 
adopting Item 6 with the modifications 
discussed above. 
9. Item 7 (Classes of Credit Ratings 
Covered by Current Registration) 
As adopted, Item 7 requires an 
NRSRO to provide information about 
the classes of credit ratings for which 
the NRSRO is currently registered, the 
approximate number of credit ratings 
issued in each class as of the previous 
calendar year end, and the date the 
NRSRO first issued credit ratings in that 
class on a continuous basis. The NRSRO 
also must provide information about 
how the NRSRO makes its credit ratings 
readily accessible. Item 7 has been 
modified from the proposed form to 
make the information provided in the 
item less subject to change, which will 
reduce the frequency of having to 
furnish updated information. 
Specifically, as discussed above, the 
number of years the NRSRO has issued 
credit ratings in a particular class is now 
indicated by having the NRSRO provide 
the date it first issued credit ratings in 
that class. As proposed, the NRSRO 
would have had to provide the number 
of years it had issued credit ratings in 
that class, which would constantly 
change with the advance of time. Also, 
the number of credit ratings issued in a 
particular class is now as of the end of 
the previous calendar year. Therefore, 
this information will change once a year 
and only be required to be updated on 
an annual basis. The instructions to the 
Form provide that this update can be 
made with the annual certification and 
within the 90-day time period for 
providing the annual certification. 
10. Item 8 (Potential Statutory 
Disqualifications) 
An applicant and NRSRO will be 
required to disclose, if applicable, if it 
or any person within its credit rating 
organization have been, or are, subject 
to certain legal judgments or orders, or 
regulatory findings. As explained in the 
proposing release, Section 
15E(a)(2)(C)(ii)(II) of the Exchange 
Act
111
directs the Commission to deny 
a credit rating agency’s application for 
registration as an NRSRO if the 
Commission finds that the applicant, if 
granted registration, would be subject to 
suspension or revocation of its 
registration under Section 15E(d) of the 
Exchange Act.
112
Section 15E(d) of the 
Exchange Act
113
provides that the 
Commission, by order, shall censure, 
place limitations on the activities, 
functions, or operations of, suspend for 
a period not exceeding 12 months, or 
revoke the registration of an NRSRO, if 
the Commission finds that the NRSRO 
or a person associated with the NRSRO 
has committed or omitted any act, or is 
subject to an order or finding 
enumerated in Sections 15(b)(4)(A), (D), 
(E), (G), or (H) of the Exchange Act,
114
 
has been convicted of any offense 
specified in Section 15(b)(4)(B) of the 
Exchange Act,
115
or is enjoined from 
any action, conduct, or practice 
specified in Section 15(b)(4)(C) of the 
Exchange Act.
116
The Commission also 
can take these actions if the NRSRO or 
a person associated with the NRSRO has 
been convicted of any crime punishable 
by imprisonment for 1 or more years 
that is not described in Section 
15(b)(4)(B) of the Exchange Act
117
or a 
substantially equivalent crime in a 
foreign court of competent jurisdiction, 
or if a person associated with the 
NRSRO is subject to any order of the 
Commission barring or suspending the 
right of the person to be associated with 
an NRSRO.
118
Item 8 of Form NRSRO 
requires an applicant or NRSRO to 
answer whether the applicant or the 
NRSRO or any person within their 
credit rating organizations, is subject to 
these acts, convictions, or orders 
described in Section 15E(d) of the 
Exchange Act.
119
 
If an applicant answers ‘‘yes’’ to a 
question, the credit rating agency is 
required to provide additional 
information on a Disclosure Reporting 
Page (DRP) NRSRO as set forth in the 
instructions for Form NRSRO. An 
NRSRO will not be required to make the 
disclosure reporting pages publicly 
available pursuant to Section 15E(a)(3) 
of the Exchange Act
120
and Rule 17g– 
1(i) thereunder.
121
If an applicant 
answers ‘‘yes’’ to a question in Item 8, 
the Commission will use the disclosure 
reporting pages to evaluate whether the 
applicant’s registration could be granted 
in light of the disclosure. After 
registration, if an NRSRO answers ‘‘yes’’ 
to one of the questions, the Commission 
will use the disclosure reporting pages 
to evaluate pursuant to the process 
under Section 15E(d) of the Exchange 
Act whether it would be appropriate to 
issue an order censuring, placing 
limitations on the activities, functions, 
or operations of, suspending for a period 
not exceeding 12 months, or revoking 
the registration of the NRSRO.
122
 
Two commenters stated that Item 8, as 
proposed, was overly broad because, in 
asking about any person ‘‘associated’’ 
with the applicant and NRSRO, it 
reached employees in areas of a large 
conglomerate that performed functions 
wholly unrelated to credit rating 
services.
123
The Commission notes that 
its authority under Sections 
15E(a)(2)(C)(ii)(II)
124
and 15E(d)
125
of 
the Exchange Act can be triggered by 
legal judgments and orders, and 
regulatory findings involving persons 
‘‘associated’’ with the applicant and 
NRSRO. In considering these comments, 
the Commission evaluated when a 
disclosure would be more likely to 
trigger Commission action. The 
Commission concluded that it would 
involve disclosures relating to the credit 
rating agency and the persons directly 
involved in providing or supporting 
credit rating services. Therefore, to 
lessen the burden on applicants and 
NRSROs, the Commission believes it is 
appropriate to narrow the scope of the 
disclosure requirement to ‘‘persons 
within the credit rating agency,’’ which 
the instructions define as the credit 
rating agency, any credit rating affiliates 
of the credit rating agency identified in 
Item 3, and any partner, officer, director, 
branch manager, or employee of the 
credit rating agency or credit rating 
affiliates (or any person occupying a 
similar status or performing similar 
functions). 
One commenter requested that the 
Commission clarify that the disclosures 
in Item 8 do not include disclosures 
relating to accusations or arrests.
126
The 
Commission notes that the disclosures 
are triggered by the provisions of 
Section 15E(d) of the Exchange Act,
127
 
which refers to convictions (not arrests 
or accusations). A second commenter 
suggested that the disclosure item not 
include the name of the individual.
128
 
The Commission believes it has reduced 
this concern, in part, by narrowing the 
disclosure item to persons within the 
credit rating agency and by providing 
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33574 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
129
15 U.S.C. 78o–7(a)(3). 
130
An applicant can request that this information 
be kept confidential to the extent permitted by law. 
See 17 CFR 200.80 and 17 CFR 200.83. 
131
15 U.S.C. 78o–7(a)(1)(B)(i). 
132
The credit rating categories of a credit rating 
agency generally are represented by symbols, 
numbers or other designations that are used to 
distinguish the creditworthiness of the obligors, 
securities and money market instruments the credit 
rating agency rates. For example, some credit rating 
agencies use symbols such as AAA, AA, A, BBB, 
BB, B, CCC, and CC to distinguish the 
creditworthiness of corporate debt securities. AAA 
would be the highest rating and CC would be the 
lowest rating above the default or regulatory 
supervision of the issuer. 
133
See DBRS Letter. 
134
Section 15E(a)(1)(B)(x) of the Exchange Act 
provides that the Commission can require 
additional information that it finds is necessary or 
appropriate in the public interest or for the 
protection of investors (15 U.S.C. 78o–7(a)(1)(B)(x)). 
135
17 CFR 240.15c3–1(c)(2)(vi)(F). 
136
Id. 
137
See letter dated March 12, 2007 from Richard 
M. Whiting, Executive Director and General 
Counsel, Financial Services Roundtable (‘‘FSR 
Letter’’); letter dated March 12, 2007 from Herwig 
M. Langohr, Professor, INSEAD Business School, 
Patricia T. Langohr, Professor, ESSEC Business 
School (‘‘Langohr Letter’’); letter dated March 22, 
2007 from George P. Miller, Executive Director, 
American Securitization Forum (‘‘ASF Letter’’); 
letter dated March 16, 2007 from Makoto Utsumi, 
President & CEO, Ratings & Investment Information 
(‘‘JCR 2nd Letter’’); ICI Letter; Gross Letter; R&I 
Letter; MM Letter; White Letter; DBRS Letter; A.M. 
Best Letter; S&P Letter; AEI Letter; Moody’s Letter. 
138
See Gross Letter; ICI Letter; JCR 2nd Letter. 
139
See, e.g., R&I Letter; A.M Best Letter; S&P 
Letter; Moody’s Letter; ASF Letter. 
140
15 U.S.C. 78o–7(a)(1)(B)(ii). 
that the disclosure reporting pages are 
not required to be made publicly 
available pursuant to Section 15E(a)(3) 
of the Exchange Act
129
and Rule 17g– 
1(i).
130
The Commission believes the 
disclosure of the name of a person 
providing or supporting credit ratings 
services will be important as these 
persons may seek to associate with 
another NRSRO if they are terminated 
from or leave the reporting NRSRO. The 
Commission also notes that the events 
triggering an Item 8 disclosure generally 
are matters of public record (e.g., 
convictions, regulatory orders) and, 
consequently, there may be a reduced 
expectation of confidentiality. 
Otherwise, Item 8 is being adopted 
substantially as proposed. 
11. Exhibit 1 (Credit Ratings 
Performance Statistics) 
Section 15E(a)(1)(B)(i) of the 
Exchange Act requires that an 
application for registration as an NRSRO 
contain credit ratings performance 
measurement statistics over short-term, 
mid-term, and long-term periods (as 
applicable).
131
An applicant and 
NRSRO will provide this information in 
Exhibit 1 to Form NRSRO. The 
Exchange Act does not otherwise define 
or identify the particular credit rating 
performance statistics to be provided 
with the application. Credit rating 
agencies typically generate statistical 
reports showing historical default and 
downgrade rates within each credit 
rating notch or grade.
132
These types of 
statistics are important indicators of the 
performance of a credit rating agency in 
terms of its ability to assess the 
creditworthiness of issuers and obligors 
and, consequently, will be useful to 
users of credit ratings in evaluating an 
NRSRO. 
The instructions to Form NRSRO 
provide that an applicant and NRSRO 
must include in the Exhibit definitions 
of the credit ratings (i.e., an explanation 
of each category and notch) and 
explanations of the performance 
measurement statistics, including the 
metrics used to derive the statistics. One 
commenter requested that the 
Commission clarify the instruction with 
respect to explaining ‘‘the metrics used 
to derive the statistics.’’
133
The intent is 
that the NRSRO explain in general terms 
how it calculates the default and 
downgrade rates. The Commission 
believes that requiring this information 
is necessary or appropriate in the public 
interest or for the protection of investors 
because it will assist users of credit 
ratings in understanding how the 
measurements were derived and in 
making comparisons with the 
measurement statistics of other 
NRSROs.
134
 
The definitions of the categories and 
notches will assist the Commission in 
assessing whether the NRSRO’s credit 
ratings, as a practical matter, can be 
used for certain Commission rules. For 
example, paragraph(c)(2)(vi)(F) of 
Exchange Act Rule 15c3–1 specifies 
lower haircuts for debt securities that 
are rated in one of the ‘‘four highest 
rating categories’’ of at least two 
NRSROs.
135
This provision was 
designed based on the practice of many 
credit rating agencies to have at least 
eight categories for their debt securities 
with the top four commonly referred to 
as ‘‘investment grade.’’ If an NRSRO 
uses less than eight categories, the 
Commission will be required to evaluate 
whether, based on the NRSRO’s 
definitions, securities included in the 
top four categories would be suitable for 
the lower haircuts specified in 
paragraph(c)(2)(vi)(F) of Rule 15c3–1.
136
 
The Commission requested comment 
on whether the performance 
measurement statistics should use 
standardized inputs, time horizons, and 
metrics to allow for greater 
comparability. This request elicited 
numerous comments.
137
Three 
commenters supported the use of 
standardized measures because it would 
make it easier to compare NRSROs.
138
A 
number of commenters opposed the use 
of standardized measures for several 
reasons, including that such measures 
would be impractical because credit 
rating agencies use different 
methodologies to determine credit 
ratings and different definitions of 
default and that the use of such 
measures could interfere with the 
methodologies for determining credit 
ratings.
139
In light of the varying 
approaches cited in the comments, the 
Commission is not prepared to prescribe 
standard metrics at this time. The 
Commission intends to continue to 
consider this issue to determine the 
feasibility, as well as the potential 
benefits and limitations, of devising 
measurements that would allow reliable 
comparisons of performance between 
NRSROs. As adopted, the Exhibit 
requires NRSROs to describe how they 
derive their statistics in sufficient detail 
to allow users of credit ratings to 
understand the measures. This will 
provide users with some basis to 
compare different NRSROs even if the 
statistics are not derived from similar 
measures. 
The Commission requested comment 
on whether other performance 
measurement statistics would be 
appropriate as an alternative, or in 
addition, to historical default and 
downgrade rates. For example, the 
Commission requested comment on 
whether Exhibit 1 should require 
measurement of the performance of a 
given credit rating by comparing or 
mapping it to the market value of the 
rated security or to extreme declines in 
the market value of the security after the 
rating. Although the Commission is not 
taking action in this regard at this time, 
the Commission intends to study these 
issues and consider possible future 
action. 
For these reasons, Exhibit 1 to Form 
NRSRO and the instructions for the 
Exhibit are being adopted substantially 
as proposed. 
12. Exhibit 2 (Procedures and 
Methodologies for Determining Credit 
Ratings) 
Section 15E(a)(1)(B)(ii) of the 
Exchange Act requires that an 
application for registration as an NRSRO 
contain information regarding the 
procedures and methodologies used by 
the credit rating agency to determine 
credit ratings.
140
An applicant and 
NRSRO will provide this information in 
Exhibit 1 to Form NRSRO. The 
Exchange Act does not otherwise define 
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33575 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
141
See 15 U.S.C. 78a et seq. 
142
See particularly, Section 3(a)(61)(B) of the 
Exchange Act (15 U.S.C. 78c(a)(61)(B)). 
143
See Section 3(a)(61) of the Exchange Act 
defining the term ‘‘credit rating agency’’ (15 U.S.C. 
78c(a)(61)). 
144
See White Letter; DBRS Letter; A.M. Best 
Letter; Fitch Letter; Moody’s Letter. 
145
See, e.g., DBRS Letter; A.M. Best Letter; Fitch 
Letter; Moody’s Letter. 
146
Id. 
147
Id. 
148
See letter dated March 12, 2007 from James A. 
Kaitz, President & CEO, Association for Financial 
Professionals (‘‘AFP Letter’’) stating the importance 
of monitoring whether an NRSRO adheres to its 
stated procedures and methodologies for 
determining credit ratings. 
149
See A.M. Best Letter; Moody’s Letter. 
or identify the procedures and 
methodologies that must be provided 
under this section.
141
However, the 
definition of ‘‘credit rating agency’’ in 
Section 3(a)(61) of the Exchange Act 
provides that a ‘‘credit rating agency’’ is 
an entity that, among other things, 
‘‘employ[s] either a quantitative or 
qualitative model, or both, to determine 
credit ratings.’’
142
 
Credit rating agencies may establish 
procedures and methodologies for 
determining credit ratings in the 
following areas: The determination of 
whether to initiate a credit rating; the 
use of public and non-public sources of 
information to perform credit rating 
analysis, including information and 
analysis provided by third-party 
vendors; the use of quantitative and 
qualitative models and metrics to 
determine credit ratings; the interaction 
with the management of a rated obligor 
or issuer of rated securities; the 
establishment of the structure and 
voting process of committees that 
review or approve credit ratings; the 
notification of rated obligors or issuers 
of rated securities about credit rating 
decisions and for appeals of final or 
pending credit rating decisions; the 
monitoring, reviewing, and updating of 
credit ratings; and the withdrawal, or 
suspension of the maintenance, of a 
credit rating. 
The list identifies areas where a credit 
rating agency may establish procedures 
and methodologies for determining 
credit ratings. The applicability of 
certain areas to a particular credit rating 
agency will depend on whether it uses 
subjective qualitative analysis, purely 
quantitative models, or a combination of 
both.
143
Consequently, a credit rating 
agency might not establish a procedure 
or methodology in a given area if doing 
so would not be relevant to how the 
credit rating agency determines credit 
ratings. 
In addition, credit rating agencies that 
issue ‘‘unsolicited’’ credit ratings may 
establish procedures and methodologies 
in the areas described above that are 
unique for such ratings. Credit rating 
agencies that use a subscription fee 
based business model may only issue 
unsolicited ratings because that 
business model does not rely on fees 
charged issuers, obligors, and 
underwriters to determine specific 
credit ratings (issuers, obligors, and 
underwriters, however, may subscribe 
to receive the credit ratings of such 
credit rating agencies). The procedures 
and methodologies these credit rating 
agencies employ, in some respects, may 
be unique to this business model. 
Credit rating agencies that are paid by 
issuers, obligors, and underwriters to 
determine specific credit ratings 
sometimes also issue unsolicited credit 
ratings. This practice has led to 
concerns that unsolicited ratings may be 
used to coerce issuers and obligors into 
ultimately paying the credit rating 
agency to determine and maintain the 
credit rating. Consequently, credit rating 
agencies that rely on fees from issuers, 
obligors, and underwriters to determine 
specific credit ratings, but also issue 
unsolicited ratings, often establish 
procedures and methodologies for 
determining unsolicited credit ratings 
that are designed to address this 
concern and the fact that the issuer or 
obligor may not have participated in the 
determination of the credit rating (as is 
most often the case with a solicited 
credit rating). 
The Commission believes that the 
information about any procedures and 
methodologies established in the areas 
described above, including any with 
respect to unsolicited credit ratings, will 
be useful to users of credit ratings. The 
information will provide them with an 
understanding of the nature of the credit 
rating agency (i.e., a user of quantitative 
models, qualitative analysis, or a 
combination of both) and how the credit 
rating agency produces credit ratings. 
This will provide a basis for comparing 
NRSROs. 
Several commenters stated that the 
Exhibit should require that an applicant 
and NRSRO describe its procedures and 
methodologies rather than submit and 
disclose each actual procedure and 
methodology.
144
These commenters 
pointed out that large credit rating 
agencies that issue multiple types of 
credit ratings generally have volumes of 
detailed procedures that credit analysts 
must follow in the course of 
determining a credit rating.
145
They 
noted that disclosing all this 
information would be burdensome and 
could be difficult for users of credit 
ratings to parse.
146
They also noted that 
some of the procedures and 
methodologies may involve the use of 
proprietary models.
147
 
The Commission agrees with these 
commenters that disclosing all the 
procedures could be burdensome and 
could result in an overload of 
information that would be less helpful 
to users of credit ratings. Therefore, the 
Commission has modified the 
instructions to require that the Exhibit 
contain a description of the procedures 
and methodologies (not the submission 
and disclosure of each actual procedure 
and methodology). The instructions 
provide that the description must be 
sufficiently detailed to provide users of 
credit ratings with an understanding of 
the processes the applicant or NRSRO 
employs to determine credit ratings. 
As discussed below, rather than have 
a credit rating agency submit its 
procedures and methodologies in 
Exhibit 2, the Commission is adopting a 
requirement in Rule 17g–2 that an 
NRSRO must document them internally. 
Moving this requirement from Exhibit 2 
to the recordkeeping rule is designed to 
reduce the burden on NRSROs, while 
making these procedures and 
methodologies available to Commission 
examination staff. These records are 
important to the Commission’s 
oversight. For example, Rule 17g–6 
prohibits, among other things, an 
NRSRO from issuing or modifying or 
threatening to issue or modify a credit 
rating contrary to the NRSRO’s 
established procedures and 
methodologies. The Commission’s 
ability to enforce this prohibition will 
depend on the Commission staff being 
able to access an NRSRO’s documented 
procedures and methodologies.
148
 
Two commenters also suggested 
changes to the Commission’s 
description of an ‘‘unsolicited credit 
rating’’ in the proposed instructions to 
Form NRSRO as being a credit rating 
that is not requested by the issuer or 
underwriter of the rated securities or the 
rated obligor.
149
The commenters noted 
that issuers and obligors may consent to 
the issuance and participate in the 
determination of a credit rating even if 
they did not specifically request that the 
credit rating be issued. As discussed 
below, the Commission has eliminated 
the prohibition in Rule 17g–6 relating to 
unsolicited credit ratings, in part, 
because of difficulties with defining the 
term. Therefore, the Commission has 
removed the definition from the 
instructions to Exhibit 2. The 
Commission wants to gain a better 
understanding through its examination 
function of how credit rating agencies 
define ‘‘unsolicited credit ratings’’ and 
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33576 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
150
15 U.S.C. 78o–7(g)(1). 
151
15 U.S.C. 78a et seq. 
152
15 U.S.C. 78o–7(g)(2). 
153
15 U.S.C. 78o–7(g)(1). 
154
15 U.S.C. 78o–7(a)(1)(B)(iii). 
155
15 U.S.C. 78a et seq. 
156
15 U.S.C. 78o–7(g). 
157
See letter dated March 12, 2007 from Ayal 
Rosenthal (‘‘Rosenthal Letter’’); R&I Letter. 
158
See R&I Letter. 
159
See Rosenthal Letter. 
160
15 U.S.C. 78o–7(a)(3). 
161
15 U.S.C. 78o–7(a)(1)(B)(iv). 
162
Id. See also, 15 U.S.C. 78a et seq. 
163
See MM Letter. 
164
See Sections 15E(a)(2)(C) and 15E(d) of the 
Exchange Act (15 U.S.C. 78o–7(a)(2)(C) and (d)). 
165
See R&I Letter. 
166
15 U.S.C. 78o–7(j). 
167
See Sections 15E(a)(2)(C) and 15E(d) of the 
Exchange Act (15 U.S.C. 78o–7(a)(2)(C) and (d)). 
168
See Section 15E(a)(1)(B)(x) of the Exchange 
Act (15 U.S.C. 78o–7(a)(1)(B)(x)). 
169
15 U.S.C. 78o–7(g) and (h). 
170
Section 15E(j) of the Exchange Act (15 U.S.C. 
78o–7(j)). 
the practices they employ with respect 
to these ratings. 
For these reasons, the Commission is 
adopting Exhibit 2 and the instructions 
for the Exhibit with the modifications 
described above. 
13. Exhibit 3 (Procedures To Prevent the 
Misuse of Material Non-Public 
Information) 
Section 15E(g)(1) of the Exchange 
Act
150
requires an NRSRO to establish, 
maintain, and enforce written policies 
and procedures to prevent the misuse of 
material, nonpublic information in 
violation of the Exchange Act.
151
 
Section 15E(g)(2) of the Exchange Act 
provides that the Commission shall 
adopt rules requiring an NRSRO to 
establish specific policies and 
procedures to prevent the misuse of 
material, nonpublic information.
152
As 
discussed below, Rule 17g–4 requires an 
NRSRO’s policies and procedures 
established pursuant to Section 
15E(g)(1) of the Exchange Act
153
to 
include certain specific types of 
procedures. 
Section 15E(a)(1)(B)(iii) of the 
Exchange Act
154
requires that an 
application for registration as an NRSRO 
contain information regarding policies 
or procedures adopted and 
implemented by the credit rating agency 
to prevent the misuse of material, 
nonpublic information in violation of 
Exchange Act
155
provisions and rules. 
An applicant and NRSRO will provide 
this information in Exhibit 3 to Form 
NRSRO. Specifically, Exhibit 3 requires 
a copy of the policies and procedures to 
prevent the misuse of material, 
nonpublic information established 
pursuant to Section 15E(g) of the 
Exchange Act
156
and Rule 17g–4. 
The Commission received two 
comments on this Exhibit, as 
proposed.
157
One commenter stated that 
the policies and procedures should not 
have to be made publicly available 
because they may contain proprietary 
information and disclosing them could 
hinder their effectiveness.
158
The 
Commission agrees that disclosing 
certain components of these policies 
and procedures could make it easier for 
persons to circumvent them. Therefore, 
the Commission has modified the 
instructions to provide that the 
applicant or NRSRO is not required to 
submit in the Exhibit any specific 
information in the policies and 
procedures that is proprietary or would 
diminish the effectiveness of the 
policies and procedures if such 
information is disclosed. The other 
commenter stated that the procedures 
should be disclosed on the NRSRO’s 
Web site without further elaboration.
159
 
The Commission notes that Section 
15E(a)(3) of the Exchange Act
160
and 
Rule 17g–1 thereunder require an 
NRSRO to make its Form NRSRO and 
Exhibits 1 through 9 publicly available 
by posting them on its Web site, or 
through another comparable, readily 
accessible means. 
For these reasons, the Commission is 
adopting Exhibit 3 and the instructions 
for the Exhibit with the modifications 
described above. 
14. Exhibit 4 (Organizational 
Information) 
Section 15E(a)(1)(B)(iv) of the 
Exchange Act requires that an 
application for registration as an NRSRO 
contain information regarding the 
organizational structure of the 
applicant.
161
An applicant and NRSRO 
will provide this information in Exhibit 
4 to Form NRSRO. The Exchange Act 
does not otherwise define or identify the 
specific type of organizational 
information that must be provided 
under Section 15E(a)(1)(B)(iv) of the 
Exchange Act.
162
Companies typically 
create, as applicable, an organizational 
chart showing ultimate and sub-holding 
companies, subsidiaries, and material 
affiliates; an organizational chart 
showing divisions, departments, and 
business units within the entity; and an 
organizational chart showing the 
management structure and senior 
management reporting lines within the 
entity. Users of credit ratings will 
benefit from this information and, 
consequently, the Commission proposed 
that it be provided in this Exhibit. One 
commenter disagreed that users of credit 
ratings would find the information 
helpful in assessing or understanding 
the NRSRO.
163
For the reasons 
discussed below, the Commission 
continues to believe these three charts 
will be valuable to users of credit ratings 
and the Commission. 
The first required organizational chart 
will show the credit rating agency’s 
ultimate and sub-holding companies, 
subsidiaries, and material affiliates, if 
applicable. This chart will reveal where 
potential conflicts of interest relating to 
the business activities of related 
companies might arise. Also, the fact 
that a credit rating agency has a holding 
company that potentially could provide 
financial support will be relevant to the 
Commission’s evaluation of whether an 
applicant or NRSRO has adequate 
financial resources as required under 
the Exchange Act.
164
One commenter 
requested that the Commission define 
the term ‘‘material affiliate.’’
165
At 
present, the Commission believes it is 
more appropriate to rely on the 
judgment of the credit rating agency to 
define its material affiliates, given that 
the size and complexity of NRSROs 
could vary widely. 
The second organizational chart will 
show the credit rating agency’s 
divisions, departments, and business 
units, if applicable. This information 
will assist users of credit ratings and the 
Commission in understanding where 
potential conflicts of interest relating to 
ancillary business activities might arise. 
The third organizational chart will 
show the credit rating agency’s 
management structure and senior 
management reporting lines and include 
in the chart its designated compliance 
officer under Section 15E(j) of the 
Exchange Act.
166
The Commission will 
benefit from this chart as it will assist 
in evaluating whether an applicant and 
NRSRO has adequate managerial 
resources as required under the 
Exchange Act.
167
Users of credit ratings 
will be able to use this information to 
compare the managerial resources of 
different NRSROs. 
Including the compliance officer in 
the chart will assist the Commission and 
users of credit ratings in understanding 
the degree of the compliance officer’s 
independence from the business 
managers.
168
The compliance officer’s 
reporting lines are relevant in assessing 
the integrity of the credit rating process 
of a particular NRSRO, since the officer 
is responsible for administering the 
credit rating agency’s policies and 
procedures required by Sections 15E(g) 
and (h) of the Exchange Act
169
and for 
ensuring the NRSRO’s compliance with 
the securities laws and rules and 
regulations thereunder.
170
In carrying 
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33577 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
171
15 U.S.C. 78o–7(a)(1)(B)(v). 
172
Id. 
173
See letter dated March 12, 2007 from John 
Grout, Policy and Technical Director, The 
Association of Corporate Treasurers (‘‘AST Letter’’); 
Gross Letter; DBRS Letter; S&P Letter; Moody’s 
Letter; Langohr Letter; JCR 2nd Letter. 
174
A number of these commenters endorsed a 
requirement that the credit rating agency disclose 
whether it has adopted a code of conduct consistent 
with the principles contained in the report: 
Statement of Principles Regarding the Activities of 
Credit Rating Agencies, Technical Committee, 
International Organization of Securities 
Commissions (‘‘IOSCO’’) (September 25, 2003). See 
also Code of Conduct Fundamentals for Credit 
Rating Agencies, Technical Committee of IOSCO 
(December 2004). 
175
See Moody’s Letter. 
176
15 U.S.C. 78o–7(a)(1)(B)(v). 
177
Id. 
178
15 U.S.C. 78o–7(a)(1)(B)(vi). 
179
Id, see also 15 U.S.C. 78a et seq. 
180
15 U.S.C. 78o–7(h). 
181
See Section 15E(a)(2)(C) Exchange Act (15 
U.S.C. 78o–7(a)(2)(C)). 
182
See, e.g., DBRS Letter; S&P Letter. 
out these responsibilities, a compliance 
officer will be required to review 
activities overseen by senior business 
managers. The ability of the compliance 
officer to objectively review an area can 
be impacted by whether the officer 
reported to the senior manager 
responsible for the area. Thus, the 
relative independence of the 
compliance officer will be relevant in 
assessing the NRSRO’s ability to ensure 
compliance with its policies and 
procedures. 
For these reasons, the Commission is 
adopting Exhibit 4 and the instructions 
for the Exhibit substantially as 
proposed. 
15. Exhibit 5 (Code of Ethics) 
Section 15E(a)(1)(B)(v) of the 
Exchange Act requires that an 
application for registration as an NRSRO 
disclose whether the applicant has a 
code of ethics in effect or an explanation 
of why the applicant has not established 
a code of ethics.
171
Exhibit 5 of Form 
NRSRO elicits this information by 
requiring an applicant and NRSRO to 
attach a copy of any established code of 
ethics or an explanation of why it does 
not have a code of ethics. The 
Commission believes the requirement to 
include a copy of any established code 
of ethics in the Exhibit is necessary or 
appropriate in the public interest or for 
the protection of investors. A statement 
that an NRSRO has a code of ethics but 
no further disclosure would not be 
particularly useful to users of credit 
ratings. They would not be able to 
review the code of ethics and use it as 
a means of comparing different 
NRSROs. 
The Exchange Act does not otherwise 
define or identify the ‘‘code of ethics’’ 
that should be provided under Section 
15E(a)(1)(B)(v).
172
The Commission 
believes each credit rating agency must 
have the flexibility to establish a code 
of ethics appropriate for its business 
model and organizational structure and, 
consequently, the Exhibit does not 
prescribe any specific elements that 
must be in the code of ethics, if any, 
furnished in this Exhibit. 
The Commission received several 
comments on this Exhibit.
173
Most 
addressed whether the Exhibit also 
should require the credit rating agency 
to disclose whether it complies with 
international principles and codes of 
conduct related to credit rating 
agencies.
174
One commenter suggested 
that the Exhibit not refer to a code of 
‘‘ethics’’ but rather to a code of 
‘‘conduct.’’
175
Another commenter 
requested that the Exhibit not require 
the credit rating agency to ‘‘certify’’ that 
it is complying with international 
principles and codes of conduct because 
some principles permit an entity to 
comply or explain. 
The Commission reiterates that 
Exhibit 5 does not prescribe any 
requirements that must be in an 
NRSRO’s code of ethics and that Section 
15E(a)(1)(B)(v) of the Exchange Act does 
not require an NRSRO to have a code of 
ethics.
176
An applicant or NRSRO can 
submit a statement of why it does not 
have a code of ethics.
177
The 
Commission believes that the Exhibit 
should not require the inclusion of any 
particular type of code of conduct. It 
could be the case that the code of ethics 
provided by an applicant or NRSRO is 
part of a broader code of conduct. For 
the foregoing reasons, the Commission 
is adopting Exhibit 5 substantially as 
proposed. 
16. Exhibit 6 (Conflicts of Interest) 
Section 15E(a)(1)(B)(vi) of the 
Exchange Act requires that an 
application for registration as an NRSRO 
contain information regarding any 
conflict of interest relating to the 
issuance of credit ratings by the 
applicant and NRSRO.
178
The Exchange 
Act does not otherwise define or 
identify the types of conflicts of interest 
that should be disclosed under Section 
15E(a)(1)(B)(vi) of the Exchange Act.
179
 
Exhibit 6, as proposed, would have 
required an applicant and NRSRO to 
describe in general terms each type of 
conflict that arises, or may arise, from 
its business model and credit rating 
activities. Thus, if an NRSRO receives 
payment from issuers to rate their 
securities, the NRSRO would have been 
required to disclose that fact. It would 
not have had to make a disclosure each 
time it received payment from an issuer. 
The purpose of the proposed disclosure 
was to alert users of credit ratings to the 
NRSRO’s business model (subscriber 
fee-based, issuer fee-based, or a 
combination of both), and to potential 
conflicts that arise from the business 
model. 
The Commission continues to believe 
that disclosing the types of conflicts that 
arise from an NRSRO’s business model 
will assist the Commission in evaluating 
whether an applicant has sufficient 
financial and managerial resources to 
comply with the procedures for 
managing conflicts of interest required 
under Section 15E(h) of the Exchange 
Act,
180
given the types of conflicts of 
interest identified by the applicant.
181
 
The information also will be useful to 
users of credit ratings in assessing an 
NRSRO by, for example, comparing the 
types of conflicts disclosed by the entity 
in Exhibit 6 with the procedures for 
managing conflicts of interest disclosed 
by the entity in Exhibit 7. 
Exhibit 6 of Form NRSRO, as adopted, 
requires an applicant and NRSRO to 
provide a list describing in general 
terms the types of conflicts of interest 
that arise from its business activities. 
The instructions to the Exhibit have 
been modified to include a list of 10 
different generic conflicts of interest 
that may apply to a credit rating agency 
based on its business model and 
activities. These conflicts were included 
in the proposed instructions as 
examples of conflicts. These are the 
types of conflicts that generally arise 
from the business of issuing credit 
ratings depending on the business 
model of the credit rating agency. The 
instructions further provide that the 
credit rating agency can use the 
descriptions provided in the 
instructions to identify an applicable 
conflict of interest and is not required 
to provide any further information. 
Thus, the credit rating agency can 
review each item on the list and 
determine whether it describes an 
applicable conflict. This modification is 
intended to make it simpler for the 
credit rating agency to create the Exhibit 
since it may rely on the language in the 
instructions to identify a conflict. A 
credit rating agency can choose to 
provide its own description of the 
conflict or further explanation to one of 
the descriptions in the instructions. 
Several commenters raised concerns 
with the Commission’s identification as 
a potential conflict the fact that a 
subscriber may use the entity’s credit 
ratings for regulatory purposes.
182
They 
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33578 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
183
Id. 
184
See DBRS Letter. 
185
15 U.S.C. 78o–7(h)(2)(D). 
186
15 U.S.C. 77b(a)(11). 
187
15 U.S.C. 78o–7(h). 
188
See Section 15E(a)(1)(B)(x) of the Exchange 
Act (15 U.S.C. 78o–7(a)(1)(B)(x)). 
189
15 U.S.C. 78o–7(h). 
190
Id. 
191
See R&I Letter. 
argued that it would be impractical to 
determine how subscribers might be 
using their credit ratings.
183
The 
Commission did not intend to require 
NRSROs to actively monitor how their 
subscribers were using their credit 
ratings. Rather, the intent is to require 
NRSROs to disclose that subscribers, 
while they do not pay to have a credit 
rating issued, may have an interest in a 
specific credit rating. Therefore, the fact 
that they compensate the NRSRO could 
give rise to a conflict of interest. The 
instructions now describe the conflict as 
the fact that subscribers may use the 
credit ratings for regulatory purposes. 
This means that any credit rating agency 
that charges subscribers to access its 
credit ratings will be required to 
identify this conflict. The credit rating 
agency is not required to determine 
whether, or how, the subscribers are 
using the credit ratings to comply with 
statutes and regulations. The purpose of 
the disclosure is to alert users of credit 
ratings to the fact that the NRSRO’s 
business model includes charging 
subscribers to access its credit ratings 
and that a subscriber may have an 
interest in a particular credit rating. For 
similar reasons, the Commission 
eliminated a provision in the 
instructions requiring the identification 
of associated persons that use credit 
ratings for regulatory purposes as this 
would have required an applicant and 
NRSRO to monitor how another legal 
entity was using its credit ratings. 
A commenter noted that subscribers 
who manage investment portfolios also 
may have an interest in a particular 
credit rating.
184
For example, such a 
subscriber may be limited to investing 
in debt securities that have investment 
grade credit ratings and, consequently, 
would be required to sell, perhaps at a 
loss, a debt security that is downgraded 
below investment grade. The 
Commission believes that, similar to 
regulatory users, this type of subscriber 
could raise a potential conflict of 
interest. Therefore, this type of conflict 
is specifically identified in the 
instructions to the Exhibit. 
The instructions to the Exhibit, as 
proposed, also required an NRSRO to 
identify a person associated with the 
NRSRO that underwrites securities or 
money market instruments that are 
subject to a credit rating of the NRSRO. 
This type of conflict is identified in 
Section 15E(h)(2)(D) of the Exchange 
Act.
185
The concerns raised by 
commenters with respect to monitoring 
how subscribers use their credit ratings 
also apply in this context. For example, 
the provision, as proposed, could be 
interpreted to require an NRSRO to 
monitor whether any person associated 
with the NRSRO is an ‘‘underwriter’’ as 
that term is defined in Section 2(a)(11) 
of the Securities Act of 1933.
186
The 
Commission believes this could impose 
a very difficult compliance standard in 
that it would involve continuous 
monitoring of the securities trading 
activities of associated persons and legal 
judgments as to whether they were 
acting as ‘‘underwriters’’ at any given 
moment. 
At the same time, the Commission 
believes that where there is a potential 
affiliation between an NRSRO and a 
securities underwriter that it is 
necessary or appropriate in the public 
interest or for the protection of investors 
to require it to be disclosed in this 
Exhibit. Specifically, an affiliation 
between an NRSRO and a broker or 
dealer that is in the business of 
underwriting securities would raise 
concerns that the NRSRO might be 
influenced by the affiliation to issue 
favorable credit ratings for these 
securities. The Commission further 
believes that disclosing this type of 
affiliation does not present the concerns 
discussed above since most persons 
associated with an NRSRO likely are not 
broker-dealers in the business of 
underwriting securities. Therefore, the 
NRSRO should be able to identify those 
associated persons. Further, the 
requirement to identify these persons is 
based on being affiliated with such an 
underwriter that may underwrite 
securities rated by the NRSRO. Thus, 
the NRSRO will not need to actively 
monitor whether it currently has rated 
such securities and update the Exhibit 
each time this changes. Consequently, 
the requirement to identify persons 
associated with the NRSRO that 
underwrite securities rated by the 
NRSRO has been narrowed to a 
requirement to identify any person 
associated with the NRSRO that is a 
broker or dealer in the business of 
underwriting securities or money 
market instruments. 
Finally, the Commission notes that 
the Exhibit contains a catchall provision 
requiring the disclosure of any other 
material conflict of interest. 
Consequently, the additional conflict 
added to the instructions is expected to 
reduce the potential conflicts that must 
be disclosed under the catchall. With 
respect to the catchall, the instructions 
note that a ‘‘material’’ type of conflict 
will include one that the NRSRO has 
established specific policies and 
procedures to address. 
For these reasons, the Commission is 
adopting Exhibit 6 and the instructions 
for the Exhibit with the modifications 
described above. 
17. Exhibit 7 (Procedures To Manage 
Conflicts) 
An applicant or NRSRO will be 
required to furnish in Exhibit 7 a copy 
of the written policies and procedures it 
establishes, maintains, and enforces to 
address and manage conflicts of interest 
pursuant to Section 15E(h) of the 
Exchange Act.
187
Requiring inclusion of 
these policies and procedures in the 
Form is necessary or appropriate in the 
public interest or for the protection of 
investors.
188
First, their disclosure will 
assist the Commission in monitoring 
whether an NRSRO is complying with 
Section 15E(h) of the Exchange Act.
189
 
Second, their disclosure will assist the 
Commission in evaluating whether an 
applicant or NRSRO has adequate 
financial and managerial resources to 
materially comply with Section 15E(h) 
of the Exchange Act.
190
Third, their 
disclosure will allow users of credit 
ratings to compare an NRSRO’s policies 
and procedures for managing conflicts 
of interest with the types of conflicts 
disclosed in Exhibit 7. 
One commenter stated that these 
policies and procedures should not have 
to be made publicly available because 
they may contain proprietary 
information and disclosing them could 
hinder their effectiveness.
191
As with 
the Exhibit 3 policies and procedures, 
the Commission has modified the 
instructions for this Exhibit to provide 
that the applicant or NRSRO is not 
required to submit in the Exhibit any 
specific information in the policies and 
procedures that is proprietary or would 
diminish the effectiveness of the 
policies and procedures if such 
information were disclosed. 
For these reasons, the Commission is 
adopting Exhibit 7 and the instructions 
for the Exhibit with the modification 
described above. 
18. Exhibit 8 (Credit Analyst 
Information) 
Exhibit 8, as proposed, would have 
required an applicant and NRSRO to 
provide certain background information 
(e.g., employment history and 
education) with respect to each credit 
analyst and credit analyst supervisor. 
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33579 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
192
See Sections 15E(a)(2)(C) and (d) of the 
Exchange Act (15 U.S.C. 78o–7(a)(2)(C) and (d)). 
193
See letter dated May 3, 2007 from Barron H. 
Putnam, Ph.D, Owner and Advisor, LACE Financial 
Corporation (‘‘LACE Letter’’); JCR Letter; R&I Letter; 
DBRS Letter; A.M. Best Letter; Fitch Letter; S&P 
Letter; AEI Letter; Moody’s Letter. 
194
See, e.g., DBRS Letter; A.M. Best Letter; Fitch 
Letter; S&P Letter; Moody’s Letter. 
195
15 U.S.C. 78o–7(j). 
196
See Sections 15E(a)(2)(C) and (d) of the 
Exchange Act (15 U.S.C. 78o–7(a)(2)(C) and (d)). 
197
See, e.g., R&I Letter; DBRS Letter; A.M. Best 
Letter; Fitch Letter; S&P Letter; Moody’s Letter. 
198
An applicant can request that the Commission 
keep this information confidential to the extent 
permitted by law. See 17 CFR 200.80 and 17 CFR 
200.83. 
199
15 U.S.C. 78o–7(a)(1)(B)(viii). 
200
15 U.S.C. 78o–7(a)(3). 
201
An applicant can request that this information 
be kept confidential to the extent permitted by law. 
See 17 CFR 200.80 and 17 CFR 200.83. 
Consistent with its reasons for 
proposing this request, the Commission 
believes that the ability of a credit rating 
agency to assess the creditworthiness of 
an issuer and obligor depends on the 
competence of the personnel 
responsible for determining the entity’s 
credit ratings. Further, the Commission 
believes that information about the 
responsibilities, experience, and 
employment history of the credit 
analysts and supervisors is necessary or 
appropriate in the public interest or for 
the protection of investors. The 
information will assist users of credit 
ratings in assessing the competence of 
an NRSRO’s credit analysts and, 
thereby, provide a means for users to 
compare NRSROs. This information also 
will assist the Commission in evaluating 
whether the applicant has adequate 
managerial resources to consistently 
produce credit ratings with integrity and 
to materially comply with its 
procedures and methodologies.
192
 
The Commission received numerous 
comments on Exhibit 8 stating that the 
requirement to provide information on 
each credit analyst and credit analyst 
supervisor was unduly burdensome and 
unnecessary.
193
Several commenters 
suggested, as an alternative, that the 
Exhibit require general information 
about the education, qualifications, and 
number of the credit analysts and their 
supervisors.
194
After considering the 
comments and the potential burden 
associated with the proposed 
requirement, the Commission has 
modified the Exhibit to only require 
aggregate information about these 
employees. Consequently, the Exhibit, 
as adopted, requires the following 
information: 
•The total number of credit analysts. 
•The total number of credit analyst 
supervisors. 
•A general description of the 
minimum required qualifications of the 
credit analysts, including education 
level and work experience (if 
applicable, distinguish between junior, 
mid, and senior level credit analysts). 
•A general description of the 
minimum required qualifications of the 
credit analyst supervisors, including 
education level and work experience. 
The information about the total 
number of credit analysts and their 
supervisors will provide the 
Commission and users of credit ratings 
with an understanding of the human 
resources the credit rating agency 
devotes to determining credit ratings. 
This will assist the Commission in 
assessing the managerial resources of an 
applicant and NRSRO. The information 
about the qualifications of the credit 
analysts and their supervisors will be 
useful to users of credit ratings in 
assessing the competency of an NRSRO. 
The Commission believes this 
modification strikes an appropriate 
balance between reducing burden and 
requiring necessary information. 
Nonetheless, the Commission intends to 
monitor whether this aggregate 
approach to the credit analyst 
information is sufficient to apprise users 
of credit ratings of the qualifications of 
a given NRSRO’s credit analysts. 
For these reasons, the Commission is 
adopting Exhibit 8 and the instructions 
for the Exhibit with the modifications 
described above. 
19. Exhibit 9 (Designated Compliance 
Officer) 
As adopted, Exhibit 9 requires an 
applicant and NRSRO to provide certain 
background information on the entity’s 
designated compliance officer. Section 
15E(j) of the Exchange Act requires 
every NRSRO to designate an individual 
responsible for administering the 
policies and procedures of the credit 
rating agency to prevent the misuse of 
nonpublic information, to manage 
conflicts of interest, and to ensure 
compliance with the securities laws and 
the rules and regulations under those 
laws.
195
The ability of the compliance 
officer to carry out these statutorily 
mandated responsibilities will depend, 
in part, on the officer’s experience and 
qualifications. 
The Commission continues to believe 
that requiring information about the 
experience and employment history of 
the designated compliance officer is 
necessary or appropriate in the public 
interest or for the protection of 
investors. It will assist the Commission 
in evaluating whether the applicant has 
adequate managerial resources to 
consistently produce credit ratings with 
integrity and to materially comply with 
its procedures and methodologies.
196
It 
also will be useful to users of credit 
ratings because it would provide 
information regarding the resources an 
NRSRO devotes to ensuring, among 
other things, that credit ratings are 
determined in accordance with the 
procedures and methodologies the 
NRSRO makes public in Exhibit 2. 
The Exhibit, as proposed, also 
required information about the 
compliance personnel responsible for 
assisting the compliance officer. Several 
commenters objected to this aspect of 
the Exhibit as being unduly 
burdensome, unnecessary, and 
intrusive.
197
After considering the 
comments and the potential burden 
associated with the proposed 
requirement, the Commission has 
modified the Exhibit to eliminate the 
requirement to provide information 
about the persons that assist the 
compliance officer. As with the 
modifications to Exhibit 8, the 
Commission believes this modification 
to Exhibit 9 strikes an appropriate 
balance between reducing burden and 
requiring necessary information. 
Nonetheless, the Commission intends to 
monitor whether information about the 
designated compliance officer alone is 
sufficient to apprise users of credit 
ratings of how this statutorily required 
compliance function is being addressed 
by a given NRSRO. 
For these reasons, the Commission is 
adopting Exhibit 9 and the instructions 
for the Exhibit with the modifications 
described above. 
20. Exhibit 10 (List of Large Users of 
Credit Rating Services) 
Section 15E(a)(1)(B)(viii) of the 
Exchange Act requires that an 
application for registration as an NRSRO 
include, on a confidential basis,
198
a list 
of the 20 largest issuers and subscribers 
that use the credit rating services 
provided by the credit rating agency by 
amount of net revenue received by the 
credit rating agency in the fiscal year 
immediately preceding the date of 
submission of the application.
199
This 
information will be elicited in Exhibit 
10 to Form NRSRO. An NRSRO will not 
be required to make this information 
publicly available pursuant to Section 
15E(a)(3) of the Exchange Act
200
and 
Rule 17g–1(i) thereunder or update the 
Exhibit after registration.
201
An NRSRO 
will be required to update this 
information in an unaudited financial 
report that must be furnished to the 
Commission pursuant to Rule 17g–3. 
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33580 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
202
Id. 
203
See R&I Letter. 
204
See 15 U.S.C. 78o–7(a)(1)(B)(viii). 
205
Id. 
206
15 U.S.C. 78a et seq. 
207
See DBRS Letter. 
208
15 U.S.C. 78o–7(a)(1)(B)(viii). 
209
15 U.S.C. 78a et seq. 
210
15 U.S.C. 78o–7(a)(1)(B)(viii). 
211
See Gross Letter; Fitch Letter; S&P Letter; 
Moody’s Letter. 
212
See, e.g., Fitch Letter; S&P Letter; Moody’s 
Letter. 
213
See, e.g., Gross Letter; Moody’s Letter. 
214
See FSR Letter. 
Exhibit 10 also requires that an 
applicant disclose in the list large 
obligors (i.e., persons who are rated as 
an entity as opposed to having their 
securities rated) and underwriters if 
they are determined to have provided at 
least as much net revenue as the 20th 
largest issuer or subscriber. 
Consequently, a credit rating agency 
will be required to identify the 20 
largest issuers and subscribers as 
required by Section 15E(a)(1)(B)(viii) of 
the Exchange Act
202
and include in the 
list any obligor and underwriter that 
meets the above criteria. 
The Commission believes that 
including large obligors and 
underwriters in the list of the 20 largest 
issuers and subscribers is necessary or 
appropriate in the public interest or for 
the protection of investors. The 
information will help identify persons 
that could potentially have undue 
influence on an NRSRO given the 
amount of revenue the person provides 
the NRSRO. Obligors and securities 
underwriters may have as much of an 
interest in potentially influencing a 
credit rating as issuers and subscribers. 
One commenter suggested that the list 
of 20 large clients be determined from 
the pool of issuers, subscribers, obligors, 
and underwriters, rather than from only 
issuers and subscribers, with obligors or 
underwriters being added only to the 
extent they meet the above criteria.
203
In 
this case, the list would never exceed 20 
persons. The Commission notes, 
however, that the statute clearly refers 
to the 20 largest ‘‘issuers and 
subscribers’’ and not to obligors or 
underwriters.
204
Therefore, this 
provision of the Exhibit is being 
adopted as proposed. 
Section 15E(a)(1)(B)(viii) of the 
Exchange Act limits the persons 
required to be included in the list to 
users of the ‘‘credit rating services’’ of 
the applicant and NRSRO.
205
The 
Exchange Act
206
does not define the 
term ‘‘credit rating services.’’ The 
Commission proposed to interpret this 
term to mean any of the following: 
Rating an obligor (regardless of whether 
the obligor or any other person paid for 
the credit rating); rating an issuer’s 
securities or money market instruments 
(regardless of whether the issuer, 
underwriter, or any other person paid 
for the credit rating); and providing 
credit ratings to a subscriber. The intent 
of this proposed interpretation is to 
include—along with persons that pay 
for credit ratings and subscriptions— 
persons that are rated, or whose 
securities or money market instruments 
are rated, but that did not pay for the 
credit rating. Even though these persons 
may not have paid for the credit rating, 
they potentially could have undue 
influence on the credit rating agency if 
they provide substantial net revenue for 
other services or products. 
One commenter suggested expanding 
the definition to include providing 
credit ratings data and analysis to 
subscribers.
207
The Commission agrees 
that the meaning of ‘‘subscribers’’ 
should include persons who pay for 
credit ratings data and the analysis 
behind credit ratings because it may be 
difficult to separate these subscribers 
from other subscribers. Additionally, 
the Commission notes that credit rating 
agencies that make their credit ratings 
publicly available for free may offer 
subscriptions to receive feeds of the 
credit ratings or to receive more reports 
detailing the analysis behind the credit 
ratings. Consequently, the Commission 
is interpreting the term ‘‘credit rating 
services’’ to mean any of the following: 
Rating an obligor (regardless of whether 
the obligor or any other person paid for 
the credit rating); rating an issuer’s 
securities or money market instruments 
(regardless of whether the issuer, 
underwriter, or any other person paid 
for the credit rating); and providing 
credit ratings, credit ratings data, or 
credit ratings analysis to a subscriber. 
Section 15E(a)(1)(B)(viii) of the 
Exchange Act provides that the 
determination of the 20 largest issuers 
and subscribers is to be based on ‘‘net 
revenue’’ received from the issuer or 
subscriber.
208
The Exchange Act
209
 
does not define the term ‘‘net revenue.’’ 
The Commission proposed to interpret 
the term ‘‘net revenue’’ for the purposes 
of Section 15E(a)(1)(B)(viii) of the 
Exchange Act
210
to mean all fees, sales 
proceeds, commissions, and other 
revenue received by the applicant and 
its affiliates for any type of service or 
product, regardless of whether related to 
credit ratings, and net of any fees, sales 
proceeds, rebates, commissions, and 
other monies paid to the customer by 
the credit rating agency and its affiliates. 
The Commission received several 
comments suggesting that this 
interpretation be narrowed in certain 
ways to make it more practical to 
employ in determining the large users of 
a credit rating agency’s services.
211
 
Commenters stated that tracking 
revenues received by affiliates of the 
credit rating agency would be 
difficult.
212
Several commenters also 
stated that payables used to determine 
the ‘‘net revenue’’ should not include, 
for example, monies paid to vendors for 
ordinary course goods and services such 
as utility bills.
213
A commenter also 
sought clarification on how to realize 
revenues (e.g., cash receipts, accrued 
receivables) for purposes of this Exhibit. 
The Commission agrees with these 
commenters that the proposed 
definition of ‘‘net revenues’’ created 
some practical difficulties in 
determining the list required in Exhibit 
10. Therefore, the Commission is 
refining the interpretation to make the 
calculation of ‘‘net revenues’’ easier to 
compute but also more focused. 
Specifically, the Commission interprets 
‘‘net revenues’’ to mean revenue earned 
by the applicant or NRSRO for any type 
of service or product, regardless of 
whether related to credit rating services, 
and net of any rebates and allowances 
paid or owed to the person by the 
applicant or NRSRO. This definition 
excludes revenues received by affiliates 
that are not part of the credit rating 
organization. Also the intent in 
describing the netting payables as 
‘‘rebates or allowances’’ is to limit them 
to items that directly reduce a payable 
on the revenue side and to exclude 
unrelated payables (e.g., payables for 
utility bills). Finally, by using the term 
‘‘revenue earned’’ the Commission 
intends that the applicant and NRSRO 
apply its standard accounting 
convention for recognizing revenue. The 
Commission is incorporating these 
interpretations into the instructions for 
Exhibit 10 and, as discussed below, 
Rule 17g–3. 
The Commission notes that one 
commenter stated that the Exhibit 
requires public disclosure and that such 
disclosure is unnecessary because credit 
rating agencies establish barriers 
between credit analysts and the 
business units.
214
In response, the 
Commission notes that, as discussed 
above, an NRSRO is not required to 
make this information publicly available 
under Rule 17g–1(i). The information is 
intended to be used by the Commission 
to identify persons that could 
potentially exert undue influence on an 
NRSRO. The Commission further notes 
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33581 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
215
15 U.S.C. 78o–7(a)(1)(B)(viii). 
216
15 U.S.C. 78o–7(a)(3). 
217
An applicant can request that this information 
be kept confidential to the extent permitted by law. 
See 17 CFR 200.80 and 17 CFR 200.83. 
218
See 15 U.S.C. 78o–7(a)(2)(C). 
219
See 15 U.S.C. 78o–7(a)(2)(C)(ii)(I). 
220
An applicant must have been in the business 
of issuing credit ratings for the three years 
preceding the application to be eligible for 
registration with the Commission as an NRSRO. See 
Section 3(a)(62)(A) of the Exchange Act (15 U.S.C. 
78c(a)(62)(A)). 
221
See DBRS Letter; Fitch Letter; Moody’s Letter. 
222
See Letter dated March 12, 2007 from Sean 
Egan, President, Egan-Jones Ratings Company (‘‘EJR 
Letter’’); LACE Letter. 
223
15 U.S.C. 78o–7(a)(3). 
224
An applicant can request that this information 
be kept confidential to the extent permitted by law. 
See 17 CFR 200.80 and 17 CFR 200.83. 
225
See S&P Letter; AEI Letter. 
226
See 15 U.S.C. 78o–7(a)(2)(C). 
that Congress specifically prescribed 
that an applicant and NRSRO provide 
the information with respect to the 20 
largest issuers and subscribers in terms 
of net revenues.
215
 
For these reasons, the Commission is 
adopting Exhibit 10 and the instructions 
for the Exhibit with the modifications 
described above. 
21. Exhibit 11 (Audited Financial 
Statements) 
As adopted, Exhibit 11 requires an 
applicant to furnish audited financial 
statements for the past three fiscal or 
calendar years immediately preceding 
the date of the application. An NRSRO 
will not be required to make this 
information publicly available pursuant 
to Section 15E(a)(3) of the Exchange 
Act
216
and Rule 17g–1(i) thereunder or 
update the Exhibit after registration.
217
 
An NRSRO will be required to provide 
audited financial statements to the 
Commission annually under Rule 17g– 
3. 
The Commission continues to believe 
this financial information is necessary 
or appropriate in the public interest or 
for the protection of investors because it 
will assist the Commission in making 
the finding required by Section 
15E(a)(2)(C) of the Exchange Act.
218
 
This section directs the Commission to 
grant a credit rating agency’s application 
for registration as an NRSRO unless, 
among other things, the Commission 
finds that the applicant does not have 
adequate financial and managerial 
resources to consistently issue ratings 
with integrity and to materially comply 
with its procedures and methodologies 
disclosed pursuant to Section 15E(1)(B) 
of the Exchange Act and established 
pursuant to the Sections 15E(g), (h), (i) 
and (j) of the Exchange Act.
219
The 
financial statements will provide the 
Commission with information as to the 
applicant’s net worth and income, 
which will assist the Commission in 
determining whether the applicant has 
sufficient financial resources. Financial 
statements for three years will assist the 
Commission in reviewing whether the 
applicant has been in the business of 
issuing credit ratings for the three years 
immediately preceding the date of its 
application for registration.
220
The 
information also will alert the 
Commission to a significant downward 
trend in the applicant’s financial 
condition, which could be relevant to 
whether it has adequate financial 
resources. 
The requirement that the financial 
statements be audited will provide the 
Commission with independent 
verification of the information in the 
statements. However, the Commission 
anticipates that some applicants may 
not have been audited in the past. 
Consequently, the instructions to the 
Exhibit provide that in this case the 
applicant may provide an audited 
financial statement for the fiscal year 
immediately preceding the date of the 
application. The prior years can be 
covered by unaudited financial 
statements. The instructions also 
provide that the applicant must attach a 
statement by a duly authorized person 
that the unaudited financial statements 
present fairly, in all material respects, 
the financial condition, results of 
operations, and the cash flows of the 
applicant. This will provide a level of 
assurance that the information in the 
financial statements has been reviewed 
and verified by the applicant. 
Finally, the Commission anticipates 
that some applicants will be 
subsidiaries of holding companies. In 
this case, the applicant may provide 
audited consolidated financial 
statements of the parent company. 
Consolidated financial statements will 
provide information on the financial 
strength of the credit rating agency’s 
parent. The parent is in a position to 
support the credit rating agency and, 
consequently, its financial condition 
may be indicative of the financial 
resources of the credit rating agency. 
Further, the information on revenues 
elicited in Exhibit 12 will augment the 
financial statements by providing 
information specific to the credit rating 
agency. 
Several commenters sought 
clarification on whether the financial 
statements provided in Exhibit 11 must 
be prepared in accordance with 
Regulation S–X.
221
The Commission’s 
intent with respect to Exhibit 11 is that 
applicants, to the extent possible, will 
be able to provide financial statements 
that have already been prepared for 
other reasons. 
Two commenters also requested that 
the proposed rule be modified to permit 
an NRSRO to furnish a tax return 
prepared by an accountant in lieu of 
audited financial statements.
222
The 
Commission believes a tax return will 
not provide sufficient detail about an 
applicant’s financial condition. For 
example, it would not provide the 
information that can be derived from a 
balance sheet, an income statement and 
statement of cash flows, and a statement 
of changes in ownership equity. 
Moreover, as indicated above, the 
Commission believes it is important to 
have an auditor provide independent 
verification that all this information is 
presented fairly, in all material respects. 
For these reasons, the Commission is 
adopting Exhibit 11 and the instructions 
for the Exhibit with the modifications 
described above. 
22. Exhibit 12 (Revenues) 
As adopted, Exhibit 12 requires an 
applicant to provide information as to 
the amount of revenue generated from 
various credit rating services and a 
separate computation of total revenue 
from all other services. The instructions 
provide that this information be for the 
most recently completed fiscal or 
calendar year and is not required to be 
audited. An NRSRO will not be required 
to make this information publicly 
available pursuant to Section 15E(a)(3) 
of the Exchange Act
223
and Rule 17g– 
1(i) thereunder or update the Exhibit 
after registration.
224
An NRSRO will be 
required to update this information in 
an unaudited financial report furnished 
to the Commission under Rule 17g–3. 
Two commenters stated that the 
Exhibit should be eliminated because it 
was unnecessary given the submission 
of financial statements in Exhibit 11.
225
 
The Commission continues to believe 
that this information is necessary or 
appropriate in the public interest or for 
the protection of investors. It will assist 
the Commission in making the finding 
with respect to adequate financial 
resources required by Section 
15E(a)(2)(C) of the Exchange Act
226
by 
providing detail as to the revenues 
generated by different types of credit 
rating services. Financial statements 
alone may not separate out or itemize 
revenues earned from credit rating 
services as opposed to other services. 
For example, an applicant that has 
earned less revenue from credit rating 
services than its total credit analyst 
compensation may not be able to 
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33582 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
227
See Moody’s Letter. 
228
See Fitch Letter. 
229
See Gross Letter; R&I Letter. 
230
See Gross Letter. 
231
See R&I Letter. 
232
15 U.S.C. 78o–7(a)(3). 
233
An applicant can request that this information 
be kept confidential to the extent permitted by law. 
See 17 CFR 200.80 and 17 CFR 200.83. 
234
See AEI Letter. 
235
See 15 U.S.C. 78o–7(a)(2)(C). 
236
See Section 5 of the Rating Agency Act and 
15 U.S.C 78q(a)(1). 
237
See 15 U.S.C 78q(b)(1). 
238
See, e.g., FSR Letter; AEI Letter. 
239
Section 15E(c)(2) of the Exchange Act (15 
U.S.C. 78o–7(c)(2)) requires that the Commission’s 
rules under the Rating Agency Act be narrowly 
tailored. 
240
See, e.g., 17 CFR 240.17a–3 and 17a–4 (broker- 
dealers); 17 CFR 275.204–2 (investment advisers); 
17 CFR 240.17Ad–6 and 17Ad–7 (transfer agents). 
241
See Electronic Storage of Broker-Dealer 
Records, Exchange Act Release No. 47806 (May 7, 
2003), 68 FR 25281 (May 12, 2003); see also 
Commission order in Matter of Deutsche Bank 
Securities, Inc. et al., Exchange Act Release No. 
46937 (December 3, 2002) (‘‘The recordkeeping 
rules are ‘a keystone of the surveillance of broker- 
dealers’’’) (citations omitted); Commission order in 
Matter of J.P. Morgan Securities Inc., Exchange Act 
Release No. 51200 (February 14, 2005); Electronic 
Recordkeeping by Investment Companies and 
Investment Advisers, Investment Company Act 
Release No. 24991 (May 24, 2001) (‘‘The 
recordkeeping requirements are a key part of the 
Commission’s regulatory program for funds and 
advisers, as they allow [the Commission] to monitor 
fund and adviser operations, and to evaluate their 
compliance with federal securities laws.’’). 
242
15 U.S.C. 78o–7. 
continue to support this business line at 
levels consistent with the statutory 
mandate. 
One commenter stated that the 
determination of the revenue amounts 
should be made using a ‘‘net revenue’’ 
definition that permits flexibility in 
terms of how revenue is recognized.
227
 
As with Exhibit 10 and Rule 17g–3, the 
Commission intends that the credit 
rating agency apply its standard 
accounting convention for recognizing 
revenue as this will make revenue 
calculations consistent across the 
various financial reports required in 
Form NRSRO and Rule 17g–3. 
Another commenter, with respect to 
Rule 17g–3, requested the elimination of 
a requirement to separately report 
revenues from determining private 
credit ratings (i.e., credit ratings that are 
not made readily accessible to the 
public).
228
The commenter stated that it 
would be difficult to separate private 
ratings revenue from public ratings 
revenue. In an effort to reduce burden, 
the Commission has eliminated the 
requirement to separately itemize 
revenue from private ratings. The 
private ratings revenue must be 
included in the revenue item for 
determining or maintaining credit 
ratings. 
Two commenters disagreed on the 
information that should be included in 
the revenue item relating to 
subscribers.
229
One commenter stated 
that the item should include revenue 
from subscribers to an applicant’s credit 
analysis in addition to credit ratings 
subscribers.
230
The other commenter 
stated that the item should only apply 
to credit ratings subscribers.
231
The 
Commission intends the Exhibit to 
include both types of subscribers. The 
Commission believes separating out 
revenues from these two types of 
subscribers could be difficult in that 
some credit rating agencies may offer 
subscriptions that include access to 
credit ratings and credit analysis. 
Furthermore, some credit rating 
agencies make their credit ratings 
available for free but charge subscribers 
for credit ratings data and credit 
analysis. The Commission believes there 
is no reason to distinguish between a 
subscriber to credit ratings and a 
subscriber to credit ratings data and 
analysis in this context. 
For these reasons, the Commission is 
adopting Exhibit 12 and the instructions 
for the Exhibit with the modifications 
described above. 
23. Exhibit 13 (Analyst Compensation) 
As adopted, Exhibit 13 will require an 
applicant to disclose to the Commission 
the amount of total aggregate annual 
compensation paid to its credit analysts 
and the median compensation. The 
instructions provide that the 
information must be for the most 
recently completed fiscal or calendar 
year and will not have to be audited. An 
NRSRO will not be required to make 
this information publicly available 
pursuant to Section 15E(a)(3) of the 
Exchange Act
232
and Rule 17g–1(i) 
thereunder or update the Exhibit after 
registration.
233
An NRSRO will be 
required to update this information in a 
financial report furnished to the 
Commission under Rule 17g–3. 
One commenter stated that the 
information may not be necessary given 
the different sizes and business models 
of credit rating agencies.
234
The 
Commission continues to believe this 
compensation information is necessary 
or appropriate in the public interest or 
for the protection of investors. It will 
assist the Commission in making the 
finding with respect to adequate 
financial resources required by Section 
15E(a)(2)(C) of the Exchange Act.
235
 
Similar to the revenue information, this 
information will augment the financial 
statements that are required under 
Exhibit 11 because it provides detail on 
the expenses necessary to retain the 
credit rating agency’s credit analysts. 
The Commission will compare this 
information with the revenues earned 
by the applicant for credit ratings 
services to evaluate an applicant’s 
financial condition. 
For these reasons, the Commission is 
adopting Exhibit 13 and the instructions 
for the Exhibit with the modifications 
described above. 
C. Rule 17g–2—Recordkeeping 
The Rating Agency Act amended 
Section 17(a)(1) of the Exchange Act to 
add NRSROs to the list of entities 
required to make and keep such records, 
and make and disseminate such reports, 
as the Commission prescribes by rule as 
necessary or appropriate in the public 
interest, for the protection of investors, 
or otherwise in furtherance of the 
Exchange Act.
236
The inclusion of 
NRSROs on the list also provides the 
Commission with authority under 
Section 17(b)(1) of the Exchange Act to 
examine all the records of an NRSRO.
237
 
The Commission is implementing this 
rulemaking authority through Rule 17g– 
2. This rule requires an NRSRO to make 
and retain certain records relating to its 
business and to retain certain other 
business records made in the normal 
course of business operations. The rule 
also prescribes the time periods and 
manner in which all these records will 
be required to be retained. 
Several commenters stated that Rule 
17g–2 as proposed was unduly 
burdensome or onerous.
238
The 
Commission believes the rule is 
necessary or appropriate in the public 
interest or for the protection of investors 
and narrowly tailored to achieve its 
purpose.
239
The Commission designed 
the rule based on its experience with 
recordkeeping rules for other regulated 
entities.
240
These other books and 
records rules have proven integral to the 
Commission’s investor protection 
function because the preserved records 
are the primary means of monitoring 
compliance with applicable securities 
laws.
241
Rule 17g–2 is designed to 
ensure that an NRSRO makes and 
retains records that will assist the 
Commission in monitoring, through its 
examination authority, whether an 
NRSRO is complying with the 
provisions of Section 15E of the 
Exchange Act
242
and the rules 
thereunder. For example, examiners 
will use the records to review whether 
an NRSRO is following its disclosed 
procedures and methodologies for 
determining credit ratings, its disclosed 
policies and procedures for preventing 
the misuse of material nonpublic 
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33583 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
243
See DBRS Letter; Langohr Letter. 
244
See DBRS Letter. 
245
15 U.S.C. 78o–7(c)(2). 
246
15 U.S.C. 78o–7. 
247
15 U.S.C. 78o–7(a)(1)(B)(ii) and 15 U.S.C. 78o– 
7(a)(3). 
248
See Langohr Letter. 
249
15 U.S.C. 78o–7(c)(2). 
250
15 U.S.C. 78o–7(f). 
251
See Moody’s Letter. 
252
15 U.S.C. 78o–7. 
253
See, e.g., In the Matter of SG Cowens 
Securities Corporation, Exchange Act Release No. 
48335 (August 14, 2003) (‘‘Implicit in the 
Commission’s recordkeeping rules is the 
requirement that information in a required book or 
record be accurate.’’). 
254
See 15 U.S.C. 78q(a)(1). 
information, and managing conflicts of 
interest, and whether it is complying 
with Rules 17g–4, 17g–5, and 17g–6 
discussed below. 
Nonetheless, the Commission is 
adopting Rule 17g–2 with modifications 
to address issues commenters raised, to 
reduce burden, and to enhance 
recordkeeping requirements with 
respect to the issuance of credit ratings 
on certain asset-backed and mortgage- 
backed securities transactions. As a 
preliminary matter, the Commission 
notes that several commenters raised 
concerns with how examiners would 
use the books and records required 
under Rule 17g–2.
243
One commenter 
requested that the Commission clarify 
that examiners would not use their 
inspection of records to second-guess 
credit rating opinions.
244
The 
Commission does not intend that Rule 
17g–2 be used as a means to substitute 
the Commission’s judgment for that of 
an NRSRO with respect to the NRSRO’s 
credit rating opinion. 
Further, Section 15E(c)(2) of the 
Exchange Act provides that the 
Commission may not ‘‘regulate the 
substance of credit ratings or the 
procedures and methodologies by which 
an NRSRO determines credit 
ratings.’’
245
The purpose of the 
recordkeeping requirements in Rule 
17g–2 is to allow examiners to review 
whether an NRSRO is following its 
stated procedures and methodologies 
and otherwise complying with Section 
15E of the Exchange Act
246
and the 
rules thereunder. It is important that 
users of credit ratings be given the 
opportunity to understand how a 
specific NRSRO determines its credit 
ratings. Consequently, Sections 
15E(a)(1)(B)(ii) and 15E(a)(3) of the 
Exchange Act require an NRSRO to 
make this information publicly 
available.
247
The Commission’s role is 
to examine whether an NRSRO has 
accurately disclosed this information so 
that users of credit ratings can assess its 
credit rating procedures and 
methodologies. The Commission’s role 
also is to examine whether an NRSRO 
adheres to its credit rating procedures 
and methodologies. 
A second commenter raised the 
concern that using records to examine 
whether an NRSRO has accurately 
disclosed information about how it 
determines credit ratings would result 
in the Commission’s tacit endorsement 
of the credit ratings.
248
The Commission 
reiterates that the purpose of examining 
these records is to review whether an 
NRSRO has accurately disclosed 
information about, and adheres to, the 
procedures and methodologies it uses to 
determine credit ratings. As noted 
above, the Commission cannot ‘‘regulate 
the substance of credit ratings or the 
procedures and methodologies by which 
an NRSRO determines credit 
ratings.’’
249
Users of credit ratings 
should not view the fact that the 
Commission has examined whether an 
NRSRO has accurately disclosed 
information about, and adheres to, its 
credit rating procedures and 
methodologies as an endorsement of the 
credit ratings or the procedures and 
methodologies used to determine the 
credit ratings. Users of credit ratings 
must evaluate a given NRSRO’s 
procedures and methodologies for 
themselves and reach their own 
conclusions as to the quality of the 
procedures and methodologies. The 
Commission’s role is limited to 
reviewing whether the information 
disclosed by an NRSRO is consistent 
with how the NRSRO conducts its credit 
rating activities. The Commission also 
notes that Section 15E(f) of the 
Exchange Act bars an NRSRO from 
representing that it has been 
‘‘designated, sponsored, recommended, 
or approved, or that [its] abilities or 
qualifications. *  *  * have in any 
respect been passed upon, by the United 
States, or any agency, officer, or 
employee thereof.’’
250
 
Finally, another commenter stated 
that the recordkeeping rule should be 
principles based and permit an NRSRO 
to implement a recordkeeping system 
appropriate for its organizational 
structure and business model.
251
The 
Commission does not intend that Rule 
17g–2 require a specific form of record 
or recordkeeping system. An NRSRO 
will have the flexibility to implement a 
recordkeeping system that captures the 
records required in Rule 17g–2 in a 
manner that conforms to the NRSRO’s 
internal processes. At the same time, as 
noted above, Rule 17g–2 is designed to 
ensure that an NRSRO makes and 
retains records that will assist the 
Commission in monitoring, through its 
examination authority, whether an 
NRSRO is complying with the 
provisions of Section 15E of the 
Exchange Act
252
and the rules 
thereunder. The Commission believes 
that a principles based recordkeeping 
rule would be difficult to administer. It 
could lead to inconsistent 
recordkeeping by NRSROs and also 
create uncertainty for NRSROs and 
Commission examiners as to the records 
that must be retained. The Commission 
believes the better approach is to 
prescribe certain records that must be 
made and retained at a minimum to 
provide for consistent recordkeeping 
requirements across all NRSROs. 
1. Paragraph (a) of Rule 17g–2 
As adopted, paragraph (a) of Rule 
17g–2 requires an NRSRO to make and 
retain certain books and records. The 
records required under paragraph (a) 
must be complete and current and not 
contain inaccurate information.
253
With 
respect to the specific records required 
under paragraph (a), the Commission 
has made several modifications in light 
of comments that will ease the 
recordkeeping burden. The Commission 
believes the records required in this 
paragraph are necessary or appropriate 
in the public interest, for the protection 
of investors, or otherwise in furtherance 
of the Exchange Act. As described 
below, they will assist the Commission 
in monitoring whether an NRSRO is 
complying with Section 15E of the 
Exchange Act and the rules 
thereunder.
254
 
a. Paragraph (a)(1) of Rule 17g–2 
As adopted, paragraph (a)(1) of Rule 
17g–2 requires an NRSRO to make 
records of original entry into an 
NRSRO’s accounting system, and 
records reflecting entries to and 
balances in all general ledger accounts 
of the NRSRO for each fiscal year. Rule 
17g–2, as proposed, contained a similar 
provision. The Commission believes 
these fundamental business records are 
necessary for the preparation of the 
financial reports required to be prepared 
under Rule 17g–3. In addition, they will 
assist Commission examiners in 
reviewing the financial resources of an 
NRSRO and its revenue sources. The 
latter information will be important in 
identifying customers that provide an 
NRSRO with significant revenues and, 
consequently, could be in a position to 
exercise undue influence over a credit 
rating decision. 
One commenter stated that, while it 
already maintains these types of 
records, the requirement to make them 
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33584 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
255
See Fitch Letter. 
256
Several commenters requested that the 
Commission eliminate the requirement to make a 
record identifying the procedures and 
methodologies used to determine the credit rating. 
See DBRS Letter; Fitch Letter; Moody’s Letter; 
Langohr Letter. These commenters argued, among 
other things, that the requirement interfered with 
the process of determining credit ratings, was not 
consistent with normal practice, and was 
burdensome. Id. 
257
See Fitch Letter. 
should be eliminated because the 
information in the Rule 17g–3 financial 
reports will be sufficient.
255
The 
Commission believes it is important that 
an NRSRO make and retain these 
records. They will provide Commission 
examiners with the source information 
that feeds into the Rule 17g–3 financial 
reports. Further, those financial reports 
are a snap shot of the NRSRO’s financial 
condition as of its fiscal year end. These 
records will provide examiners with 
current financial information as of the 
time of their exam. For these reasons, 
the Commission is adopting paragraph 
(a)(1) of Rule 17g–2 substantially as 
proposed. 
b. Paragraph (a)(2) of Rule 17g–2 
As adopted, paragraph (a)(2) of Rule 
17g–2 requires an NRSRO to make the 
following records with respect to each 
of the NRSRO’s current credit ratings, as 
applicable: The identity of any credit 
analyst(s) that participated in the 
determination of the credit rating; the 
identity of the person(s) who approved 
the credit rating before it was issued; 
whether the credit rating was solicited 
or unsolicited; and the date the credit 
rating action was taken. This 
information will assist the Commission 
in monitoring whether the NRSRO is 
following its procedures and 
methodologies for determining credit 
ratings and whether the NRSRO is 
complying with procedures designed to 
prevent the misuse of material 
nonpublic information. For example, if 
questions arise about a particular credit 
rating, the record will provide the 
Commission staff with the names of the 
credit analysts that participated in 
determining the credit rating and the 
persons that approved the credit rating. 
This will identify for the Commission 
staff the persons with the best 
information as to how the credit rating 
was determined. 
Rule 17g–2, as proposed, also would 
have required a record identifying the 
procedures and methodologies used to 
determine the credit rating and the 
method by which the credit rating was 
made publicly available. The 
Commission has eliminated these 
requirements to reduce recordkeeping 
burden and because Commission 
examiners can ascertain the information 
through a less burdensome 
requirement.
256
Under paragraph (a)(6) 
of Rule 17g–2, an NRSRO is required to 
separately document the procedures and 
methodologies it uses to determine 
credit ratings. The Commission 
examination staff will be able to refer to 
these records to understand how 
specific types of credit ratings are 
determined by the NRSRO. Therefore, 
examiners will not need an individual 
record identifying the methodology 
used to determine each credit rating. For 
similar reasons, the Commission has 
eliminated the proposed requirement to 
make a record of the method by which 
each credit rating was made readily 
accessible. An NRSRO must disclose in 
Form NRSRO how it makes its credit 
ratings readily accessible. Commission 
examiners can review this disclosure to 
understand how a specific credit rating 
was made readily accessible. 
The Commission notes, however, that 
if an NRSRO materially diverges from 
its stated methodology for determining 
a specific type of credit rating or for 
making credit ratings readily accessible, 
it may violate the requirements to 
disclose in Form NRSRO information 
about credit ratings methodologies and 
how credit ratings are made readily 
accessible and, in the former case, the 
requirement in paragraph (a)(6) to 
document the procedures and 
methodologies for determining credit 
ratings. Consequently, an NRSRO must 
include in its documented procedures 
any alternative methodologies for 
determining a specific type of credit 
rating and when such alternatives may 
be used by a credit analyst. 
Finally, consistent with changes to 
Form NRSRO discussed above, the final 
rule changes the requirement proposed 
in Rule 17g–2(a)(2) to identify the credit 
analysts ‘‘who determined’’ the credit 
rating to credit analysts ‘‘who 
participated in determining’’ the credit 
rating. In all other respects, the 
Commission is adopting paragraph (a)(2) 
of Rule 17g–2 substantially as proposed. 
c. Paragraph (a)(3) of Rule 17g–2 
As adopted, paragraph (a)(3) of Rule 
17g–2 requires an NRSRO to make an 
account record for each person (for 
example, an obligor, issuer, underwriter, 
or other user) that has paid for the 
issuance or maintenance of a credit 
rating indicating the identity and 
address of the person and the credit 
ratings determined or maintained for the 
person. This information will assist the 
Commission in monitoring whether the 
NRSRO is complying with procedures 
for addressing and managing conflicts of 
interest as well as complying with the 
requirements in Rule 17g–5 prohibiting 
certain conflicts of interest. For 
example, examiners can use this record 
to identify persons that have paid the 
NRSRO for a significant number of 
credit ratings (e.g., a regular sponsor of 
structured products). These persons, 
given the large volume of business they 
provide the NRSRO, may be in a 
position to exert inappropriate influence 
on the NRSRO to issue favorable credit 
ratings. 
One commenter pointed out that by 
using the term ‘‘solicits’’ the rule could 
be construed to require a record of each 
person that asks the NRSRO to issue a 
credit rating, regardless of whether the 
person ultimately pays for the credit 
rating or the NRSRO ultimately issues 
the credit rating.
257
The Commission 
agrees that the rule text, as proposed, 
contained a degree of ambiguity. 
Further, the Commission believes it 
could be difficult and unduly 
burdensome to create a record of each 
person who approaches the NRSRO 
about having a credit rating issued. For 
example, some contacts between the 
NRSRO and a person may never 
progress beyond initial inquiries. For 
these reasons, the Commission modified 
the rule to clarify that the requirement 
is limited to persons who pay for credit 
ratings that are issued publicly. 
The Commission also modified 
paragraph (a)(3) of Rule 17g–2 by 
eliminating the requirement to provide 
the customer’s ‘‘principal’’ address. The 
term ‘‘principal address’’ has a legal 
meaning in some contexts and, 
accordingly, could unduly complicate 
the process of creating the record. The 
rule now requires the customer’s 
‘‘address’’ without regard to whether it 
is the principal address. In all other 
respects, the Commission is adopting 
paragraph (a)(3) of Rule 17g–2 
substantially as proposed. 
d. Paragraph (a)(4) of Rule 17g–2 
As adopted, paragraph (a)(4) of Rule 
17g–2 requires an NRSRO to make an 
account record for each subscriber to the 
credit ratings and/or credit analysis 
reports of the NRSRO indicating the 
identity and address of the subscriber. 
This information will assist the 
Commission in monitoring whether the 
NRSRO was complying with its 
procedures for addressing and managing 
conflicts of interest and the handling of 
material, nonpublic information as well 
as complying with the requirements in 
Rule 17g–5 prohibiting certain conflicts 
of interest. The Commission did not 
receive any comments on this provision. 
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33585 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
258
See Fitch Letter. 
259
See AFP Letter. 
260
As discussed below, several commenters 
sought clarification as to whether the record 
retention requirements in paragraph (b) of Rule 
17g–2, as proposed, would apply to drafts of 
documents. The Commission did not intend these 
requirements to apply to drafts and has added 
language the introductory text of paragraph (b) of 
Rule 17g-2 excluding drafts of documents. 
For the reasons discussed above with 
respect to paragraph (a)(3) of Rule 17g– 
2, the Commission has modified the 
provision to eliminate the reference to a 
customer’s ‘‘principal’’ address. In all 
other respects, the Commission is 
adopting paragraph (a)(4) of Rule 17g– 
2 substantially as proposed. 
e. Paragraph (a)(5) of Rule 17g–2 
As adopted, paragraph (a)(5) of Rule 
17g–2 requires an NRSRO to make a 
record listing the general types of 
services and products offered by the 
NRSRO. This record will provide the 
Commission with details of the ancillary 
business activities of the NRSRO and, 
therefore, will be useful in identifying 
potential conflicts of interest that arise 
from such activities. Commission 
examiners then will be able to review 
whether the NRSRO has implemented 
procedures to manage these potential 
conflicts. 
One commenter pointed out that the 
rule text as proposed could be construed 
to require a record each time the NRSRO 
made an offer to provide a service to a 
customer.
258
This was not the intent of 
the proposed requirement. Rather, it 
was to require a record listing the 
general types of services the NRSRO 
offers. The record is designed to provide 
Commission examiners with a way to 
quickly understand the NRSRO’s 
business model based on the types of 
services and products it provides to 
persons. The record does not require an 
entry for each offer to a person or 
transaction with a person. The final rule 
has been modified to clarify that the 
provision only requires a list of the 
types of services offered by the NRSRO. 
In all other respects, the Commission is 
adopting paragraph (a)(5) of Rule 17g– 
2 substantially as proposed. 
f. Paragraph (a)(6) of Rule 17g–2 
As adopted, paragraph (a)(6) of Rule 
17g–2 requires an NRSRO to make a 
record documenting the established 
procedures and methodologies used by 
the NRSRO to determine credit ratings. 
This provision is being added to Rule 
17g–2 in response to comments 
regarding Exhibit 2 to Form NRSRO, 
which, as proposed, required an NRSRO 
to attach the procedures and 
methodologies to the Form and make 
them publicly available after 
registration. As discussed above, Exhibit 
2 has been modified so that it now 
requires a description of the procedures 
and methodologies as opposed to each 
procedure and methodology. The intent 
is to require sufficient information in 
Exhibit 2 to allow users of credit ratings 
to develop an understanding of how the 
NRSRO determines credit ratings 
without imposing the burden of making 
a voluminous submission to the 
Commission and public disclosure. It 
also is designed to avoid the public 
disclosure of proprietary information. 
Accordingly, rather than require these 
procedures and methodologies to be 
attached to Form NRSRO and disclosed 
publicly, the Commission is requiring 
that they be documented internally. 
This will permit Commission examiners 
to review the procedures and 
methodologies in order to review 
whether the NRSRO has disclosed 
sufficient information about them in 
Form NRSRO to permit users of credit 
ratings to understand how the NRSRO 
determines credit ratings. It also will 
permit Commission examiners to review 
whether the NRSRO is adhering to its 
procedures and methodologies and 
complying with other rules.
259
For 
example, Rule 17g–6 prohibits, among 
other things, an NRSRO from issuing or 
modifying, or threatening to issue or 
modify, a credit rating contrary to the 
NRSRO’s established procedures and 
methodologies. The Commission’s 
ability to enforce this prohibition will 
depend in part on the NRSRO having 
fully documented its procedures and 
methodologies. As discussed below, 
these records also will be an important 
means for the Commission to gain a 
better understanding of the procedures 
and methodologies used by credit rating 
agencies to treat the credit ratings of 
other credit rating agencies when 
determining the overall credit rating for 
securities or money market instruments 
issued by asset pools or as part of any 
asset-backed or mortgage-backed 
securities transactions (‘‘structured 
products’’). 
As noted above, to the extent a credit 
rating agency permits credit analysts to 
diverge from the procedures or 
methodologies it has established, the 
NRSRO must document the 
circumstances under which such a 
divergence will be permitted and the 
alternative procedure or methodology 
that must be used. In effect, 
documenting the divergence in this 
manner will make it part of the 
NRSRO’s established procedures and 
methodologies and, therefore, the 
NRSRO will be adhering to the 
requirements of paragraph (a)(6) of Rule 
17g–2. Failing to document when the 
divergence will be permitted or required 
will expose the NRSRO to potential 
violations of Rules 17g–1, 17g–2, and 
17g–6. 
For the foregoing reasons and the 
reasons discussed with respect to 
Exhibit 2 of Form NRSRO, the 
Commission is eliminating the 
requirement that an NRSRO attach to 
Form NRSRO and make publicly 
available its procedures and 
methodologies for determining credit 
ratings. Instead, the Commission is 
adopting paragraph (a)(6) of Rule 17g– 
2 to require that the procedures and 
methodologies be documented 
internally. 
g. Paragraph (a)(7) of Rule 17g–2 
As adopted, paragraph (a)(7) of Rule 
17g–2 requires an NRSRO to make a 
record that lists each security and its 
corresponding credit rating issued by an 
asset pool or as part of any asset-backed 
or mortgage-backed securities 
transaction where the NRSRO in 
determining the credit rating for the 
security treats assets within such pool 
or as a part of such transaction that are 
not subject to a credit rating of the 
NRSRO by one or more of four ways 
specified in the rule to determine a 
credit rating for the security. This 
provision was not proposed but is being 
added because of modifications to 
paragraph (a)(4) of Rule 17g–6, which 
prohibits anti-competitive practices 
relating to determining credit ratings for 
structured products. As discussed below 
with respect to paragraph (a)(4) of Rule 
17g–6, the Commission believes this 
provision is necessary or appropriate in 
the public interest or for the protection 
of investors because it will assist the 
Commission in monitoring practices in 
the structured product area that many 
commenters believe are anti- 
competitive. 
2. Paragraph (b) of Rule 17g–2 
As adopted, paragraph (b) of Rule 
17g–2 requires an NRSRO to retain 
certain records (excluding drafts of 
documents) that relate to its business as 
a credit rating agency.
260
The records 
required to be retained in paragraph (b) 
of Rule 17g–2 are those an NRSRO 
makes or receives as a matter of 
business practice but are not records an 
NRSRO is required to make. The 
Commission believes the records 
required to be retained under paragraph 
(b) are necessary or appropriate in the 
public interest, for the protection of 
investors, or otherwise in furtherance of 
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33586 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
261
15 U.S.C. 78o–7. 
262
See 15 U.S.C. 78o–7(b)(1). 
263
See Fitch Letter. 
264
See S&P Letter; DBRS Letter; Fitch Letter; 
Moody’s Letter. 
265
Id. 
266
See Letter dated March 8, 2007 from John B. 
Rutherfurd, Jr. (‘‘Rutherfurd Letter’’); DBRS Letter; 
Fitch Letter; Moody’s Letter; S&P Letter. 
267
Id. 
the Exchange Act because, as described 
below, they will assist the Commission 
in monitoring whether an NRSRO is 
complying with Section 15E of the 
Exchange Act
261
and the rules 
thereunder. 
Since these records are not required to 
be made, an NRSRO will not have to 
update them. Rather, the NRSRO is 
required to retain the original record in 
an unaltered form or a true copy of the 
original record for the prescribed 
retention period. The Commission 
notes, however, that, under Section 
15E(b)(1) of the Exchange Act,
262
an 
NRSRO must update, as provided in 
that section, certain information in the 
Forms and Exhibits that are required to 
be retained under paragraph (b)(9) of 
Rule 17g–2 (discussed below). 
a. Paragraph (b)(1) of Rule 17g–2 
As adopted, paragraph (b)(1) of Rule 
17g–2 requires an NRSRO to retain all 
significant records underlying the 
information included in the NRSRO’s 
annual financial reports required 
pursuant to Rule 17g–3. This includes 
bank statements, bills payable and 
receivable, trial balances, and records 
relating to the determination of the 
largest customers. These records will 
assist Commission examiners in 
understanding and reviewing the basis 
of information provided in the financial 
reports the NRSRO will be required to 
annually furnish to the Commission. For 
example, examiners can use the records 
relating to the list of the largest 
customers to review whether the 
NRSRO has identified such customers 
in accordance with Rule 17g–3. 
The Commission received one 
comment on this provision.
263
The 
commenter stated that, while it retains 
these records, the requirement should 
be eliminated because the financial 
reports required in Rule 17g–3 provide 
sufficient information in these areas. 
Similar to the records required in 
paragraph (a)(1) of Rule 17g–2, the 
Commission believes it is important that 
an NRSRO retain these records. They 
will provide Commission examiners 
with the source information that feeds 
into the Rule 17g–3 financial reports. 
Further, as noted above, those financial 
reports are a snap shot of the NRSRO’s 
financial condition as of its fiscal year 
end. These records will provide 
examiners with current information as 
of the time of their exam. For these 
reasons, the Commission is adopting 
paragraph (b)(1) of Rule 17g–2 
substantially as proposed. 
b. Paragraph (b)(2) of Rule 17g–2 
As adopted paragraph (b)(2) of Rule 
17g–2 requires an NRSRO to retain 
internal records, including nonpublic 
information and work papers, used to 
form the basis of a credit rating. These 
records will include, for example, notes 
of conversations with the management 
of an issuer or obligor that was the 
subject of the credit rating and the 
inputs and raw results of a quantitative 
model used to determine the credit 
rating. The retention of this information, 
and other internal records used to 
determine a credit rating, will assist the 
Commission in reviewing whether an 
NRSRO is adhering to its established 
procedures and methodologies for 
determining credit ratings and for 
preventing the misuse of material 
nonpublic information. It also will assist 
the Commission in gaining a better 
understanding of the practices used by 
credit rating agencies to incorporate the 
credit ratings of other credit rating 
agencies into the overall credit rating of 
a structured product. 
The Commission received several 
comments on the rule text in this 
paragraph as proposed.
264
The 
comments generally were similar in that 
they sought clarification that the 
provision does not require the retention 
of every record that somehow relates to 
the credit rating.
265
In response, the 
Commission notes that it did not intend 
the rule to be interpreted that broadly. 
The provision only applies to internal 
records and documents that are used to 
form the basis of the credit rating. The 
provision explicitly excludes publicly 
available information and the 
introductory text to paragraph (b) of 
Rule 17g–2 excludes drafts of 
documents from its provisions. The rule 
does not require an NRSRO to retain 
internal documents that a credit analyst 
reviews but that do not factor into the 
determination of the credit rating. For 
the foregoing reasons, the Commission 
is adopting paragraph (b)(2) of Rule 
17g–2 substantially as proposed. 
c. Paragraph (b)(3) of Rule 17g–2 
As adopted, paragraph (b)(3) of Rule 
17g–2 requires an NRSRO to retain 
credit analysis reports, credit 
assessment reports, and private credit 
rating reports and internal records, 
including nonpublic information and 
work papers, used to form the basis for 
the opinions expressed in these reports. 
These reports—which credit rating 
agencies commonly create and sell as an 
ancillary service to the issuance of 
credit ratings—generally provide a 
detailed analysis of the information and 
assumptions underlying a credit rating. 
In developing these reports, the credit 
analyst may receive material nonpublic 
information about an issuer or obligor. 
For example, an issuer may request a 
private credit rating report to 
understand how a contemplated 
transaction would impact the current 
publicly available credit rating of its 
debt securities. Consequently, the 
retention of these reports and internal 
records used to form the basis of the 
reports will assist the Commission in 
monitoring whether the NRSRO is 
complying with its policies and 
procedures for preventing the misuse of 
material nonpublic information. 
The Commission received several 
comments on the rule text of this 
paragraph as proposed.
266
Similar to the 
comments regarding paragraph (b)(2) of 
Rule 17g–2, the comments sought 
clarification that the provision does not 
require the retention of every potentially 
relevant record such as records that do 
not contain information that the credit 
analysis used to form the basis of 
conclusions in the report.
267
In response 
to these comments, the Commission 
notes that it does not intend the rule to 
be interpreted to apply to internal 
documents that a credit analyst reviews 
but that do not factor into the 
conclusions in the final report. Further, 
the provision explicitly excludes 
publicly available information and the 
introductory text to paragraph (b) of 
Rule 17g–2 excludes drafts of 
documents from its provisions. 
Consequently, the Commission is 
adopting paragraph (b)(3) of Rule 17g– 
2 substantially as proposed. 
d. Paragraph (b)(4) of Rule 17g–2 
As adopted, paragraph (b)(4) of Rule 
17g–2 requires an NRSRO to retain 
compliance reports and compliance 
exception reports. The retention of these 
reports will identify activities of the 
NRSRO that its designated compliance 
officer had determined raised, or did not 
raise, compliance and control issues. 
Commission examiners will then be able 
to review how the NRSRO addressed the 
compliance issues. This can lead to 
more focused examinations, which also 
will decrease the burden on the NRSRO. 
The reports also will provide 
information as to whether the NRSRO is 
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33587 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
268
See DBRS Letter; Moody’s Letter. 
269
See DBRS Letter. 
270
Id. 
271
See Moody’s Letter. 
272
See DBRS Letter; Moody’s Letter. 
273
See DBRS Letter. 
274
See Moody’s Letter. 
275
Id. 
276
Id. 
277
15 U.S.C. 78o–7(f). 
278
See R&I Letter; DBRS Letter. 
279
See R&I Letter. 
280
See DBRS Letter. 
complying with its established 
methodologies, procedures, and 
policies. 
The Commission received two 
comments on this provision.
268
One 
commenter stated that it should be 
narrowed to exclude compliance reports 
that do not find any deficiencies.
269
The 
commenter stated that Commission 
examiners might use reports that do not 
contain deficiencies to second-guess the 
designated compliance officer.
270
As 
noted above, compliance reports that do 
not contain deficiencies will be useful 
to examiners in terms of focusing 
exams. This commenter also stated that 
the provision should not apply to 
whistleblower reports. The Commission 
understands the concern that including 
whistleblower reports with the 
provision’s scope could have a chilling 
effect on an employee’s willingness to 
report violations, particularly in smaller 
organizations. For the purposes of this 
rule, the Commission does not view a 
whistleblower report as a final 
compliance report or a compliance 
exception report. It is an allegation 
made by someone within the 
organization about inappropriate or 
unlawful conduct. However, any final 
report of the NRSRO’s compliance 
officer resulting from the allegations or 
disclosures contained in the report of a 
whistleblower will be a compliance 
report subject to this provision. The 
compliance officer’s final compliance 
report on the matter can be drafted in a 
manner to protect the whistleblower by 
not identifying the person. 
The other commenter stated that the 
Commission should clarify that the rule 
does not require the retention of draft 
reports.
271
In response, the Commission 
notes, as discussed above, that it did not 
intend the rule to be interpreted to 
require the retention of draft reports and 
other interim work product. The 
Commission has clarified this by adding 
introductory text to paragraph (b) of 
Rule 17g–2 that excludes drafts of 
documents from its provisions. For the 
foregoing reasons, the Commission is 
adopting paragraph (b)(4) of Rule 17g– 
2 substantially as proposed. 
e. Paragraph (b)(5) of Rule 17g–2 
As adopted, paragraph (b)(5) of Rule 
17g–2 requires an NRSRO to retain 
internal audit plans, internal audit 
reports, documents relating to internal 
audit follow-up measures, and all 
records identified by its internal 
auditors as necessary to perform the 
audit of an activity that relates to its 
business as a credit rating agency. The 
retention of these records will identify 
activities of the NRSRO that its internal 
auditors had determined raised, or did 
not raise, compliance or control issues. 
They also will assist the Commission in 
reviewing whether the NRSRO is 
complying with its established methods, 
procedures, and policies. 
The Commission received two 
comments on this provision.
272
The first 
commenter requested that the provision 
be deleted because it would chill 
NRSROs from establishing robust 
internal audit departments.
273
The 
Commission continues to believe these 
are important records that will assist the 
Commission examination staff in 
understanding a given NRSRO’s internal 
operations and activities. As noted 
above, one of the Commission’s 
oversight roles is to review whether an 
NRSRO is accurately disclosing 
information about, and adhering to, its 
procedures and methodologies for 
determining credit ratings. Reports of an 
NRSRO’s internal auditors can provide 
highly useful information to assist the 
Commission in performing this 
regulatory function. The Commission 
notes that the provision requires an 
NRSRO to maintain internal audit 
records for three years. This retention 
period is designed to provide 
Commission examiners with the 
opportunity to review them. Finally, the 
Commission staff’s experience with 
reviewing supervised entities such as 
broker-dealers and broker-dealer 
holding companies has not indicated 
that having access to internal audit 
reports chills the robust functioning of 
their internal audit departments. 
The second commenter requested that 
the Commission clarify that the 
provision only requires the retention of 
final internal audit reports and not 
interim work product.
274
In response, 
the Commission notes that it does not 
intend the provisions to apply to drafts 
of internal audit records and, as noted 
above, has added introductory text to 
paragraph (b) of Rule 17g–2 that 
excludes drafts of documents from its 
provisions. The commenter also 
requested that the provision permit an 
NRSRO to tailor its internal audit 
records to its business plan.
275
In 
response, the Commission notes that the 
provision only requires an NRSRO to 
retain internal audit records. It does not 
specify the types of audit records that 
must be made. An NRSRO is free to 
establish an internal audit process that 
is tailored to its business model. Finally, 
this commenter requested that the 
Commission clarify that the provision 
does not require an NRSRO that is a 
public company to retain financial 
reporting internal auditing reports 
beyond those required under the 
Exchange Act.
276
The Commission notes 
that Rule 17g–2 requires an NRSRO to 
retain internal audit reports that relate 
to its business as a credit rating agency. 
The NRSRO must determine whether an 
internal audit report created under a 
statutory or regulatory requirement is 
one that relates to its credit rating 
business and, therefore, must be 
retained under this provision. 
For the foregoing reasons, the 
Commission is adopting paragraph 
(b)(5) of Rule 17g–2 substantially as 
proposed. 
f. Paragraph (b)(6) of Rule 17g–2 
As adopted, paragraph (b)(6) of Rule 
17g–2 requires an NRSRO to retain 
copies of marketing materials that are 
published or otherwise made available 
to persons that are not associated with 
the NRSRO. Section 15E(f) of the 
Exchange Act prohibits an NRSRO from 
representing that it has been designated, 
recommended, or approved, or that its 
abilities or qualifications have been 
passed upon by any federal agency or 
officer.
277
The retention of marketing 
materials will assist the Commission in 
reviewing whether the NRSRO is 
complying with this statutory provision. 
The Commission received two 
comments on the provision.
278
One 
commenter sought clarification that it 
does not apply to internal documents of 
the marketing department.
279
The 
second commenter requested that the 
Commission provide guidance on the 
meaning of ‘‘marketing materials.’’
280
 
The Commission intended that the 
provision only apply to materials that 
are actually used to market the NRSRO’s 
credit rating services. The Commission 
has modified the rule text to clarify that 
the requirement only applies to 
marketing materials that are published 
or otherwise made available to persons 
who are not associated with the NRSRO. 
The Commission does not intend that 
the provision be interpreted to apply to 
records that are used by the marketing 
department for internal purposes. This 
modification is designed to provide 
greater clarity on the marketing 
materials that must be retained. In 
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33588 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
281
See ASF Letter; Rutherfurd Letter; DBRS 
Letter; Fitch Letter; S&P Letter. 
282
Id. 
283
See DBRS Letter. 
284
See Rutherfurd Letter; S&P Letter. 
285
See Fitch Letter. 
286
See, e.g., Commission complaint in 
Commission v. Citigroup Global Markets Inc., 03 CV 
2945 (WHP) (S.D.N.Y.) (April 28, 2003); 
Commission complaint in Commission v. Merrill, 
Lynch, Pierce, Fenner & Smith, 03 CV 2941 (WHP) 
(S.D.N.Y.) (April 28, 2003); Commission Order in 
Matter of Columbia Management Advisers, Inc. and 
Columbia Funds Distributor, Inc., Securities Act 
Release No. 8534 (February 9, 2005). 
287
As proposed, paragraph (b)(8) required an 
NRSRO to retain a record required to be made 
under paragraph (b) of proposed Rule 17g–6. The 
record required under paragraph (b) of proposed 
Rule 17g–6 would have documented when an 
NRSRO refused to issue or withdrew a credit rating 
for a security or money market instrument issued 
by an asset pool or as part of any asset-backed or 
mortgage backed securities transaction. This 
proposed provision in Rule 17g–6 has been 
eliminated and, therefore, the requirement to retain 
this record in Rule 17g–2 also has been eliminated. 
response to the second commenter, the 
Commission notes that marketing 
materials, generally, will include any 
written documents that an NRSRO 
publishes or provides to persons that 
explain or describe its credit rating 
services and are designed to induce 
persons to purchase the services. 
In all other respects, the Commission 
is adopting paragraph (b)(6) of Rule 
17g–2 substantially as proposed. 
g. Paragraph (b)(7) of Rule 17g–2 
As adopted, paragraph (b)(7) of Rule 
17g–2 requires an NRSRO to retain 
external and internal communications, 
including electronic communications, 
received and sent by the nationally 
recognized statistical rating organization 
and its employees that relate to 
initiating, determining, maintaining, 
changing, or withdrawing a credit 
rating. The Commission received several 
comments on the proposed rule text of 
the paragraph.
281
The commenters all 
stated generally that the requirement 
was overbroad and should be 
narrowed.
282
One suggested that it only 
require external communications.
283
 
Two suggested it only require 
communications used by a credit 
analyst to form the basis of a credit 
rating.
284
Another commenter suggested 
the provision should have a materiality 
threshold.
285
 
In response to these comments, the 
Commission notes that the retention of 
written communications has played an 
important role in assisting the 
Commission in identifying legal 
violations and compliance issues with 
respect to other regulated entities.
286
 
The Commission believes that internal 
communications will play an important 
role in assisting the Commission in 
identifying legal violations and 
compliance issues in its oversight of 
NRSROs. For example, paragraph (a)(4) 
of Rule 17g–6 prohibits certain practices 
if they are undertaken with anti- 
competitive intent. The ability of the 
Commission to prove intent will be 
difficult absent communications that 
demonstrate why an NRSRO engaged in 
a particular act. Further, the 
Commission believes that narrowing the 
provision to communications used by a 
credit analyst to form the basis of a 
credit rating would carve out highly 
relevant communications, including 
communications that could be relevant 
to compliance with Rule 17g–4 
(nonpublic information), Rule 17g–5 
(conflicts of interest), and, as noted 
above, Rule 17g–6 (prohibited 
practices). Finally, the Commission 
believes that a materiality threshold 
would be very difficult to comply with 
and enforce. The degree of materiality of 
a communication viewed in isolation 
may not be apparent. In some cases, a 
seemingly innocuous communication 
may in fact be highly material when 
placed in the context of related events 
and other communications. 
For the foregoing reasons, the 
Commission is adopting paragraph 
(b)(7) of Rule 17g–2 substantially as 
proposed. 
h. Paragraph (b)(8) of Rule 17g–2 
As adopted, paragraph (b)(8) of Rule 
17g–2 requires an NRSRO to retain 
internal documents that contain 
information, analysis, or statistics that 
were used to develop a procedure or 
methodology to treat the credit ratings 
of another NRSRO for the purpose of 
determining a credit rating of a security 
or money market instrument issued by 
an asset pool or as part of any asset- 
backed or mortgage-backed securities 
transaction.
287
This provision was not 
proposed but is being added because of 
modifications to paragraph (a)(4) of Rule 
17g–6, which prohibits anti-competitive 
practices relating to determining credit 
ratings for structured products. As 
discussed below with respect to 
paragraph (a)(4) of Rule 17g–6, the 
Commission believes this provision is 
necessary or appropriate in the public 
interest or for the protection of investors 
because it will assist the Commission in 
monitoring practices in the structured 
product area that many commenters 
believe are anti-competitive. 
i. Paragraph (b)(9) of Rule 17g–2 
As adopted, paragraph (b)(9) of Rule 
17g–2 requires an NRSRO to retain for 
each security identified in the record 
required under paragraph (a)(7) of Rule 
17g–2, any document that contains a 
description of how any assets within 
such pool or as a part of such 
transaction not rated by the NRSRO but 
rated by another NRSRO were treated 
for the purpose of determining the 
credit rating of the security. This 
provision was not proposed but is being 
added because of modifications to 
paragraph (a)(4) of Rule 17g–6, which 
prohibits anti-competitive practices 
relating to determining credit ratings for 
structured products. As discussed below 
with respect to paragraph (a)(4) of Rule 
17g–6, the Commission believes this 
provision is necessary or appropriate in 
the public interest or for the protection 
of investors because it will assist the 
Commission in monitoring practices in 
the structured product area that many 
commenters believe are anti- 
competitive. 
j. Paragraph (b)(10) of Rule 17g–2 
As adopted, paragraph (b)(10) of Rule 
17g–2 requires an NRSRO to retain 
Form NRSROs (including Exhibits and 
accompanying information and 
documents) submitted to the 
Commission. This provision will make 
the Forms and Exhibits subject to the 
retention and production requirements 
in Rule 17g–2. For example, NRSROs 
will be required to retain them in a 
manner that makes them easily 
accessible to the NRSRO’s principal 
office. This will assist Commission 
examiners, particularly examiners in 
regional offices, in accessing the records 
on site during an examination. 
The Commission did not receive any 
comments on the proposed rule text in 
this paragraph (proposed as paragraph 
(b)(9)) and is adopting it substantially as 
proposed. 
3. Paragraph (c) of Rule 17g–2 
As adopted, paragraph (c) of Rule 
17g–2 requires an NRSRO to retain the 
records identified in paragraphs (a) and 
(b) for three years after the date the 
record is made or received. The 
Commission believes the three-year 
retention period is necessary or 
appropriate in the public interest or for 
the protection of investors because it is 
designed to ensure that the records are 
preserved for at least one internal audit 
or Commission exam cycle. 
The proposed rule, however, 
articulated different retention periods 
for the records identified in paragraphs 
(a)(2) and (a)(3); namely, for three years 
after the NRSRO’s business relationship 
with the person ended. The Commission 
received a number of comments on this 
proposed retention period all of which 
stated that it was either too long or 
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33589 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
288
See Gross Letter; Rutherfurd Letter; R&I Letter; 
DBRS Letter; Fitch Letter; S&P Letter; Moody’s 
Letter; LACE Letter. 
289
See R&I Letter; Fitch Letter; LACE Letter. 
290
See R&I Letter. 
291
15 U.S.C. 78q(b)(1). 
292
See Fitch Letter. 
293
See LACE Letter. 
294
See 15 U.S.C 78q(b). 
295
See Moody’s Letter. 
unclear.
288
The Commission believes 
there has been some confusion 
regarding the retention requirement for 
these records. The proposed rule was 
designed so that an NRSRO would 
retain the last version of an account 
record for three years after the account 
was closed. The Commission believes 
the simpler and clarified text in the 
adopted version of the rule is designed 
to ensure this record is retained for this 
period. 
In other respects, paragraph (c) of 
Rule 17g–2 is being adopted 
substantially as proposed. 
4. Paragraph (d) of Rule 17g–2 
As adopted, paragraph (d) of Rule 
17g–2 requires an NRSRO to maintain 
an original, or a true and complete copy 
of the original, of each record required 
to be retained pursuant to paragraphs (a) 
and (b) of Rule 17g–2 in a manner that, 
for the applicable retention period 
specified in paragraph (c) of Rule 17g– 
2, makes the original record or copy 
easily accessible to the principal office 
of the NRSRO and to any other office 
that conducted activities causing the 
record to be made or received. The 
Commission believes this rule is 
necessary or appropriate in the public 
interest or for the protection of investors 
because it is designed to facilitate 
Commission examination of the NRSRO 
and to avoid delays in obtaining the 
records during an on-site examination. 
The rule does not specify the format in 
which the records must be retained. 
Consequently, NRSROs may retain them 
in, for example, paper form, on 
microfilm or microfiche, or 
electronically. 
The Commission did not receive any 
comments on this provision and is 
adopting it substantially as proposed. 
5. Paragraph (e) of Rule 17g–2 
As adopted, paragraph (e) of Rule 
17g–2 provides that an NRSRO can use 
the services of a third-party record 
custodian to make and retain the 
records identified in paragraphs (a) and 
(b), provided the NRSRO furnishes the 
Commission with a written undertaking 
of the custodian. The rule prescribes the 
form of the undertaking; namely, that 
the third-party must represent that the 
records are the exclusive property of the 
NRSRO, will be produced promptly to 
the NRSRO or the Commission or its 
representatives at the request of the 
NRSRO, and will be available for 
inspection by the Commission or its 
representatives. The rule also provides 
that an NRSRO remains responsible for 
complying with the Commission’s books 
and records rules, notwithstanding the 
fact that a third-party is making and/or 
storing them. The Commission believes 
this rule is necessary or appropriate in 
the public interest or for the protection 
of investors because it is designed to 
ensure that storing the records with a 
third-party does not make them less 
accessible than records stored at an 
NRSRO’s offices. 
The Commission received three 
comments on this provision.
289
One 
commenter stated that the form of the 
undertaking could conflict with certain 
foreign business practices and, 
therefore, suggested that the NRSRO be 
required to provide the undertaking.
290
 
The Commission notes, however, that 
the undertaking is designed to ensure 
that a third-party custodian is under a 
direct obligation to produce the records 
to the Commission and its 
representatives. An NRSRO already is 
obligated under Section 17(b)(1) of the 
Exchange Act and Rule 17g–2 to 
produce these records.
291
This 
obligation is in no way diminished 
because a third-party custodian is 
holding the records. The undertaking 
establishes a direct obligation on the 
third-party to produce the records to the 
Commission and its representatives. 
This direct obligation will be 
particularly important in situations 
where the NRSRO is unable or 
unwilling to request that the third-party 
produce the records. 
The second commenter requested that 
the form of the undertaking be modified 
in a manner that would obligate the 
third-party to only comply with 
‘‘reasonable’’ requests for records and 
only to the extent that producing the 
records was permitted by local law.
292
 
While the Commission is not codifying 
this suggestion into the rule, the 
Commission and its representatives 
make every effort to work with regulated 
entities on the scope and timing of 
record requests to lessen the burden and 
establish a production schedule that is 
practicable, given the circumstances. 
The final commenter stated that an 
NRSRO should not be required to use a 
third-party to store its records.
293
The 
Commission notes that the rule does not 
require an NRSRO to use a third-party 
custodian to store its records. Rather, it 
provides the option for an NRSRO to 
use a third-party record custodian. 
For these reasons, the Commission is 
adopting paragraph (e) of Rule 17g–2 
substantially as proposed. 
6. Paragraph (f) of Rule 17g–2 
As adopted, paragraph (f) of Rule 17g– 
2 requires an NRSRO to promptly 
furnish the Commission or its 
representatives with legible, complete, 
and current copies, and, if specifically 
requested English translations, of those 
records of the NRSRO required to be 
retained under Rule 17g–2, or any other 
records of the NRSRO subject to 
examination under Section 17(b) of the 
Exchange Act
294
that are requested by 
the Commission or its representatives. 
As discussed in the next section, the 
proposed rule has been modified to 
incorporate a provision that the 
produced records be translated if 
necessary. The Commission believes 
this rule is necessary or appropriate in 
the public interest or for the protection 
of investors because it is designed to 
facilitate Commission examinations of 
NRSROs. 
The Commission received one 
comment on the provision.
295
 
Specifically, the commenter stated that 
the provision should not require an 
NRSRO to produce compliance and 
audit reports because doing so could 
adversely impact deliberations related 
to these functions and chill 
whistleblowers. The Commission 
explained above how the retention of 
compliance and audit reports under 
paragraphs (b)(4) and (b)(5) of Rule 17g– 
2, respectively, will assist Commission 
examiners in reviewing NRSROs. 
However, the retention of these records 
without the corresponding requirement 
to produce them would prevent the 
Commission and its examiners from 
using the records for these purposes. 
Therefore, the Commission believes 
they must be produced upon request to 
the Commission and its representatives. 
For these reasons, the Commission is 
adopting the provisions in paragraph (f) 
of Rule 17g–2 substantially as proposed. 
7. Non-Resident NRSROs 
Rule 17g–2, as proposed, contained 
provisions in two paragraphs 
(paragraphs (f) and (h)) designed to 
address the fact that credit rating 
agencies not located in the U.S. may 
become NRSROs. After consideration of 
the comments and for the reasons 
discussed below, the Commission is 
eliminating these provisions from Rule 
17g–2, as adopted, except for the 
provision concerning translating 
records. 
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33590 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
296
See AEI Letter; R&I Letter; DBRS Letter; Fitch 
Letter. 
297
See, e.g., DBRS Letter. 
298
See AEI Letter. 
299
See 15 U.S.C 78q(b). 
300
An applicant can request that the Commission 
keep this information confidential. See 17 CFR 
200.80 and 17 CFR 200.83. 
301
15 U.S.C. 78o–7(k). 
302
Id. 
303
15 U.S.C. 78o–7(d). 
304
Id. 
305
15 U.S.C. 78o–7(b)(1). 
306
An applicant can request that the Commission 
keep this information confidential. See 17 CFR 
200.80 and 17 CFR 200.83. 
307
15 U.S.C. 78o–7(a)(3). 
308
The Commission notes that some NRSROs 
may have fiscal year ends that are not on December 
31. Therefore, if the Commission required that this 
financial information be updated through 
furnishing Form NRSROs, these entities would not 
be able to furnish the update with their annual 
certifications, which—pursuant to Section 15E(b)(2) 
of the Exchange Act (15 U.S.C. 78o–7(b)(2))—must 
be furnished on a calendar year basis. 
309
See 15 U.S.C. 78o–7(k). 
Paragraph (f) of proposed Rule 17g–2 
would have required that a non-resident 
NRSRO must undertake to send books 
and records to the Commission and its 
representatives upon request. The 
undertaking would have been required 
to be attached to an initial application 
for registration as an NRSRO. The 
Commission explained in the proposing 
release that the undertaking was 
designed to provide a mechanism for 
the Commission examination staff to 
inspect records maintained overseas 
without having to travel to the location. 
In addition, because some non-resident 
NRSROs may maintain original records 
in a language other than English, the 
proposed undertaking would have 
required a translation if the Commission 
requested it. 
The Commission received four 
comments on the proposed rule text in 
this paragraph.
296
Generally, the 
commenters objected to various 
representations in the form of the non- 
resident undertaking
297
or to the 
requirement to provide the undertaking 
altogether.
298
After considering the 
comments, the Commission believes the 
requirement for non-resident NRSROs to 
provide a special undertaking is 
unnecessary. As NRSROs, they are 
subject to the production requirements 
of Section 17(b) of the Exchange Act
299
 
and Rule 17g–2(f). Therefore, the 
Commission and its representatives will 
not require the non-resident 
undertaking to compel a foreign NRSRO 
to produce the records. Moreover, Rule 
17g–2(f), as adopted, requires the 
records to be ‘‘furnished’’ to the 
Commission. Thus, an NRSRO located 
outside the U.S. is required to send the 
records to the Commission upon 
request. 
However, the Commission continues 
to believe that the representation in the 
proposed undertaking to provide 
translated records is necessary or 
appropriate in the public interest or for 
the protection of investors. Providing 
un-translated records to the Commission 
could significantly delay and hinder its 
oversight function. Consequently, this 
provision has been moved into the 
provisions of paragraph (f) of Rule 17g– 
2. In all other respects, the provisions of 
paragraph (f) of proposed Rule 17g–2 
have been eliminated from the final 
rule. 
The provisions of paragraph (h) of 
proposed Rule 17g–2 would have 
defined the term non-resident rating 
organization for the purpose of 
specifying the type of NRSRO that 
would have been required to provide 
the non-resident undertaking. The 
definition is no longer necessary and 
has been eliminated from the adopted 
rule. 
For these reasons, the Commission is 
eliminating the provisions in Rule 17g– 
2 relating to non-resident NRSROs 
except for the provision concerning the 
translation of records. 
D. Rule 17g–3—Annual Financial 
Reports 
Section 15E(k) of the Exchange Act 
requires an NRSRO to furnish to the 
Commission, on a confidential basis
300
 
and at intervals determined by the 
Commission, such financial statements 
and information concerning its financial 
condition as the Commission, by rule, 
may prescribe as necessary or 
appropriate in the public interest or for 
the protection of investors.
301
The 
statute also provides that the 
Commission may, by rule, require that 
the financial statements be certified by 
an independent public accountant.
302
 
Rule 17g–3 requires an NRSRO to 
furnish the Commission on an annual 
basis certain financial reports. The 
furnishing of these reports will serve 
two important functions in the NRSRO 
regulatory program. 
First, Section 15E(d) of the Exchange 
Act provides that the Commission shall, 
by order, censure, place limitations on 
the activities, functions or operations of, 
suspend for a period not exceeding 12 
months, or revoke the registration of an 
NRSRO if, among other things, the 
NRSRO fails to maintain adequate 
financial and managerial resources to 
consistently produce credit ratings with 
integrity.
303
The financial reports will 
assist the Commission in monitoring the 
NRSRO’s financial resources and the 
resources it commits to management to 
evaluate whether the Commission must 
take action under Section 15E(d) of the 
Exchange Act.
304
 
Second, Section 15E(b)(1) of the 
Exchange Act requires an NRSRO to 
promptly amend its application for 
registration, as prescribed in that 
section, if any information or document 
provided in the application becomes 
materially inaccurate.
305
Form NRSRO 
requires the following financial 
information: a list of large customers in 
terms of net revenues; audited financial 
statements; information about revenues; 
and information about credit analyst 
compensation. This information is 
required to be as of, or for, the NRSRO’s 
previous fiscal year. Accordingly, the 
information only will become materially 
inaccurate and, therefore, be required to 
be updated on an annual basis. In 
addition, the information will be 
submitted with Form NRSRO on a 
confidential basis to the extent 
permitted by law
306
and will not have 
to be made publicly available pursuant 
to Section 15E(a)(3) of the Exchange 
Act
307
and Rule 17g–1(i) thereunder. 
Therefore, because the information only 
will be disclosed to the Commission, it 
is more appropriate to require that it be 
updated through the Commission’s 
authority under Section 15E(k) of the 
Exchange Act and Rule 17g–3 
thereunder than through annual 
furnishings of Form NRSRO.
308
 
After consideration of the comments, 
Rule 17g–3 has been modified in several 
ways. In particular, the rule has been 
restructured to prescribe that the audit 
requirement only applies to the 
financial statements. The proposed 
schedules to the financial statements are 
now separate financial reports that are 
not required to be audited. For the 
reasons discussed above and below, the 
Commission believes Rule 17g–3, as 
modified, is necessary or appropriate in 
the public interest or for the protection 
of investors.
309
 
1. Paragraph (a) to Rule 17g–3 
As adopted, paragraph (a) of Rule 
17g–3 requires an NRSRO to annually 
furnish the Commission four, or in some 
cases five, financial reports. The reports 
must be furnished not more than 90 
days after the end of the NRSRO’s fiscal 
year and the information in the reports 
must be as of the most recently ended 
fiscal year. The reports will consist 
substantially of the same information 
that would have been in the financial 
statements and schedules required 
under Rule 17g–3, as proposed. The 
Commission received numerous 
comments requesting that the proposed 
schedules to the audited financial 
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33591 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
310
See DBRS Letter; A.M. Best Letter; Fitch 
Letter; AEI Letter; Moody’s Letter. 
311
See R&I Letter. 
312
See S&P Letter; Moody’s Letter. 
313
See Letter dated March 12, 2007 from Makoto 
Utsumi, President & CEO, Japan Credit Rating 
Agency, Ltd. (‘‘JCR Letter’’); R&I Letter; DBRS 
Letter. 
314
Id. 
315
See JCR Letter; R&I Letter; DBRS Letter; Fitch 
Letter. 
316
The Commission notes NRSROs that furnish 
consolidated audited financial statements of parents 
that are public companies should furnish those 
statements as they are prepared in accordance with 
all applicable reporting requirements for public 
companies, which may include adhering to all 
provisions of Regulation S–X. 
317
See Final Rule: Strengthening the 
Commission’s Rules Regarding Auditor 
Independence, Securities Act Release No. 8183 
(January 28, 2003), 68 FR 6005 (February 5, 2003). 
statements not be subject to the audit 
requirement.
310
The comments stated 
generally that obtaining an audit of the 
information in the proposed schedules 
would be difficult and unduly 
expensive. After consideration of these 
comments, the Commission has 
modified Rule 17g–3 to eliminate the 
requirement that the information that 
would have been provided in the 
schedules be audited. This will lessen 
the burden of preparing the information 
for submission to the Commission. 
Moreover, Rule 17g–3 no longer requires 
that this information be submitted in 
schedules to the NRSRO’s financial 
statements. Instead, the information 
must be furnished in separate financial 
reports. This is intended to clarify that 
the independent auditor that certifies 
the NRSRO’s financial statements is not 
required to include the other unaudited 
financial reports in the opinion covering 
the financial statements. 
As noted above, Rule 17g–3 requires 
that the financial reports be furnished 
within 90 days after the end of the 
NRSRO’s fiscal year. One commenter 
requested that the period be lengthened 
to 120 days for non-resident NRSROs.
311
 
The Commission notes that paragraph 
(c) of Rule 17g–3 provides a mechanism 
for an NRSRO to seek an extension of 
the time to furnish the financial reports. 
An NRSRO that cannot provide its 
financial reports within 90 days will be 
able to request an extension under this 
provision. Therefore, the Commission 
does not believe it is necessary to create 
a different standard for non-resident 
NRSROs, particularly since Rule 17g–3 
has been modified to make the 
preparation of the financial reports less 
burdensome. 
a. Paragraph (a)(1): Audited Financial 
Statements 
The first report, required under 
paragraph (a)(1) of Rule 17g–3, must 
contain audited financial statements of 
the NRSRO. Rule 17g–3, as proposed, 
also required the submission of audited 
financial statements and, as noted 
above, certain schedules to the financial 
statements. The schedules are now 
separate financial reports that are not 
required to be audited. Two commenters 
stated that an NRSRO that is a 
separately identifiable department or 
division of a public company should be 
permitted to furnish audited financial 
statements of its parent.
312
As noted 
above with respect to Exhibit 11, the 
Commission believes that, in this case, 
the financial statements of the parent 
provide information from which it can 
assess the financial resources of the 
NRSRO. The Commission believes, 
however, that certain financial 
information about the NRSRO must be 
furnished as well. For these reasons, the 
rule has been modified to permit an 
NRSRO to furnish audited consolidated 
financial statements of its parent; 
however, the NRSRO also will have to 
furnish unaudited consolidating 
financial statements under paragraph 
(a)(2) of Rule 17g–3 discussed below. 
The audited financial statements must 
include a balance sheet, an income 
statement and statement of cash flows, 
and a statement of changes in 
ownership equity. They must be 
prepared in accordance with generally 
accepted accounting principles in the 
jurisdiction where the NRSRO or its 
parent is incorporated, organized, or has 
its principal office. Finally, the audited 
financial statements must be certified by 
an accountant who is qualified and 
independent in accordance with 17 CFR 
240.210.2–01(a), (b), and (c)(1), (2), (3), 
(4), (5) and (8). In addition, the 
accountant must give an opinion on the 
financial statements in accordance with 
17 CFR 210.2–02(a), (b), (c) and (d). The 
first financial report is how an NRSRO 
will update the information initially 
provided in Exhibit 11 of Form NRSRO. 
The requirement to have the financial 
statements audited will provide the 
Commission with an independent 
verification that the information in them 
is presented fairly, in all material 
respects. The Commission received 
numerous comments on these audit 
requirements. Several commenters 
stated that non-resident NRSROs should 
be permitted to provide financial 
statements prepared in accordance with 
generally accepted accounting 
principles of the jurisdiction where the 
NRSRO is incorporated or has its 
principal place of business.
313
The 
commenters stated that preparing them 
according U.S. generally accepted 
accounting principles could be very 
expensive.
314
Similarly, several 
commenters stated that complying with 
certain provisions of Regulation S–X (17 
CFR 210.1–01—12–29) would be unduly 
burdensome for non-resident NRSROs 
and non-reporting companies.
315
 
The Commission notes that the 
financial statements will be prepared to 
assist the Commission in carrying out its 
oversight responsibilities with respect to 
monitoring the financial resources of 
NRSROs and not as a disclosure item for 
public consumption. The Commission 
staff will have the opportunity to 
discuss the financial statements with a 
non-resident NRSRO to gain an 
understanding of any material 
divergences from U.S. generally 
accepted accounting principles. 
Accordingly, the Commission believes 
that it is appropriate to permit the 
financial statements to be prepared in 
accordance with generally accepted 
accounting principles in the jurisdiction 
where the NRSRO or its parent is 
incorporated, organized, or has its 
principal office. This will lessen the 
burden for non-resident NRSROs and 
still provide the Commission with the 
financial information necessary to carry 
out its oversight responsibilities. 
For these reasons, the Commission 
also agrees that applying many 
provisions of Regulation S–X would be 
unnecessary and, therefore, has 
eliminated most of this requirement 
from the rule. The Commission does 
believe that certain provisions of 
Regulation S–X relating to the 
qualifications and independence of the 
auditor and the auditor’s attestation and 
the scope of the auditor’s opinion are 
appropriate for all NRSROs, including 
non-residents and non-public 
companies. Consequently, Rule 17g–2, 
as adopted, eliminates the proposed 
requirement to comply with all the 
provisions of Regulation S–X. Instead, 
the rule requires the auditor to be 
qualified and independent in 
accordance with 17 CFR 240.210.2– 
01(a), (b), and (c)(1), (2), (3), (4), (5) and 
(8).
316
These provisions are designed to 
ensure that auditors are independent of 
their audit clients.
317
In addition, the 
accountant must give an opinion on the 
financial statements in accordance with 
17 CFR 210.2–02(a), (b), (c) and (d). The 
retained provisions of Regulation S–X 
are appropriate for any audit as they 
relate to general standards of 
competence, independence, and audit 
work and are not specifically designed 
for public companies. Accordingly, the 
audited financial statements in Rule 
17g–3 must be prepared in accordance 
with them. 
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33592 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
318
See EJR Letter; LACE Letter. 
319
See LACE Letter. 
320
See 17 CFR 240.17a–5. 
321
15 U.S.C. 78o–7(d). 
322
See DBRS Letter. 
323
15 U.S.C. 78o–7(k). 
324
See, e.g., Section 13(a) of the Exchange Act (15 
U.S.C. 78m(a)) and the rules thereunder; Section 17 
of the Exchange Act (15 U.S.C. 78q). 
325
See Moody’s Letter. 
326
15 U.S.C. 78o–7(d). 
327
See Fitch Letter. 
328
15 U.S.C. 78o–7(d). 
329
See Fitch Letter. 
As noted with respect to Exhibit 11, 
two commenters also requested that the 
proposed rule be modified to permit an 
NRSRO to furnish a tax return prepared 
by an accountant in lieu of audited 
financial statements.
318
One of the 
commenters suggested that this lesser 
requirement only apply to smaller 
entities (less than $5 to $10 million in 
asset size) and could be augmented with 
a requirement to include with the tax 
return a balance sheet and income 
statement signed by an accountant.
319
 
As discussed with respect to Exhibit 
11, the Commission does not believe a 
tax return will provide sufficient 
information. Further, the Commission 
notes that the financial responsibility 
rules for broker-dealers require audited 
financial statements for small broker- 
dealers with a minimum capital 
requirement of $5,000.
320
The 
accountants performing an audit of a 
small NRSRO will tailor the audit and 
audit report to the size and complexity 
of the entity’s business. This will keep 
costs for smaller NRSROs lower. This is 
especially true in light of the changes 
discussed above with respect to 
eliminating requirements with respect 
to Regulation S–X and the proposed 
requirement that the information 
proposed for the schedules be audited. 
Moreover, in response to the second 
commenter, it is unclear to the 
Commission in what capacity an 
accountant would sign financial 
statements short of performing an audit 
of them. For the purposes of Rule 17g– 
3, the Commission believes that the only 
appropriate review of the financial 
statements is an audit by an 
independent accountant. The audit, as 
noted above, is designed to provide a 
reasonable level of assurance that the 
financial statements are free of material 
misstatement. 
The Commission believes that the 
annual audit will be integral to its 
ability to effectively monitor the 
financial resources of an NRSRO as 
required under Section 15E(d) of the 
Exchange Act, since it provides an 
independent verification of an NRSRO’s 
financial condition. For these reasons, 
Rule 17g–3, as adopted, requires audited 
financial statements on an annual 
basis.
321
 
Finally, one commenter suggested 
that the requirement that the audited 
financial statements be ‘‘certified’’ by 
the accountant is inconsistent with 
accounting practice because financial 
statements are either ‘‘audited’’ or 
‘‘certified.’’
322
The Commission notes 
that the authority to require that an 
auditor ‘‘certify’’ the audited financial 
statements is set forth in Section 15E(k) 
of the Exchange Act.
323
Moreover, this 
provision is consistent with other 
Commission financial reporting 
requirements.
324
Consequently, the final 
rule retains the provision. 
b. Paragraph (a)(2): Consolidating 
Financial Statements 
As adopted, paragraph (a)(2) of Rule 
17g–3 requires an NRSRO furnishing 
audited consolidated financial 
statements of its parent to furnish a 
second report containing unaudited 
consolidating financial statements of its 
parent that include the NRSRO. This 
will provide the Commission with 
information about the financial 
condition of the NRSRO as distinct from 
the financial condition of its parent. 
One commenter requested that this 
information not be subject to the audit 
requirement if the audited consolidated 
statements include operating segment 
reporting in accordance with Regulation 
S–X.
325
As noted above, this financial 
report is not required to be audited. 
c. Paragraph (a)(3): Revenue Information 
The third report, required under 
paragraph (a)(3) of Rule 17g–3, must 
contain the following unaudited 
information about the NRSRO’s 
revenues: (1) Revenue from determining 
and maintaining credit ratings; (2) 
revenue from subscribers; (3) revenue 
from granting licenses or rights to 
publish credit ratings; and (4) revenue 
from all other services and products 
offered by the NRSRO. This financial 
report will be how an NRSRO updates 
the information initially provided in 
Exhibit 12 to Form NRSRO. This 
information would have been required 
in the first schedule to the financial 
statements required under Rule 17g–3, 
as proposed. 
This information will augment the 
audited financial statements by 
providing detail as to the revenues 
generated specifically from credit rating 
services. The revenue information will 
assist the Commission in monitoring 
whether an NRSRO maintains adequate 
financial resources to consistently 
produce credit ratings with integrity.
326
 
As discussed with respect to Exhibit 12, 
one commenter requested the 
elimination of a requirement in the 
proposed rule to separately report 
revenues from determining private 
credit ratings (i.e., credit ratings that are 
not made readily accessible to the 
public).
327
The commenter stated that it 
would be difficult to separate private 
ratings revenue from public ratings 
revenue. The Commission agrees and 
the requirement to separately itemize 
private ratings revenue has been 
eliminated. This revenue must be 
included in the revenue item for 
determining or maintaining credit 
ratings. 
The Commission is adopting this 
provision with the modifications 
discussed above. 
d. Paragraph (a)(4): Credit Analyst 
Compensation 
The fourth report, required under 
paragraph (a)(4) of Rule 17g–3, must 
contain the total aggregate and median 
annual compensation of the NRSRO’s 
credit analysts. The information in this 
report is not required to be audited. This 
financial report will be how an NRSRO 
updates the information initially 
provided in Exhibit 13 to Form NRSRO. 
This information would have been 
required in the second schedule to the 
financial statements required under 
Rule 17g–3, as proposed. 
The information on analyst 
compensation will augment the audited 
financial statements by providing detail 
as to expenses necessary to retain the 
credit rating agency’s credit analysts. 
This information collectively will assist 
the Commission in monitoring whether 
an NRSRO maintains adequate financial 
resources to consistently produce credit 
ratings with integrity.
328
As discussed 
with respect to Exhibit 13, one 
commenter requested that the 
Commission clarify how an NRSRO 
should treat deferred compensation.
329
 
The Commission believes an NRSRO 
should have the flexibility to include or 
exclude deferred compensation in 
making the calculation. If deferred 
compensation is excluded, the rule 
requires the NRSRO to make a note of 
that fact in the financial report. The 
Commission also believes that an 
NRSRO must be consistent in its 
approach of either including or 
excluding deferred compensation. 
The Commission is adopting this 
provision with the modifications 
discussed above. 
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33593 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
330
17 CFR 240.17a–5(e)(2). 
331
See A.M. Best Letter. 
332
15 U.S.C. 78o–7(g)(1). 
333
15 U.S.C. 78a et seq. 
334
15 U.S.C. 78o–7(g)(2). 
335
See Proposed Rule: Definition of Nationally 
Recognized Statistical Rating Organization, 
Securities Act Release No. 8570 (April 19, 2005), 70 
FR 21306 (April 25, 2005). 
336
Id. 
337
See 17 CFR 243.100. 
338
17 CFR 243.100(b)(2)(iii). 
339
See Commission 2003 CRA Report and 
Commission 2003 Concept Release, Securities Act 
Release No. 8236 (June 4, 2003), 68 FR 35258 (June 
12, 2003), noting the concern raised by some that 
subscribers may have preferential access to credit 
analysts and, as a result, may inappropriately learn 
material nonpublic information in the possession of 
a credit analyst. 
340
Id. 
e. Paragraph (a)(5): List of Large 
Customers 
The fifth report, required under 
paragraph (a)(5) of Rule 17g–3, must 
contain a list of the NRSRO’s 20 largest 
issuer and subscriber customers in 
terms of net revenue earned from the 
customers and, include in the list, any 
obligor or underwriter customers that 
are as large as or larger than the 20th 
largest issuer or subscriber customer. 
The information in this report is not 
required to be audited. This financial 
report will be the mechanism that an 
NRSRO uses to update the information 
initially provided in Exhibit 10 to Form 
NRSRO. This information would have 
been required in the third schedule to 
the financial statements required under 
Rule 17g–3, as proposed. 
The largest customers will be 
determined applying the same 
definitions of ‘‘net revenues’’ and 
‘‘credit rating services’’ used for Exhibit 
10, including the changes to those 
definitions discussed above with respect 
to Exhibit 10. In addition, just as with 
Exhibit 10, obligor and underwriter 
customers must be added to the list to 
the extent they are as large as, or larger 
than, the 20th largest issuer or 
subscriber customer. 
The list will assist the Commission in 
identifying conflicts arising from any 
influence a person may have on the 
NRSRO given the amount of revenue the 
person provides the credit rating 
agency. 
2. Paragraph (b) of Rule 17g–3 
Paragraph (b) of Rule 17g–3 requires 
that the NRSRO attach to each financial 
report provided under paragraph (a) a 
statement by a duly authorized person 
of the NRSRO that the information in 
the report presents fairly, in all material 
respects and as applicable, the financial 
condition, results of operations, income, 
cash flows, revenues, and analyst 
compensation of the NRSRO. This 
information will provide a level of 
assurance that the information in the 
financial reports has been reviewed by 
the NRSRO. Further, the requirement 
parallels Commission Rule 17a–5(e)(2), 
which requires a duly authorized officer 
of a broker-dealer (or, in the case of a 
general partnership, the general partner) 
to attach an oath or affirmation stating 
the financial statements and schedules 
required under that rule are true and 
correct.
330
This requirement was 
proposed in paragraph (c) of Rule 17g– 
3. 
One commenter suggested that the 
Commission eliminate this requirement 
because it was unnecessary given the 
NRSRO’s legal exposure for furnishing 
an inaccurate report.
331
The commenter 
stated that the requirement could 
dissuade a credit rating agency from 
registering with the Commission. The 
Commission believes it is important that 
a person within the NRSRO be 
responsible for reviewing the 
information in the financial reports and 
stating that they are a fair representation 
of its financial condition, results of 
operations, income, cash flows, 
revenues, and analyst compensation. 
This provision is designed to enhance 
the accuracy of these reports insomuch 
as the individual within the NRSRO 
will perform some level of due diligence 
before executing the statements. 
Moreover, since only the information in 
the first financial report will be audited, 
the Commission believes a person 
within the NRSRO must be responsible 
for the information in all the reports. 
For these reasons, the Commission is 
retaining the requirement in the final 
rule. 
3. Paragraph (c) of Rule 17g–3 
Paragraph (c) of Rule 17g–3 provides 
that the Commission may grant an 
extension of time or exemption from 
any requirements in the rule either 
unconditionally or on specified terms 
and conditions on the written request of 
an NRSRO, if the Commission finds that 
such extension or exemption is 
necessary or appropriate in the public 
interest, and is consistent with the 
protection of investors. This provision 
was proposed in paragraph (d) of Rule 
17g–3. The Commission did not receive 
any comments on this provision and is 
adopting it substantially as proposed. 
E. Rule 17g–4—Procedures To Prevent 
the Misuse of Material, Nonpublic 
Information 
Rule 17g–4 will require an NRSRO to 
establish procedures to address three 
areas where material, nonpublic 
information could be inappropriately 
disclosed or used. Section 15E(g)(1) of 
the Exchange Act
332
requires an NRSRO 
to establish, maintain, and enforce 
written policies and procedures 
reasonably designed to prevent the 
misuse of material, nonpublic 
information in violation of the Exchange 
Act.
333
Section 15E(g)(2) of the 
Exchange Act provides that the 
Commission shall adopt rules requiring 
an NRSRO to establish specific policies 
and procedures reasonably designed to 
prevent the misuse of material, 
nonpublic information.
334
 
1. Paragraph (a)(1) of Rule 17g–4 
Paragraph (a)(1) of Rule 17g–4 
requires procedures reasonably 
designed to prevent the inappropriate 
dissemination within and outside the 
NRSRO of material nonpublic 
information obtained for the purpose of 
developing a credit rating. Some credit 
rating agencies, as part of their analysis, 
contact senior management of the 
obligors and issuers subject to their 
credit ratings. In the course of these 
contacts, an issuer or obligor may 
provide the credit rating agency with 
nonpublic information including 
contemplated business transactions or 
estimated financial projections.
335
 
Credit rating agencies have commented 
that this confidential information 
greatly assists them in issuing credible 
and reliable ratings.
336
In fact, the 
Commission’s Regulation FD, which 
governs the disclosure of material, 
nonpublic information by issuers, 
contains an exception that permits 
issuers to intentionally disclose such 
information to a credit rating agency 
without making a simultaneous public 
disclosure of the information.
337
The 
selective disclosure to the credit rating 
agency, however, must be solely for the 
purpose of developing a publicly 
available credit rating.
338
 
One concern that has been raised in 
the past is that subscribers to a credit 
rating agency’s more detailed credit 
reports also may be granted direct 
access to the credit analysts.
339
If the 
credit analyst is in possession of 
material, nonpublic information, there 
is a risk the information may be 
inappropriately disclosed to the 
subscriber during the course of 
communications with the credit 
analyst.
340
 
The rule does not prescribe specific 
procedures that must be established. 
Therefore, NRSROs will have flexibility 
to develop procedures tailored to their 
organizational structures and business 
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33594 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
341
See S&P Letter. 
342
Id. 
343
15 U.S.C. 78o–7(g)(1). 
344
15 U.S.C. 78a et seq. 
345
See, e.g., Commission complaint in 
Commission v. Rick A. Marano, William Marano 
and Carl Loizzi, 04 CV 5828 (Judge Kimba Wood) 
(S.D.N.Y.); see also Commission Litigation Release 
No. 18799 (July 27, 2004). 
346
See S&P Letter. 
347
Id. 
348
See Moody’s Letter. 
349
See 17 CFR 240.10b5–1. 
350
See Moody’s Letter. 
351
See Moody’s Letter. 
352
15 U.S.C. 78o–7(g)(1). 
353
15 U.S.C. 78a et seq. 
models. An NRSRO may have 
procedures requiring credit analysts to 
receive training in the laws governing 
the misuse of material, nonpublic 
information; defining the persons 
within the NRSRO with whom the 
credit analyst can share the information; 
prohibiting the credit analyst from 
disclosing the information to any other 
persons; and requiring the credit analyst 
to take steps to safeguard documents 
containing the information. An NRSRO 
that does not use management contacts 
as part of its methodology for 
determining credit ratings may prohibit 
credit analysts from contacting rated 
issuers or obligors. 
The Commission received one 
comment on this provision.
341
The 
commenter stated that an NRSRO 
should be permitted to disclose 
material, nonpublic information in 
aggregate form (e.g., through usage in 
models) in a manner that does not 
identify individual issuers.
342
The 
Commission notes, however, that the 
rule, by itself, does not expressly 
prohibit any types of disclosures. As 
discussed above, Section 15E(g)(1) of 
the Exchange Act
343
requires an NRSRO 
to establish, maintain, and enforce 
written policies and procedures to 
prevent the misuse of material, 
nonpublic information in violation of 
the Exchange Act and the rules 
thereunder.
344
Rule 17g–4 requires an 
NRSRO to address the inappropriate 
disclosure of material, nonpublic 
information when establishing these 
procedures required by statute. 
For these reasons, the Commission is 
adopting paragraph (a)(1) of Rule 17g– 
4 substantially as proposed. 
2. Paragraph (a)(2) of Rule 17g–4 
Paragraph (a)(2) of Rule 17g–4 
requires procedures reasonably 
designed to prevent a person within the 
NRSRO from purchasing, selling, or 
otherwise benefiting from any 
transaction in securities or money 
market instruments when the person is 
aware of material, nonpublic 
information obtained for the purpose of 
developing a credit rating. This 
provision requires an NRSRO to address 
the risk that individuals in possession of 
material, nonpublic information about 
an issuer or obligor may trade securities 
or money market instruments on the 
information.
345
 
As with paragraph (a), the provision 
does not prescribe specific procedures 
that must be established. An NRSRO 
may have policies prohibiting persons 
within the NRSRO from purchasing or 
selling a security or money market 
instrument that is subject to a pending 
credit rating action; requiring persons 
within the NRSRO to obtain pre- 
approval before purchasing or selling a 
security or money market instrument; or 
requiring persons within the NRSRO to 
be notified of securities or money 
market instruments that are on a ‘‘do not 
trade’’ list. 
The Commission made three 
modifications to the provision, as 
proposed, to address comments. The 
Commission believes the commenters 
identified areas where the provision 
could cause some practical difficulties 
in designing procedures. The changes 
are designed to remove these 
impediments. 
First, the Commission deleted a 
reference in the provision to members of 
the household of an NRSRO employee. 
This change was made in response to a 
comment that it would be difficult to 
design procedures addressing the 
trading activities of household members 
since a household may include persons 
that the employee has no influence over, 
such as roommates.
346
The commenter 
further noted that procedures designed 
to prevent an employee ‘‘from otherwise 
benefiting’’ from the use of material 
non-public information would cover an 
employee’s immediate family 
members.
347
 
Second, the Commission replaced a 
reference in the provision to an 
employee ‘‘possess[ing]’’ or having 
‘‘access’’ to material, non-public 
information. The provision, as adopted, 
refers to an employee being ‘‘aware’’ of 
material, nonpublic information. This 
change was made in response to a 
comment that having ‘‘access’’ to 
material, nonpublic information could 
be interpreted very broadly, which 
would make designing procedures to 
address the issue difficult.
348
The 
commenter also noted that Commission 
Rule 10b5–1, which concerns trading on 
the basis of material, nonpublic 
information in insider trading cases, 
refers to being ‘‘aware’’ of material, 
nonpublic information.
349
 
The third modification narrowed the 
scope of the provision to ‘‘persons 
within’’ the NRSRO. As proposed, the 
provision would have required 
procedures designed to prevent persons 
‘‘associated’’ with the NRSRO from 
trading on material, nonpublic 
information. A commenter stated that 
this made the provision overly broad 
since the definition of persons 
‘‘associated’’ with an NRSRO in Section 
3(a)(63) of the Exchange Act includes 
employees of affiliates engaged in 
activities wholly unrelated to credit 
rating services.
350
Similar to Item 8 of 
Form NRSRO (statutory disclosures) 
and, as discussed next, Rule 17g–5, the 
Commission is narrowing the scope of 
this provision to persons ‘‘within’’ the 
NRSRO. Paragraph (b) of Rule 17g–4 
defines a person ‘‘within’’ the NRSRO to 
mean the NRSRO, its credit rating 
affiliates identified on Form NRSRO, 
and any partner, officer, director, branch 
manager, and employee of the NRSRO 
or its credit rating affiliates (or any 
person occupying a similar status or 
performing similar functions). 
Finally, a commenter stated that the 
provision should not apply to indirect 
trading in securities such as through 
transactions in mutual funds.
351
The 
Commission notes that the rule by itself 
does not expressly prohibit any types of 
transactions. As discussed above, 
Section 15E(g)(1) of the Exchange 
Act
352
requires an NRSRO to establish, 
maintain, and enforce written policies 
and procedures to prevent the misuse of 
material, nonpublic information in 
violation of the Exchange Act and the 
rules thereunder.
353
Rule 17g–4 requires 
an NRSRO to address the inappropriate 
use of material, nonpublic information 
when establishing these procedures 
required by statute. 
For these reasons, paragraph (a)(2) of 
Rule 17g–4 is being adopted with the 
modifications described above. 
3. Paragraph (a)(3) of Rule 17g–4 
Paragraph (a)(3) of Rule 17g–4 
requires procedures reasonably 
designed to prevent the inappropriate 
dissemination within and outside the 
NRSRO of a credit rating action before 
issuing the credit rating on the Internet 
or through another readily accessible 
means. This provision recognizes that a 
credit rating action of an NRSRO may be 
material, nonpublic information. 
Consequently, an NRSRO must have 
policies designed to ensure that its 
pending credit rating actions are not 
selectively disclosed before the credit 
rating is issued on the Internet or 
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33595 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
354
15 U.S.C. 78o–7(h)(1). 
355
15 U.S.C. 78o–7(h)(2). 
356
See 15 U.S.C. 78o–7(h)(2)(A)–(D). 
357
See 15 U.S.C. 78o–7(h)(2)(E). 
358
15 U.S.C. 78o–7(h)(1). 
359
15 U.S.C. 78o–7(h)(2); see also R&I Letter. 
360
See DBRS Letter proposing that the conflicts 
identified in Exhibit 6 and Rule 17g–5 better track 
one another. 
361
For example, the conflicts identified in 
paragraphs (b)(1), (2) and (3) were all identified in 
paragraph (b)(1) of the proposed rule. 
362
15 U.S.C. 78o–7. 
through another readily accessible 
means. 
As with paragraphs (a)(1) and (a)(2), 
paragraph (a)(3) does not prescribe 
specific procedures. However, as 
applicable to the business model of the 
NRSRO, these policies may include 
procedures designed to ensure that a 
credit rating action is issued in a way 
that makes it readily accessible to the 
market place, such as posting the credit 
rating or an announcement of the credit 
rating action on the NRSRO’s Web site 
or through a news or information 
service used by market participants or 
by making it available to all subscribers 
simultaneously. The policies also may 
include procedures prohibiting credit 
analysts from selectively disclosing the 
pending action to persons outside the 
NRSRO and to persons inside the 
NRSRO who do not need to know of the 
pending action. 
At the same time, some credit rating 
agencies, as part of their methodologies 
for determining credit ratings, will 
discuss a proposed credit rating action 
with the management of the issuer or 
obligor being rated to solicit their views 
or provide an opportunity to appeal the 
decision. NRSROs engaging in this 
practice must have procedures 
reasonably designed to ensure that the 
discussions with the issuer or obligor do 
not lead to the selective disclosure of 
the information to persons other than 
those persons within the issuer or 
obligor who are authorized to receive 
the information. 
For these reasons, the Commission is 
adopting paragraph (a)(3) of Rule 17g– 
4 substantially as proposed. 
4. Paragraph (b) of Rule 17g–4 
As discussed above with respect to 
paragraph (a)(2) of Rule 17g–4, 
paragraph (b) of Rule 17g–4 contains the 
definition of a person ‘‘within’’ the 
NRSRO. The definition narrows the 
scope of the paragraph (a)(2) to persons 
involved in credit rating activities. 
F. Proposed Rule 17g–5—Management 
of Conflicts of Interest 
Section 15E(h)(1) of the Exchange Act 
requires an NRSRO to establish, 
maintain, and enforce policies and 
procedures reasonably designed, taking 
into consideration the nature of its 
business, to address and manage 
conflicts of interest.
354
Section 15E(h)(2) 
of the Exchange Act requires the 
Commission to adopt rules to prohibit 
or require the management and 
disclosure of conflicts of interest 
relating to the issuance of credit 
ratings.
355
The statute also identifies 
certain types of conflicts relating to the 
issuance of credit ratings that the 
Commission may include in its rules.
356
 
It also contains a catchall provision for 
any other potential conflict of interest 
the Commission deems is necessary or 
appropriate in the public interest or for 
the protection of investors to include in 
its rules.
357
Rule 17g–5 implements 
these statutory provisions by prohibiting 
the conflicts identified in the statute 
and certain additional conflicts either 
outright or if the NRSRO has not 
disclosed them and established policies 
and procedures to manage them. 
1. Paragraph (a) of Rule 17g–5 
Paragraph (a) of Rule 17g–5 prohibits 
a person within an NRSRO from having 
a conflict of interest relating to the 
issuance of a credit rating that is 
identified in paragraph (b) of the rule 
unless the NRSRO has disclosed the 
type of conflict of interest in compliance 
with Rule 17g–1 (i.e., in Exhibit 6 to 
Form NRSRO) and has implemented 
policies and procedures to address and 
manage the type of conflict of interest in 
accordance with Section 15E(h)(1) of the 
Exchange Act.
358
Paragraph (d) of Rule 
17g–5 defines a person within an 
NRSRO. The Commission believes that 
these prohibitions are appropriate in the 
public interest and for the protection of 
investors because they are designed to 
ensure that users of credit ratings are 
made aware of the potential conflicts of 
interest that arise from an NRSRO’s 
business activities and that an NRSRO 
establishes policies and procedures for 
managing the specific conflicts it 
identifies. 
This provision, as proposed, would 
have made it ‘‘unlawful’’ for an NRSRO 
to have a conflict in these 
circumstances. As adopted, paragraph 
(a) ‘‘prohibits’’ an NRSRO from having 
the conflict. The Commission adopted 
this change to make the rule text more 
consistent with the Section 15E(h)(2) of 
the Exchange Act, which provides the 
Commission with authority to ‘‘prohibit, 
or require the management and 
disclosure of’’ conflicts of interest.
359
 
For these reasons, the Commission is 
adopting paragraph (a) of Rule 17g–5 
substantially as proposed with the 
modification described above. 
2. Paragraph (b) of Rule 17g–5 
The types of conflicts identified in 
paragraph (b) of Rule 17g–5 are the same 
conflicts listed in the instructions to 
Exhibit 6 of Form NRSRO.
360
These are 
the types of conflicts that commonly 
arise from the business of providing 
credit rating services. Prohibiting these 
types of conflicts outright may adversely 
impact the ability of an NRSRO to 
operate as a credit rating agency. 
Nonetheless, the conflicts must be 
managed through policies and 
procedures and disclosed so that users 
of the credit ratings can assess whether 
the conflict impacts the NRSRO’s 
judgment. 
Paragraph (b), as adopted, has been 
restructured from the proposed version 
of the rule. For example, certain 
conflicts are now identified in separate 
paragraphs as opposed to a single 
paragraph.
361
The Commission’s intent 
is to provide greater clarity to the 
descriptions of the types of conflicts 
and, as noted above, to have them track 
the conflicts described in Exhibit 6 to 
Form NRSRO. As discussed below, the 
conflicts identified in paragraph (b) of 
Rule 17g–5 are substantially the same 
conflicts identified in the paragraph as 
proposed; though they have been 
refined to address comments. The one 
exception is the conflict identified in 
paragraph (b)(5) of Rule 17g–5, which— 
as discussed below—the Commission 
added in response to a comment 
identifying it as a potential conflict. 
a. Paragraph (b)(1) Rule 17g–5 
The conflict identified in paragraph 
(b)(1) of Rule 17g–5 involves being paid 
by an issuer or underwriter to determine 
credit ratings with respect to securities 
or money market instruments they issue 
or underwrite. The Commission believes 
the inclusion of this conflict in the rule 
is necessary or appropriate in the public 
interest or for the protection of 
investors. The concern is that an 
NRSRO may be influenced to issue a 
more favorable credit rating than 
warranted in order to obtain or retain 
the business of the issuer or 
underwriter. The Commission did not 
receive any comments on prohibiting 
this type of conflict unless it is 
disclosed and managed as required 
pursuant to Section 15E of the Exchange 
Act
362
and Rule 17g–1 and is adopting 
the requirement substantially as 
proposed. 
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33596 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
363
15 U.S.C. 78o–7(h)(2)(A). 
364
15 U.S.C. 78o–7. 
365
15 U.S.C. 78o–7(h)(2)(B). 
366
See Commission 2003 CRA Report noting 
concerns of some that conflicts in this area could 
become much greater if these ancillary services 
were to become a substantial portion of an NRSRO’s 
business. See also Commission 2003 CRA Concept 
Release, Securities Act Release No. 8236 (June 4, 
2003), 68 FR 35258 (June 12, 2003), noting concerns 
of some that greater concerns about conflicts of 
interest that arise when a credit rating agency offers 
consulting or other advisory services to issuers it 
rates. 
367
15 U.S.C. 78o–7. 
368
See 17 CFR 240.15c3–1(c)(2)(vi)(E), (F), and 
(H). 
369
See DBRS Letter; S&P Letter; Moody’s Letter. 
370
See DBRS Letter. 
371
See Proposed Rule: Definition of Nationally 
Recognized Statistical Rating Organization, 
Securities Act Release No. 8570 (April 19, 2005), 70 
FR 21306 (April 25, 2005), which noted that 
conflicts may arise when a person associated with 
a credit rating agency also is associated with, or has 
an interest in, an issuer that is being rated. 
372
15 U.S.C. 78o–7(h)(2)(C). 
b. Paragraph (b)(2) of Rule 17g–5 
The conflict identified in paragraph 
(b)(2) of Rule 17g–5 involves being paid 
by an obligor to determine a credit 
rating of the obligor as an entity. This 
conflict is identified in Section 
15E(h)(2)(A) of the Exchange Act.
363
 
This business practice raises the same 
concerns as being paid by an issuer or 
underwriter to determine a credit rating 
on a security or money market 
instrument. The Commission did not 
receive any comments on prohibiting 
this type of conflict unless it is 
disclosed and managed as required 
pursuant to Section 15E of the Exchange 
Act
364
and Rule 17g–1 and is adopting 
the requirement substantially as 
proposed. 
c. Paragraph (b)(3) of Rule 17g–5 
The conflict identified in paragraph 
(b)(3) of Rule 17g–5 involves being paid 
by issuers, underwriters, or obligors for 
ancillary services when they also have 
paid for a credit rating. This conflict as 
it relates to obligors is identified in 
Section 15E(h)(2)(B) of the Exchange 
Act.
365
The Commission believes the 
inclusion of this conflict in the rule as 
it relates to issuers and underwriters is 
necessary or appropriate in the public 
interest or for the protection of 
investors. The concern with respect to 
all of these types of entities is that the 
NRSRO may issue a more favorable than 
warranted credit rating in order to 
obtain business from them for the 
ancillary services.
366
The Commission 
did not receive any comments on the 
requirement that this type of conflict be 
prohibited unless it is disclosed and 
managed as required pursuant to 
Section 15E of the Exchange Act
367
and 
Rule 17g–1 and is adopting the 
requirement substantially as proposed. 
d. Paragraph (b)(4) of Rule 17g–5 
The conflict identified in paragraph 
(b)(4) of Rule 17g–5 involves being paid 
by subscribers for access to credit 
ratings and for other credit ratings 
services where such subscribers may 
use the credit ratings to comply with, 
and obtain benefits or relief under, 
statutes and regulations using the term 
‘‘nationally recognized statistical rating 
organization.’’ The Commission believes 
the inclusion of this conflict in the rule 
is necessary or appropriate in the public 
interest or for the protection of 
investors. The concern is that a 
subscriber potentially could be subject 
to one or more of these statutes and 
regulations and, consequently, benefit 
depending on how the NRSRO rates the 
subscriber, or securities held or issued 
by the subscriber. A broker-dealer 
subscriber holding debt securities is 
able to apply lower haircuts when 
computing its net capital under 
Exchange Act Rule 15c3–1 if the 
securities are rated investment grade by 
two NRSROs.
368
Broker-dealers 
frequently subscribe to receive credit 
analysis or other services from credit 
rating agencies. 
As noted with respect to Exhibit 6 to 
Form NRSRO, several commenters 
raised a concern with the identification 
of this conflict because, as proposed, it 
could have been construed to require an 
NRSRO to affirmatively ascertain 
whether, and how, its subscribers were 
using its credit ratings.
369
For this 
reason, the Commission has modified 
the description in Exhibit 6 and Rule 
17g–5 to make it generally applicable to 
any subscriber, since any subscriber 
potentially could be a user of credit 
ratings for regulatory purposes. 
Consequently, an NRSRO that has 
subscribers will be required to make the 
disclosure in Exhibit 6 and have a 
policy and procedure to address the 
conflict. 
The Commission notes, however, that 
Rule 17g–5 does not prescribe any 
specific policies and procedures to 
address conflicts of interest. The 
Commission does not expect that an 
NRSRO will be required to affirmatively 
ascertain whether, and how, its 
subscribers were using its credit ratings 
to manage this conflict. General policies 
and procedures designed to keep 
persons within the NRSRO who 
participate in the determination of 
credit ratings free of the undue 
influence of all persons who pay the 
NRSRO for credit rating services (e.g., 
issuers, underwriters, obligors, and 
subscribers) will be a way of addressing 
this conflict. 
For these reasons, the Commission is 
adopting the requirement with the 
modifications discussed above. 
e. Paragraph (b)(5) of Rule 17g–5 
The conflict identified in paragraph 
(b)(5) of Rule 17g–5 involves being paid 
by subscribers that also may own 
investments or have entered into 
transactions that could be favorably or 
adversely impacted by a credit rating 
issued by the nationally recognized 
statistical rating organization. As 
discussed with respect to Exhibit 6, this 
conflict was added in response to a 
commenter who pointed out that 
subscribers who manage investment 
portfolios also may have interests in a 
particular credit rating.
370
The 
Commission believes the inclusion of 
this conflict in the rule is necessary or 
appropriate in the public interest or for 
the protection of investors. The 
Commission believes the commenter 
identified a conflict that should be 
disclosed and managed because certain 
large investors that may derive benefits 
from the issuance of a particular credit 
rating could provide a credit rating 
agency with substantial revenues for 
credit rating services. As with potential 
regulatory users, the Commission does 
not expect that an NRSRO will be 
required to affirmatively ascertain how 
the investment portfolios of its 
subscribers would be impacted by a 
pending credit rating. General policies 
and procedures designed to keep 
persons within the NRSRO who 
participate in the determination of 
credit ratings free of the undue 
influence of clients will be a way of 
addressing this conflict. 
For these reasons, the Commission is 
adding this conflict to the conflicts 
identified in paragraph (b) of Rule 17g– 
5. 
f. Paragraph (b)(6) of Rule 17g–5 
The conflict identified in paragraph 
(b)(6) of Rule 17g–5 involves allowing 
persons within the NRSRO to own 
directly securities or money market 
instruments of, or having any other 
direct ownership interests in, issuers or 
obligors subject to a credit rating 
determined by the NRSRO.
371
This 
conflict as it relates to obligors is 
identified in Section 15E(h)(2)(C) of the 
Exchange Act.
372
The Commission 
believes the inclusion of this conflict in 
the rule as it relates to issuers is 
necessary or appropriate in the public 
interest or for the protection of 
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33597 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
373
As discussed below, the NRSRO and a person 
within the NRSRO who participated in the 
determination of a credit rating is prohibited from 
having this conflict under paragraph (c) of Rule 
17g–5. 
374
Cf. 17 CFR 275.204A–1(e)(1) (defining ‘‘access 
person’’ for purposes of requiring investment 
advisers to establish procedures requiring access 
persons to report their personal securities holdings). 
375
See, e.g., S&P Letter; JCR 2nd Letter. 
376
15 U.S.C. 78o–7(h)(2)(C). 
377
See, e.g., Moody’s Letter. 
378
15 U.S.C. 78o–7(h)(2)(D). 
379
15 U.S.C. 77b(a)(11). 
investors. The concern is that allowing 
persons within the NRSRO, even if they 
are not directly involved in determining 
the credit rating, to own securities of an 
issuer or obligor subject to a credit 
rating could lead to situations where 
they seek to influence a credit analyst to 
issue a credit rating favorable to their 
trading position.
373
For example, a 
manager or supervisor may be in a 
position to exert undue influence on a 
credit analyst. 
The Commission, however, does not 
believe this conflict should be 
prohibited for employees that have no 
involvement in determining or 
approving the credit rating. They should 
be able to own securities or money 
market instruments of an issuer or 
obligor subject to a credit rating issued 
by the NRSRO, provided the practice is 
disclosed and managed.
374
A 
prohibition against owning any rated 
securities may be a particular hardship 
for the employees of an NRSRO that 
issues credit ratings with respect to 
most public companies. 
The Commission has modified the 
description of the conflict so it now 
involves ‘‘allowing’’ persons within the 
NRSRO to have these ownership 
interests. This is intended to clarify that 
the conflict does not arise only when 
these persons actually have such an 
ownership interest. This distinction is 
intended to simplify the rule. 
Specifically, as proposed, the rule could 
have been construed as requiring an 
NRSRO to affirmatively determine if, 
and when, an employee purchased a 
rated security. The rule, as adopted, 
only requires the NRSRO to disclose 
that it allows persons within the NRSRO 
to have these direct ownership interests 
in rated securities. 
Finally, two commenters noted that 
indirect ownership of rated securities— 
such as through mutual funds and blind 
trusts—should not be within the scope 
of the provision.
375
The Commission 
believes that indirect ownership of rated 
securities by employees does not 
present the same concerns as direct 
ownership, since an indirect ownership 
interest implies the investor does not 
have control over the decision to 
purchase or sell a specific security. 
Therefore, the provision specifically 
references ‘‘direct’’ ownership. The 
Commission also believes that an 
NRSRO must have flexibility to define 
through its policies and procedures 
when an ownership interest would not 
be ‘‘direct’’ for the purposes of this 
provision. 
For these reasons, the Commission is 
adopting the requirement with the 
modifications described above. 
g. Paragraph (b)(7) of Rule 17g–5 
The conflict identified in paragraph 
(b)(7) of Rule 17g–5 involves allowing 
persons within the NRSRO to have a 
business relationship that is more than 
an ordinary course business relationship 
with an issuer or obligor subject to a 
credit rating determined by the NRSRO. 
This conflict as it relates to obligors is 
identified in Section 15E(h)(2)(C) of the 
Exchange Act.
376
The Commission 
believes the inclusion of this conflict in 
the rule as it relates to issuers is 
necessary or appropriate in the public 
interest or for the protection of 
investors. The concern is that persons 
within the NRSRO having these types of 
business relationships may be 
influenced to determine a favorable 
credit rating for the entity based on the 
business relationship or exert improper 
influence on credit analysts to 
determine a favorable credit rating. The 
Commission believes an NRSRO should 
be required to disclose that it allows 
these types of relationships and be 
required to have policies and 
procedures to manage them. Otherwise, 
the conflicts should be prohibited. 
The Commission notes that in the 
case of a credit analyst it may be 
difficult to remain impartial with 
respect to an issuer or obligor where the 
credit analyst has a non-ordinary course 
business relationship with the entity. 
For example, in the case where the 
issuer or obligor extends a loan to the 
credit analyst that has an interest rate 
far below market rates. However, the 
Commission believes that NRSROs 
should have flexibility in designing 
policies and procedures to address these 
types of conflicts, in part, because of the 
difficulty of defining when a business 
relationship creates too much potential 
for a loss of impartiality on behalf of the 
credit analyst or person within the 
NRSRO. Consequently, the Commission 
is not prohibiting these conflicts 
outright. 
The Commission is modifying the 
provision to clarify that it does not 
apply to ordinary course business 
relationships such as arms length 
mortgage loans and bank and credit card 
accounts. Commenters stated that these 
types of business relationships do not 
raise conflict of interest concerns.
377
 
The Commission agrees that, for 
example, a credit analyst likely would 
not be influenced to issue a favorable 
credit rating simply because the analyst 
has a bank account at the rated entity. 
Examples of a non-ordinary course 
business relationship would be an 
employee entering into a joint business 
venture with a rated obligor or, as noted 
above, obtaining a loan from an obligor 
with an interest rate far below market 
rates. 
For these reasons, the Commission is 
adopting the requirement with the 
modifications discussed above. 
h. Paragraph (b)(8) of Rule 17g–5 
The conflict identified in paragraph 
(b)(8) of Rule 17g–5 involves having a 
person associated with the NRSRO that 
is a broker or dealer engaged in the 
business of underwriting securities or 
money market instruments. This type of 
conflict is identified in Section 
15E(h)(2)(D) of the Exchange Act.
378
The 
Commission believes the inclusion of 
this conflict in the rule is necessary or 
appropriate in the public interest or for 
the protection of investors. As the 
Commission discussed with respect to 
Exhibit 6 of Form NRSRO, an affiliation 
with a broker or dealer that is in the 
business of underwriting securities 
would raise concerns that the NRSRO 
might be influenced by the affiliation to 
issue favorable credit ratings for these 
securities. 
This requirement was in paragraph 
(b)(5) of Rule 17g–5, as proposed. 
However, the conflict identified was 
broader in that it referred to ‘‘having any 
*  *  * affiliation with *  *  * an 
underwriter of securities or money 
market instruments rated by the 
[NRSRO].’’ As discussed with respect to 
Exhibit 6, the Commission has narrowed 
the description of the conflict to address 
concerns that the requirement, as 
proposed, could have created a difficult 
compliance standard by requiring an 
NRSRO to monitor whether any person 
associated with the NRSRO is an 
‘‘underwriter’’ as that term is defined in 
Section 2(a)(11) of the Securities Act of 
1933.
379
 
For these reasons, the Commission is 
adopting the requirement with the 
modifications discussed above. 
i. Paragraph (b)(9) of Rule 17g–5 
The conflict referred to in paragraph 
(b)(9) of Rule 17g–5 is any other type of 
conflict that the NRSRO identifies on 
Form NRSRO in compliance with 
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33598 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
380
15 U.S.C. 78o–7(a)(1)(B)(vi). 
381
See 15 U.S.C. 78o–7(h)(2)(E). 
382
15 U.S.C. 78o–7. 
383
15 U.S.C. 78o–7(h)(2). 
384
See, e.g., S&P Letter stating that all the 
conflicts identified in paragraph (c) of Rule 17g–5 
should not be prohibited as they can be managed. 
385
The determination of ‘‘net revenue’’ is same as 
the determination of net revenue for purposes of 
Form NRSRO and Rule 17g–3. 
386
As noted in the Commission 2003 CRA Report, 
some participants in the Commission 2002 CRA 
Hearings expressed concern that ancillary services 
could become much greater in the future and 
suggestions were made that their percentage 
contribution to total revenue be capped. 
387
As noted in the Commission 2003 CRA Report, 
fees from any single issuer typically comprise a 
very small percentage, less than 1%, of an NRSRO’s 
total revenue. 
388
See R&I Letter; Fitch Letter; S&P Letter; AEI 
Letter; Langohr Letter; AST Letter; ASF Letter. 
389
See LACE Letter. 
390
See R&I Letter. 
391
15 U.S.C. 78o–7(h)(2)(C). 
392
The Senate Report notes that rating agencies 
argue that although the pay-for-rating business 
model presents inherent conflicts of interest, the 
conflict is effectively managed inasmuch as credit 
analysts do not benefit financially from any of their 
ratings decisions. The Senate Report further notes 
that credit analysts are not permitted to own any 
of the securities they follow. 
393
See S&P Letter. 
Section 15E(a)(1)(B)(vi) of the Exchange 
Act
380
and Rule 17g–1. The 
Commission believes the inclusion of 
this provision is necessary or 
appropriate in the public interest or for 
the protection of investors. This catchall 
provision will capture conflicts not 
specifically listed in the instructions for 
Exhibit 6 and Rule 17g–5 that the 
NRSRO has identified on Exhibit 6 to 
Form NRSRO as arising from its 
business activities.
381
The Commission 
did not receive any comments on the 
proposal that this type of conflict be 
prohibited unless it is disclosed and 
managed as required pursuant to 
Section 15E of the Exchange Act
382
and 
Rule 17g–1 and is adopting the 
requirement substantially as proposed. 
3. Paragraph (c) of Rule 17g–5 
Section 15E(h)(2) of the Exchange Act 
requires the Commission to adopt rules 
to prohibit or require the management 
and disclosure of conflicts of interest 
relating to the issuance of credit 
ratings.
383
Paragraph (c) of proposed 
Rule 17g–5 specifically prohibits 
outright four types of conflicts of 
interest. The Commission believes 
prohibiting these conflicts is necessary 
or appropriate in the public interest or 
for the protection of investors. These are 
conflicts that are not a necessary 
consequence of how credit rating 
agencies operate. They would be 
difficult to manage given the risk that 
they could cause undue influence. 
Therefore, the Commission is 
prohibiting them; rather than requiring 
they be disclosed and managed. 
Nonetheless, the Commission intends to 
monitor how the prohibitions operate in 
practice and, if it appears a prohibition 
is interfering inappropriately, the 
Commission will re-evaluate whether it 
should be subject to disclosure and 
management (rather than prohibited).
384
 
a. Paragraph (c)(1) of Rule 17g–5 
As adopted, paragraph (c)(1) prohibits 
an NRSRO from having a conflict 
relating to the issuance of a credit rating 
where the person soliciting the credit 
rating was the source of 10% or more of 
the total net revenue of the NRSRO 
during the most recently ended fiscal 
year.
385
Such a person will be in a 
position to exercise substantial 
influence on the NRSRO.
386
 
Consequently, it will be difficult for the 
NRSRO to remain impartial, given the 
impact on the NRSRO’s income if the 
person withdrew its business. Given the 
Commission’s understanding that fees 
from a single entity generally compose 
a very small percentage of the revenues 
of entities currently identified as 
NRSROs, the Commission believes that 
a 10% threshold is a reasonable 
threshold for registered NRSROs.
387
 
Several commenters stated that this 
conflict should not be prohibited but 
rather subject to procedures to manage 
it.
388
One commenter, while not 
requesting that the proposal be changed, 
noted that in an atypical circumstance 
such as issuing credit ratings for 
structured products sponsored by a 
large client an NRSRO may be required 
to request a waiver of the prohibition.
389
 
Another commenter also mentioned 
structured product sponsors as clients 
that potentially could approach the 10% 
revenue threshold and, therefore, that 
exemptive relief may be appropriate in 
such circumstances.
390
The Commission 
continues to believe that 10% of net 
revenues is a very high threshold. 
Moreover, the definition of net revenues 
has been narrowed to exclude revenues 
earned by affiliates that are not persons 
within the NRSRO. Therefore, the 
threshold will be higher than that 
proposed for NRSROs with affiliates 
engaged in activities unrelated to credit 
ratings. Consequently, the Commission 
does not believe the conflict should be 
subject to a requirement that it be 
managed (rather than prohibited). 
Nonetheless, as noted above, the 
Commission intends to monitor how the 
prohibition operates in practice, 
particularly with respect to structured 
products. The intent behind all the 
prohibitions in paragraph (c) is not to 
prohibit a business practice that is a 
normal part of an NRSRO’s activities. 
Rather, the intent is to prohibit conflicts 
that are not a necessary consequence of 
providing credit rating services. If the 
prohibition in paragraph (c)(1) interferes 
with how NRSROs as a matter of course 
deal with structured product sponsors, 
the Commission will evaluate whether 
the rule should be modified to 
accommodate this business practice or 
whether—as suggested by the 
commenter—an exemption would be 
appropriate. 
For these reasons, the Commission is 
adopting the prohibition substantially as 
proposed. 
b. Paragraph (c)(2) of Rule 17g–5 
As adopted, paragraph (c)(2) prohibits 
an NRSRO from having a conflict 
relating to the issuance of a credit rating 
with respect to a person (excluding a 
sovereign governments nation or an 
agency of a sovereign nation) where the 
nationally recognized statistical rating 
organization, a credit analyst who 
participated in determining the credit 
rating, or a person responsible for 
approving the credit rating, directly 
owns securities of, or has any other 
direct ownership interest in, the rated 
person. This conflict as it relates to 
obligors is identified in Section 
15E(h)(2)(C) of the Exchange Act.
391
The 
Commission believes prohibiting these 
conflicts, including with respect to 
issuers, is necessary or appropriate in 
the public interest or for the protection 
of investors. An NRSRO and persons 
within the NRSRO that participate in 
the credit rating should not have a 
direct financial interest in the issuer or 
obligor subject to the credit rating. It 
will be difficult for these persons to 
remain impartial and issue an objective 
credit rating in this circumstance.
392
 
As with the provision in paragraph 
(b)(6) of Rule 17g–5, the Commission 
has narrowed the scope of this provision 
to ‘‘direct’’ ownership interests. These 
persons will be permitted to have 
indirect ownership interests, for 
example, through mutual funds or blind 
trusts. The prohibition also excludes 
from its scope ownership of securities 
issued by a sovereign government or an 
agency of a sovereign government. The 
Commission added this exclusion in 
response to a comment that sovereign 
government and agency securities may 
be held as cash equivalents.
393
Further, 
the Commission believes for many of 
these securities it would be difficult to 
influence their market price through the 
issuance of a credit rating. Therefore, a 
prohibition on a credit analyst owning 
securities of sovereign governments the 
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33599 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
394
See Section 3(a)(63) of the Exchange Act (15 
U.S.C. 78c(a)(63)) defining ‘‘person associated with 
an NRSRO.’’ 
395
15 U.S.C. 78o–7(h)(2)(C). 
396
See Moody’s Letter; S&P Letter. 
397
Cf. Rule 2711 of the National Association of 
Securities Dealers, Inc. (‘‘NASD’’) allowing a 
securities research analyst to be an officer or 
director of a subject company if proper disclosure 
is made. 
398
15 U.S.C. 78o–7(h)(2)(C). 
399
15 U.S.C. 78o–7(i)(1). 
400
15 U.S.C. 78o–7(i)(1)(A), (B) and (C). 
401
Id. 
402
15 U.S.C. 78o–7(i)(1). 
403
See Commission 2003 CRA Report, which 
noted that some participants in the Commission 
2002 CRA Hearings questioned the appropriateness 
of unsolicited credit ratings because they could 
used to engage in ‘‘strong-arm’’ tactics to induce 
payment for a credit rating the issuer did not 
request. 
404
15 U.S.C. 78o–7(i)(1)(A). 
405
See Commission 2003 CRA Report, which 
noted that some participants in the Commission’s 
2002 CRA Hearings worried that issuers could be 
unduly pressured to purchase advisory services, 
particularly in cases where they were solicited by 
the credit rating analyst. 
analyst rates is not necessary. The 
Commission notes that this ownership 
interest is subject to the requirements of 
paragraphs (a) and (b)(6) of Rule 17g–5. 
Consequently, it will be required to be 
addressed in the procedures for 
managing the conflicts that arise from 
direct ownership of rated securities. 
For the reasons, the Commission is 
adopting the prohibition with the 
modifications discussed above. 
c. Paragraph (c)(3) of Rule 17g–5 
Paragraph (c)(3) prohibits an NRSRO 
from having a conflict relating to the 
issuance of a credit rating where the 
rated entity is a person associated with 
the NRSRO (i.e., a company directly or 
indirectly controlling, controlled by, or 
under common control with, the 
NRSRO).
394
This conflict as it relates to 
obligors is identified in Section 
15E(h)(2)(C) of the Exchange Act.
395
The 
Commission believes prohibiting this 
conflict, including with respect to 
issuers, is necessary or appropriate in 
the public interest or for the protection 
of investors. The Commission believes 
that it is appropriate to prohibit such 
conflicts because of the degree of 
difficulty the Commission foresees in 
maintaining an appropriate level of 
impartiality, when issuing a credit 
rating with respect to an affiliated 
entity. 
Two commenters stated that this 
conflict can be managed and should not 
be prohibited.
396
The Commission 
believes that for a credit analyst to 
determine a credit rating for the 
company where the analyst works or an 
affiliate of that company would place 
the analyst in an untenable position. 
Moreover, the Commission does not 
believe there will be a need for such a 
credit rating as long as other NRSROs 
are available to determine credit ratings 
for these companies. The Commission 
will entertain requests for exemptive 
relief from this prohibition where 
appropriate, such as if circumstances 
develop to a point where an NRSRO or 
its affiliate requires a public credit 
rating and cannot obtain one from 
another NRSRO. For these reasons, the 
Commission is adopting this prohibition 
substantially as proposed. 
d. Paragraph (c)(4) of Rule 17g–5 
Paragraph (c)(4) prohibits an NRSRO 
from having a conflict relating to the 
issuance of a credit rating where the 
credit analyst who participated in 
determining the credit rating, or a 
person responsible for approving the 
credit rating, also is an officer or 
director of the person that is the subject 
of the credit rating.
397
This conflict as 
it relates to obligors is identified in 
Section 15E(h)(2)(C) of the Exchange 
Act.
398
The Commission believes 
prohibiting this conflict, including with 
respect to issuers, is necessary or 
appropriate in the public interest or for 
the protection of investors. The 
Commission believes that an NRSRO or 
person associated with the NRSRO 
having such a position will have 
difficulty remaining objective in these 
circumstances. 
The Commission did not receive any 
comments on this specific prohibition 
and is adopting it substantially as 
proposed. 
F. Rule 17g–6—Prohibited Unfair, 
Coercive, or Abusive Practices 
Section 15E(i)(1) of the Exchange 
Act
399
provides that the Commission 
shall adopt rules prohibiting any act or 
practice by an NRSRO that the 
Commission determines is unfair, 
abusive, or coercive, including certain 
acts and practices set forth in 
paragraphs (i)(1)(A)–(C) of Section 15E 
of the Exchange Act.
400
In explaining 
this statutory provision, the Senate 
Report stated that ‘‘the Commission, as 
a threshold consideration, must 
determine that the practices subject to 
prohibition under this section are 
unfair, coercive or abusive before 
adopting rules prohibiting such 
practices.’’ 
In the proposing release, the 
Commission made a preliminary 
determination that the acts and 
practices described in paragraphs 
(i)(1)(A)–(C) of Section 15E of the 
Exchange Act
401
would be unfair, 
coercive, or abusive. Consequently, the 
Commission proposed that they be 
prohibited through provisions in 
paragraphs (a)(1) through (a)(4) of Rule 
17g–6, with one conditional exception. 
The Commission also made a 
preliminary determination in the 
proposing release that using an 
unsolicited credit rating to pressure an 
issuer or obligor into paying for the 
rating or another service would be 
unfair, coercive, or abusive. 
Consequently, the Commission 
proposed to use its authority under 
Section 15E(i)(1) of the Exchange Act
402
 
to prohibit such act and practice 
through the provisions in paragraph 
(a)(5) of Rule 17g–6.
403
 
1. Paragraph (a)(1) of Rule 17g–6 
Section 15E(i)(1)(A) of the Exchange 
Act provides that the Commission shall 
prohibit the following practice if the 
Commission determines it is unfair, 
coercive, or abusive: 
Conditioning or threatening to condition 
the issuance of a credit rating on the 
purchase by the obligor or an affiliate thereof 
of other services or products, including pre- 
credit rating assessment products of the 
nationally recognized statistical rating 
organization or any person associated with 
such nationally recognized statistical rating 
organization[.]
404
 
In the proposing release, the 
Commission preliminarily determined 
that this practice would be unfair, 
coercive, or abusive. Consequently, the 
Commission proposed to prohibit it in 
paragraph (a)(1) of Rule 17g–6. 
Specifically, this paragraph, as 
proposed, would have prohibited an 
NRSRO from conditioning or 
threatening to condition the issuance of 
a credit rating on the purchase of other 
products or services, including pre- 
credit rating assessment products.
405
 
Credit ratings play an important role 
in the financial markets. Market 
participants use them in making 
financial decisions on whether to buy or 
sell debt securities and extend credit to 
rated entities. Moreover, credit ratings 
of NRSROs are used in federal and state 
laws and regulations to establish limits 
or confer exemptions or privileges. 
Consequently, an entity may benefit 
from having an NRSRO credit rating 
because the credit rating makes its 
securities more marketable; or the credit 
rating qualifies the entity for an 
exemption or privilege or makes holding 
the entity’s debt securities or transacting 
with the entity more attractive to other 
regulated entities. An NRSRO could 
abuse this incentive by using it to coerce 
an issuer or obligor to purchase services 
from the NRSRO or its affiliates. 
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33600 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
406
See Moody’s Letter. 
407
Id. 
408
Id. 
409
15 U.S.C. 78o–7(i)(1)(C). 
410
Paragraph (a)(2) of Rule 17g–6. 
411
Presumably, an issuer or obligor would not 
agree to compensate an NRSRO for a credit rating 
that was lower than would result from applying the 
NRSRO’s methodologies. Nonetheless, if an NRSRO 
agreed to issue a lower than warranted credit rating 
in return for compensation, the NRSRO would 
violate paragraph (a)(2) as well. 
412
See Commission 2003 CRA Report, which 
noted that some participants in the Commission 
2002 CRA Hearings believed that, even if the 
purchase of ancillary services did not impact the 
credit rating decision, issuers may be pressured into 
using the services out of fear that their failure to do 
so may adversely impact their credit rating. 
413
As noted above, the prohibitions in paragraphs 
(a)(2) and (a)(3) Rule 17g–6 are being adopted 
pursuant to authority in Section 15E(i)(1)(C) of the 
Exchange Act (15 U.S.C. 78o–7(i)(1)(C)). 
The Commission did not receive any 
comments objecting to its preliminary 
determination that this practice would 
be unfair, coercive, or abusive. The 
Commission has determined this 
practice would be unfair, coercive, or 
abusive and, consequently, is adopting 
paragraph (a)(1) of Rule 17g–6 
substantially as proposed in order to 
prohibit it. 
One commenter did state that there 
are certain circumstances where it 
would not be unfair, coercive, or 
abusive to condition the determination 
of a credit rating on a security on further 
analysis of the issuer.
406
Specifically, 
the commenter stated that to determine 
a credit rating for a subordinated debt 
security, a credit rating agency may be 
required to analyze the overall capital 
structure of the issuer and determine 
credit ratings for the issuer as an entity 
and for its senior debt.
407
The 
commenter requested that the rule text 
in paragraph (a)(1) of proposed Rule 
17g–6 be amended to clarify that this 
specific practice is not prohibited.
408
 
The Commission believes that the rule 
text as proposed and as adopted would 
not prohibit this specific practice. The 
prohibition applies to conditioning a 
credit rating on the purchase of ‘‘other’’ 
services of the credit rating agency. In 
the situation described above, the 
requirement to analyze the capital 
structure of the issuer and the 
creditworthiness of its senior debt is 
part of the process of determining the 
credit rating on the subordinated debt. 
Therefore, the Commission views this as 
all part of one service and not three 
different services. 
For these reasons, the Commission is 
adopting the prohibition substantially as 
proposed. 
2. Paragraphs (a)(2) and (a)(3) of Rule 
17g–6 
Section 15E(i)(1)(C) of the Exchange 
Act provides that the Commission shall 
prohibit the following practices if the 
Commission determines they are unfair, 
coercive, or abusive: 
Modifying or threatening to modify a credit 
rating or otherwise departing from systematic 
procedures and methodologies in 
determining credit ratings, based on whether 
the obligor, or an affiliate of the obligor, 
purchases or will purchase the credit rating 
or any other service or product of the 
nationally recognized statistical rating 
organization or any person associated with 
such organization.
409
 
In the proposing release, the 
Commission preliminarily determined 
that these practices would be unfair, 
coercive, or abusive. Consequently, the 
Commission proposed to prohibit them 
through paragraphs (a)(2) and (a)(3) of 
proposed Rule 17g–6. The Commission 
did not receive any comments objecting 
to its preliminary determination that 
these practices are unfair, coercive, or 
abusive. The Commission has 
determined they are unfair, coercive, or 
abusive for the reasons discussed below 
and, consequently, is adopting 
paragraphs (a)(2) and (a)(3) of Rule 17g– 
6 substantially as proposed in order to 
prohibit them. 
As adopted, paragraph (a)(2) prohibits 
an NRSRO from issuing, or offering or 
threatening to issue, a credit rating that 
is not determined in accordance with 
the NRSRO’s established procedures for 
determining credit ratings based on 
whether the rated person purchases or 
will purchase the credit rating or 
another product or service.
410
Under 
this provision, an NRSRO is prohibited 
from issuing or threatening to issue a 
credit rating that is lower than would 
result from using its methodology for 
determining credit ratings based on 
whether the issuer or obligor pays for 
the credit rating or any other service or 
product of the NRSRO and its affiliates. 
The NRSRO also will be prohibited from 
issuing or promising to issue a higher 
credit rating in these circumstances.
411
 
The practice prohibited in this 
paragraph is distinguishable from the 
practice prohibited in Paragraph (a)(1) 
of Rule 17g–6. Paragraph (a)(1) 
addresses the situation where an 
NRSRO conditions the issuance of a 
credit rating on the purchase of another 
service or product. Paragraph (a)(2) 
addresses the situation where an 
NRSRO conditions the opinion reached 
in the credit rating on the purchase of 
the credit rating or another service or 
product.
412
Thus, unlike paragraph 
(a)(1), an NRSRO will violate paragraph 
(a)(2) if it conditions the issuance of the 
credit rating on the obligor or issuer 
paying for the credit rating. This is 
because the NRSRO will not be agreeing 
to determine a credit rating that 
reflected the NRSRO’s assessment of the 
creditworthiness of the issuer or obligor 
as determined by its methodologies. 
Rather, the NRSRO will be agreeing to 
skew the credit rating higher based on 
the issuer or obligor agreeing to pay for 
it. 
Paragraph (a)(3) Rule 17g–6 prohibits 
an NRSRO from modifying, or offering 
or threatening to modify, a credit rating 
in a manner contrary to its procedures 
for modifying a credit rating based on 
whether the rated person, or an affiliate 
of the rated person, purchases or will 
purchase the credit rating or any other 
service or product of the NRSRO and its 
affiliates. The prohibition in paragraph 
(a)(2) of Rule 17g–6 applies to threats or 
promises with respect to the issuance of 
a credit rating. Paragraph (a)(3) extends 
this prohibition to threats or promises 
with respect to changing an existing 
credit rating.
413
 
The Commission believes these 
practices are unfair, coercive, or abusive 
because an entity’s cost of credit and, in 
some cases, ability to obtain credit, 
generally depends on its credit rating. 
Entities with lower credit ratings must 
pay higher interest rates to borrow funds 
or issue debt. In some cases, a low credit 
rating could block an entity’s access to 
credit. Thus, it is in a borrower’s 
economic interest to have a high credit 
rating. This creates the potential for an 
NRSRO to have inappropriate leverage 
over an issuer or obligor. 
An NRSRO could use this leverage to 
obtain business by threatening to issue 
or modify a credit rating in a manner 
that results in a lower credit rating than 
would have resulted from using its 
established methodologies. The NRSRO 
also could issue a lower credit rating or 
lower an existing rating to punish an 
issuer or obligor for not purchasing the 
credit rating or another service or 
product of the NRSRO and its affiliates. 
Conversely, the NRSRO could promise 
to issue or modify a credit rating in a 
manner that results in a higher credit 
rating than would have resulted from 
using its established methodologies as a 
reward for purchasing the credit rating 
or other services or products. 
Paragraphs (a)(2) and (3) of Rule 17g–6 
are designed to provide a check on the 
potential inappropriate influence an 
NRSRO may have over issuers and 
obligors by prohibiting an NRSRO from 
using this leverage to coerce an issuer or 
obligor into purchasing a credit rating or 
other services and products of the 
NRSRO and its affiliates. 
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33601 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
414
The Commission is mindful of the limitation 
in Section 15E(c)(2) of the Exchange Act that the 
rules the Commission adopts under the Exchange 
Act not regulate the substance of credit ratings (15 
U.S.C. 78o–7(c)(2)). The Commission does not 
believe that this prohibition will interfere with the 
process by which an NRSRO assesses the 
creditworthiness of a security, money market 
instrument, or obligor. An issuer’s or obligor’s 
agreement or refusal to pay the NRSRO or its 
affiliate for a service or product is, of itself, not 
relevant to a credit assessment of the issuer or 
obligor. Moreover, this is a practice that Congress 
specifically identified in Section 15E(i)(1)(C) of the 
Exchange Act as potentially unfair, coercive, or 
abusive (15 U.S.C. 78o–7(i)(1)(C)). 
415
15 U.S.C. 78o–7(i)(1)(B). 
416
See DBRS Letter; Fitch Letter; letter dated 
April 11, 2007 from Charles D. Brown, General 
Counsel, Fitch Ratings (‘‘Fitch 2nd Letter’’). 
417
See letter dated March 30, 2007 from 
Raymond W. McDaniel, President, Moody’s 
Investor Services (‘‘Moody’s 2nd Letter’’); letter 
dated April 24, 2007 from Jeanne M. Dering, 
Executive Vice President, Global Regulatory Affairs 
& Compliance (‘‘Moody’s 3rd Letter); S&P Letter; 
Moody’s Letter. 
418
Id. 
419
Id. 
420
Id. 
421
Id. 
422
Id. 
423
See e.g., DBRS Letter; Fitch letter; Fitch 2nd 
Letter. See also letter dated February 13, 2007 from 
Janet M. Tavakoli, President, Tavakoli Structured 
Finance, Inc.; letter dated February 14, 2007 from 
Gregory G. Raab, Chief Executive Officer, Axon; 
letter dated February 16, 2007 from Emile Van den 
Bol, Managing Director, Deutsche Bank; letter dated 
February 16, 2007 from Kent D. Born, Senior 
Managing Director, PPM America; letter dated 
February 23, 2007 from Patti Unti, Managing 
Director, Capmark Investments LP; letter dated 
February 23, 2007 from David Lazarus, Managing 
Director, Capmark Securities, Inc.; letter dated 
February 28, 2007 from Ronald E. Schrager, Chief 
Executive Officer, LNR Property Corporation; letter 
Continued 
The Commission further notes that 
these practices could result in credit 
ratings that mislead the marketplace and 
undermine the regulatory use of NRSRO 
credit ratings. An NRSRO that follows 
through on a threat to issue a low credit 
rating or promise to issue a high credit 
rating will be issuing a credit rating that 
does not accurately reflect the credit 
rating agency’s true assessment of the 
creditworthiness of the issuer or obligor. 
The credibility and reliability of an 
NRSRO and its credit ratings depends 
on the NRSRO developing and 
implementing sound methodologies for 
determining credit ratings and following 
those methodologies. The fact that an 
issuer or obligor agrees or refuses to 
purchase a credit rating or other service 
or product from the NRSRO and its 
affiliates should have no bearing on the 
NRSRO’s credit assessment of the issuer 
or obligor.
414
 
For these reasons, the Commission is 
adopting the prohibition substantially as 
proposed. 
3. Paragraph (a)(4) of Rule 17g–6 
Section 15E(i)(1)(B) of the Exchange 
Act provides that the Commission by 
rule shall prohibit any act or practice 
the Commission determines to be unfair, 
coercive, or abusive relating to: 
Lowering or threatening to lower a credit 
rating on, or refusing to rate, securities or 
money market instruments issued by an asset 
pool or as part of any asset-backed or 
mortgage-backed securities transaction, 
unless a portion of the assets within such 
pool or part of such transaction, as 
applicable, also is rated by the nationally 
recognized statistical rating 
organization[.]
415
 
In explaining this statutory 
provisions, the Senate Report stated that 
‘‘there may be instances when a rating 
agency may refuse to rate securities or 
money market instruments for reasons 
that are not intended to be anti- 
competitive.’’ The Senate Report further 
stated that ‘‘the Commission *  *  * 
should prohibit only those ratings 
refusals that occur as part of unfair, 
coercive or abusive conduct.’’ 
a. Structured Product Credit Rating 
Practices 
Two of the current NRSROs—Fitch 
and DBRS—believe two other 
NRSROs—S&P and Moody’s engage in 
anti-competitive practices in the area of 
determining credit ratings for structured 
products and, consequently, these 
practices should be found by the 
Commission to be unfair, coercive, or 
abusive.
416
These practices relate to 
instances where the credit rating agency 
has not rated particular securities that 
have been rated by another credit rating 
agency and that underlie a structured 
product. S&P and Moody’s believe their 
practices are necessary to determine a 
credible credit rating.
417
 
The practices take several forms. The 
credit rating agency may, as a condition 
of issuing a credit rating for a structured 
product, require that it effectively issue 
a public credit rating for a fee for most, 
if not all, the assets underlying the 
structured product.
418
The second form 
involves the credit rating agency 
insisting that it provide a private credit 
rating or credit assessment for a fee with 
respect to the unrated assets.
419
The 
third form involves the credit rating 
agency taking into consideration the 
internal credit analysis of another 
person (e.g., the underwriter, sponsor, 
or manager of the structured product) 
with respect to the unrated assets to 
determine a credit rating or private 
credit rating, or perform a credit 
assessment of the unrated assets.
420
The 
fourth form involves the credit rating 
agency taking into consideration but not 
necessarily adopting the credit ratings of 
another credit rating agency to 
determine a credit rating or private 
credit rating, or perform a credit 
assessment of the unrated assets.
421
 
Under this last form, the credit rating 
agency may employ a standardized 
methodology to discount (notch down) 
the credit ratings of the other credit 
rating agency based on the type of 
security and category of credit rating.
422
 
b. Proposed Rule 17g–6(a)(4) 
In the proposing release, the 
Commission preliminarily determined 
that it would be unfair, coercive, or 
abusive for an NRSRO to issue or 
threaten to issue a lower credit rating, 
lower or threaten to lower an existing 
credit rating, refuse to issue a credit 
rating, or to withdraw a credit rating 
with respect to a structured product 
unless a portion of the assets underlying 
the structured product also are rated by 
the NRSRO. Consequently, the 
Commission proposed to prohibit these 
practices in paragraph (a)(4) of proposed 
Rule 17g–6. 
The Commission also proposed an 
exception to the prohibition that would 
permit an NRSRO to refuse to issue the 
credit rating or withdraw the credit 
rating if the NRSRO has rated less than 
85% of the market value of the assets 
underlying the structured product. This 
was designed to address the concern 
that an NRSRO when assessing the 
creditworthiness of the structured 
product would be forced to issue a 
credit rating either when a substantial 
portion of the underlying assets were 
not rated or when the underlying assets 
have been rated by another credit rating 
agency. If the underlying assets were 
unrated, the NRSRO may not have 
sufficient information for issuing a 
credit rating on the structured product. 
In the case where the underlying assets 
were rated by another credit rating 
agency, the other credit rating agency 
may have used different methodologies 
to assess the creditworthiness of the 
asset and may have determined a credit 
rating that is different than the credit 
rating the NRSRO would issue, if it had 
rated the asset. 
c. Comments on Proposed Rule 17g– 
6(a)(4) 
i. Support for a Prohibition 
The Commission received far more 
comments on this provision of the 
proposed rules than on any other 
provision. Many commenters expressed 
strong support for the prohibition; 
though many of the supporters stated 
that the 85% exception was too high 
and should be lowered to at least 
66%.
423
These commenters generally 
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33602 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
dated March 5, 2007 from David Hynes, Partner, 
Northcross Capital LLP; letter dated March 6, 2007 
from S. Trezevant Moore, Jr., President & COO, 
Luminent Mortgage Capital, Inc.; letter dated March 
7, 2007 from Bruce E. Stern, Chairman, Government 
Affairs Committee, Association of Financial 
Guaranty Insurers; letter dated March 9, 2007 from 
Petra Spiegel, Eurohypo AG; letter dated March 9, 
2007 from Landon D. Parsons, Managing Director, 
G-Bass (‘‘G-Bass Letter’’); letter dated March 9, 2007 
from Pat G. Halter, Chief Executive Officer, 
Principal Real Estate Investors; letter dated March 
12, 2007 from Charles Covell, Executive Vice 
President, Citigroup Alternative Investments; letter 
dated March 12, 2007 from Rodney J. Dillman, 
General Counsel, Babson Capital Management LLC; 
letter dated March 12, 2007 from Louis C. Lucido, 
Group Managing Director, Trust Company of the 
West; letter dated March 12, 2007 from Daniel 
Ivascyn, Managing Director, PIMCO (‘‘PIMCO 
Letter’’); letter dated March 27, 2007 from Dottie 
Cunningham, Chief Executive Officer, Commercial 
Mortgage Securities Association; letter dated April 
23, 2007 from Dwight M. Jaffe, Professor, Haas 
School of Business (‘‘Jaffe Letter’’); letter dated 
April 24, 2007 from Daniel Rubinfeld, Professor, 
Boalt Law School (‘‘Rubinfeld Letter’’); letter dated 
April 25, 2007 from Dottie Cunningham, Chief 
Executive Officer, Commercial Mortgage Securities 
Association; letter dated May 11, 2007 from Kent 
Wideman, Group Managing Director, Policy and 
Rating Committee, and Mary Keogh, Managing 
Director, Policy and Regulatory Affairs, Dominion 
Bond Rating Service (‘‘DBRS 2nd Letter’’). 
424
Id. 
425
See DBRS Letter; DBRS 2nd Letter. 
426
See Fitch Letter. 
427
Id. 
428
Fitch Letter. 
429
See Rubinfeld Letter; Jaffe Letter. 
430
Id. 
431
See Jaffe Letter. 
432
See, e.g., Fitch Letter; PIMCO Letter; G-Bass 
Letter. 
433
Id. 
434
Id. 
435
See, e.g., Fitch Letter. 
436
Id. 
437
See Fitch Letter. 
438
See Fitch 2nd Letter. 
439
See, e.g., S&P Letter; S&P 2nd Letter; Moody’s 
Letter; Moody’s 3rd; R&I Letter; FSR Letter; 
Rutherfurd Letter; Langohr Letter; AST Letter; letter 
dated March 30, 2007 from Raymond W. McDaniel, 
President, Moody’s Investor Services (‘‘Moody’s 
2nd Letter’’); letter dated March 30, 2007 from 
Charles W. Calomiris, Professor, Columbia 
University, et al. (‘‘Calomiris Letter’’); letter dated 
April 3, 2007, from J. Darrell Duffie, Professor, 
Stanford University, Graduate School of Business; 
letter dated April 6, 2007 from Jean Helwege, 
Associate Professor of Finance, Penn State 
University; letter dated April 13, 2007 from Robert 
M. Chilstrom, Esq., Skadden, Arps, Slate, Meagher 
& Flom LLP, on behalf of Moody’s Investor 
Services; letter dated April 18, 2007 from Gunter 
Loeffler, Professor, University of Ulm, Germany; 
letter dated April 26, 2007 from Louis H. 
Ederington, Professor, Price College of Business, 
University of Oklahoma; letter dated April 28, 2007 
from Mitchell A. Petersen, Professor, Kellogg 
School of Management, Northwestern University; 
letter dated May 3, 2007 from the Honorable 
Charles E. Schumer, Senator, Robert Menendez, 
Senator, John E. Sununu, Senator, and Mike Enzi, 
Senator, U.S. Senate; letter dated May 12, 2007 from 
Ren-Raw Chen, Professor, Rutgers University. 
440
Id. 
441
See Calomiris Letter. 
442
See Moody’s 3rd Letter; Calomiris Letter. 
443
See Moody’s Letter; Calomiris Letter. 
444
See Langohr Letter. 
445
See Moody’s 2nd Letter. 
believe the proposed rule would serve 
to increase competition within the 
credit ratings market, thus benefiting 
investors in structured products.
424
 
For example, DBRS stated that 
notching has a ripple effect on 
competition wider than just the 
structured products and affects 
competition in the corporate bond rating 
market and that the practices employed 
by S&P and Moody’s could have a 
profound and harmful effect on efforts 
to increase competition among 
NRSROs.
425
Fitch stated that adoption 
of the proposed rule is critical to 
achieving the Rating Agency Act’s 
objective of greater accountability, 
transparency, and competition in the 
credit ratings market.
426
Fitch noted that 
structured products increasingly are 
designed to hold other structured 
products.
427
Fitch stated that the 
practices employed by S&P and 
Moody’s have increased their market 
share in rating structured products, 
As the structured finance market has 
grown exponentially in terms of both dollar 
value and number of market participants, it 
has become increasingly circular. Most 
notably, [structured product] issuers 
regularly acquire securities of other 
[structured product] issuers. The circularity 
of the market, in which large, intertwined 
investors are each subject to notching 
guidelines mandated by Moody’s and S&P, 
has allowed Moody’s and S&P to extend their 
partner monopoly in the traditional bond 
market to the increasingly prominent 
structured finance market. Therein lies the 
power of the unfair, coercive, and abusive 
practice of notching.
428
 
Academic commenters also stated that 
Moody’s and S&P’s practices are unfair, 
coercive, and abusive within the 
meaning of the Rating Agency Act.
429
 
They stated that the securities market 
would benefit from increased 
competition in the credit rating market, 
and that these practices have served to 
hinder Fitch’s ability to compete.
430
 
One commenter also argued that these 
practices may lead to misleading credit 
ratings if another credit rating agency’s 
ratings are categorically reduced 
without analytic support.
431
 
As noted above, many of the 
commenters that supported the 
prohibition stated that the 85% 
threshold should be lowered to 66% or 
less.
432
They based this assertion on 
Fitch’s showing that S&P, Moody’s, and 
Fitch each shared approximately 66% of 
the structured product market before 
S&P and Moody’s began their practices 
in 2001.
433
They further stated that as a 
direct result of notching, S&P and 
Moody’s have significantly increased 
their market share; while Fitch has lost 
market share.
434
 
The commenters that support 
prohibiting the practices of S&P and 
Moody’s believe that the remedy is to 
require an NRSRO to rely on the credit 
ratings of another NRSRO without 
employing any mapping methodology 
that would lower the credit rating.
435
 
For example, Fitch argues that historical 
default, transition rate, and rating 
comparability studies indicate that the 
credit ratings of S&P, Moody’s, and 
Fitch for structured products are 
comparable.
436
Therefore, Fitch asserts 
that NRSROs should rely on the credit 
ratings of other NRSROs at face 
value.
437
Fitch suggested that the 
proposed rule be modified to provide 
that if an NRSRO has rated 66% of the 
par value of an asset pool, and all assets 
in the pool are publicly rated by two or 
more NRSROs, for those assets the 
NRSRO has not itself rated, the NRSRO 
be required to use one of the two or 
more public ratings assigned to the 
underlying asset.
438
 
ii. Opposition to a Prohibition 
S&P, Moody’s, and several other 
commenters (including academic 
commenters) strongly opposed the 
prohibition in paragraph (a)(4) of 
proposed Rule 17g–6.
439
They cited a 
number of reasons, most notably that it 
would require one NRSRO to rely on the 
credit ratings of another NRSRO.
440
 
Several commenters asserted that the 
proposed rule would have an 
anticompetitive effect.
441
They argued 
that requiring an NRSRO to adopt the 
credit ratings of competitors in its credit 
ratings analysis would reduce 
competition because the ability of an 
NRSRO to reach an independent 
determination of creditworthiness based 
on different methodologies or criteria 
would be impeded.
442
These 
commenters state that value is brought 
to the market by allowing NRSROs to 
deliver different analytical perspectives 
on issuers and securities.
443
Another 
commenter wrote that the proposed rule 
would require an NRSRO to put its own 
reputation at risk on behalf of the 
commercial interests of a competitor.
444
 
Further, Moody’s argued that 
differences among credit rating opinions 
on the same security tend to be larger 
than those observed when comparing 
only published credit ratings on jointly- 
rated securities, and that differences 
between credit rating opinions are more 
common and are often greater when 
Moody’s rates securities in a category 
other than Aaa.
445
A rule that prohibited 
notching would, in the view of many 
commenters, prohibit an agency from 
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33603 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
446
See, e.g., Moody’s Letter. 
447
See S&P Letter; Moody’s Letter. 
448
Id. 
449
See S&P Letter. 
450
Id. 
451
Id. 
452
See Moody’s 3rd Letter. 
453
See Moody’s Letter; Moody’s 2nd Letter; 
Moody’s 3rd Letter; S&P Letter; S&P 2nd Letter. 
454
Id. 
455
Id. 
456
Id. 
457
See S&P Letter; S&P 2nd Letter. 
458
See S&P 2nd Letter; Moody’s 3rd Letter. 
459
See S&P 2nd Letter. 
460
See Moody’s Letter; Moody’s 2nd Letter; 
Moody’s 3rd Letter; S&P Letter; S&P 2nd Letter. 
461
Id. 
462
Id. 
463
See Moody’s Letter; Moody’s 2nd Letter; 
Moody’s 3rd Letter; S&P Letter; S&P 2nd Letter. 
464
Id. 
465
See Calomiris Letter. 
466
See Moody’s Letter. 
467
See S&P Letter; see also DBRS 2nd Letter 
supporting increased recordkeeping and revising its 
earlier comment that an NRSRO should be required 
to rely on the credit ratings of another NRSRO in 
light of objections that this would interfere with 
how an NRSRO determines credit ratings. 
468
See S&P Letter. 
469
Id. 
forming its own opinion about the risks 
of collateral in a structured product.
446
 
Additionally, S&P and Moody’s 
believe the proposed rule would unduly 
interfere with their methodologies for 
determining credit ratings, could lead to 
inaccurate credit ratings and credit 
ratings that violate securities laws, and 
unnecessarily raise constitutional 
issues.
447
They argue that users of credit 
ratings believe ratings reflect the 
agency’s bona fide opinion of the 
creditworthiness of a particular issuer, 
security, or transaction.
448
S&P wrote 
that when an agency is asked to rate 
structured products it must understand 
the credit quality of all of the 
underlying assets.
449
If an NRSRO was 
required to use the credit rating of 
another NRSRO, it would in effect lose 
the right to understand the credit 
quality of the underlying assets, and 
lose control over the credit rating 
opinions it publishes.
450
Such a result, 
it argues, would be contrary to the 
legislative intent that credit ratings be 
independent and free from interference 
by third parties, including governments, 
issuers, investors, and competitors.
451
 
Moody’s similarly argues that such a 
credit rating would not reflect an 
evaluation of the credit risk of all the 
assets in the pool, and therefore, 
negatively impact the credibility and 
reliability of its credit ratings and 
increase the risks to investors who rely 
on its credit ratings.
452
 
S&P and Moody’s argue that 
prohibiting their practices, in effect, 
would require them to rely on another 
NRSRO’s credit rating even when they 
believed that credit rating to be 
unsupportable.
453
Further, if they were 
required to rely on a credit rating from 
another NRSRO, they argue they would 
be placed in a position of having to 
publish credit ratings that they do not 
believe are accurate or engage in a 
prohibited practice.
454
They state that 
this would create the untenable choice 
of taking an action that is inconsistent 
with general securities law principles or 
violating Rule 17g–6.
455
 
S&P and Moody’s state that their 
practices are analytically justified 
methods of forming an independent 
credit rating opinion.
456
S&P asserts that 
it is appropriate to reserve the right to 
discount the credit ratings of other 
credit rating agencies when 
incorporating these credit ratings into 
its own analysis to account for 
differences in analytical and 
surveillance practices among credit 
rating agencies, preserve its ability to 
perform its own surveillance of the 
underlying assets, and account for the 
possibility that the assets could be 
down-rated by another credit rating 
agency without notice.
457
 
S&P and Moody’s also have disputed 
the assertion that there are no 
differences between their credit ratings 
and Fitch’s credit ratings.
458
S&P argues 
that historical correlations that may 
have existed are not a justification for 
adopting a rule that would require 
recognition of future credit ratings 
issued by credit rating agencies that may 
register as NRSROs.
459
Moreover, S&P 
and Moody’s say that their practice of 
mapping to other credit ratings was 
developed to accommodate structured 
product sponsors who did not want to 
wait or pay for credit analysis on the 
assets underlying a structured product 
that the agency had not previously 
rated.
460
They asserted that this practice 
provides a quicker means to close a 
structured product issuance because the 
existing credit rating serves as a starting 
point in analyzing a portion of the pool 
of underlying assets.
461
Therefore, in 
their view, prohibiting their practices 
would harm users of credit ratings.
462
 
S&P and Moody’s also commented on 
how paragraph (a)(4) of proposed Rule 
17g–6 should be revised. For example, 
Moody’s commented that the 85% 
threshold in the proposed rule was not 
appropriate.
463
It argued that credit 
ratings for tranches of structured 
products are sensitive to the accuracy of 
credit ratings for even small portions of 
the underlying asset pool. Further, S&P 
and Moody’s argued that the 85% 
threshold would create an incentive for 
collateral managers to include the 
riskiest securities in the 15% unrated 
portion of the structured product.
464
 
Other commenters also argued the 
proposed rule would undermine the 
market’s ability to offset potential harm 
from credit rating shopping.
465
 
Moody’s and S&P recommended that 
the Commission strike paragraph (a)(4) 
of Proposed Rule 17g–6 in its entirety. 
Alternatively, Moody’s commented that 
if paragraph (a)(4) is retained, the rule 
should be revised to clearly prohibit 
only conduct that is motivated by an 
‘‘unfair, coercive or abusive’’ intent.
466
 
Moody’s suggested that the rule be 
amended to provide, among other 
things, that the prohibitions of 
paragraph (a)(4) shall not apply if any 
such action is taken in accordance with 
the NRSRO’s analytical procedures and 
methodologies and that the rule should 
not compel credit rating agencies to use 
or to rely upon the credit rating 
opinions of other persons as their own. 
S&P commented that one alternative 
to prohibiting these practices would be 
a record retention regime whereby 
NRSROs would be required to retain 
records related to their decisions to treat 
another NRSRO’s credit ratings, 
including the NRSRO’s reasons for the 
treatment.
467
S&P stated that requiring 
the firm to explain its reasons would 
guard against unfair, coercive, or 
abusive practices.
468
 
In lieu of striking paragraph (a)(4) or 
adopting only recordkeeping 
requirements, S&P commented that 
paragraph (a)(4) should be revised to 
provide that in situations where it has 
not rated 100% of the underlying assets, 
an NRSRO should have three options: (i) 
Accepting the credit ratings of others at 
face value; (ii) refusing to rate the 
transaction at all; or (iii) reviewing all 
the underlying assets and receiving 
compensation for the additional work 
involved.
469
 
d. Final Rule 17g–6(a)(4) 
At this time, the Commission cannot 
determine that the acts and practices 
described above are unfair, coercive, or 
abusive in and of themselves. The 
Commission needs more information 
about these practices to gain a better 
understanding of how they were 
developed and are being employed. The 
Commission is concerned, however, that 
these practices have adversely affected 
competition among credit rating 
agencies and that they may occur for 
anticompetitive purposes. 
Consequently, the Commission is 
adopting a final rule that is intended to 
increase accountability and 
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33604 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
470
15 U.S.C. 78o–7(i)(1)(B). 
471
See S&P Letter; DBRS 2nd Letter. 
472
See S&P Letter. 
473
See DBRS Letter; Fitch Letter; Fitch 2nd 
Letter; Moody’s Letter; Moody’s 2nd Letter; 
Moody’s 3rd Letter; S&P Letter; S&P 2nd Letter. 
474
Id. 
475
Id. 
476
Id. 
477
Id. 
478
Id. 
479
See S&P Letter; Moody’s Letter. 
transparency in the structured product 
credit ratings market. 
First, the Commission has determined 
that the practices identified in Section 
15E(i)(1)(B) of the Exchange Act
470
are 
unfair, coercive, or abusive to the extent 
they are practiced with anticompetitive 
intent. Consequently, paragraph (a)(4) of 
Rule 17g–6 prohibits an NRSRO from 
issuing or threatening to issue a lower 
credit rating, lowering or threatening to 
lower an existing credit rating, refusing 
to issue a credit rating, or withdrawing 
or threatening to withdraw a credit 
rating, with respect to securities or 
money market instruments issued by an 
asset pool or as part of any asset-backed 
or mortgage-backed securities 
transaction, unless all or a portion of the 
assets within such pool or part of such 
transaction also are rated by the 
nationally recognized statistical rating 
organization where such practice is 
engaged in by the nationally recognized 
statistical rating organization for an 
anticompetitive purpose. 
The Commission recognizes that 
proving anticompetitive intent will be 
difficult, particularly where an NRSRO 
has analysis to support the contention 
that its methodology is not arbitrary and 
is designed to make the credit rating of 
a structured product more accurate. 
Nonetheless, the Commission believes 
this prohibition will be an important 
deterrent against anticompetitive 
practices when combined with the 
enhanced recordkeeping requirements 
in Rule 17g–2 discussed below. 
e. Enhanced Recordkeeping 
Requirements 
As noted above, two commenters 
suggested that an alternative to banning 
the practices of S&P and Moody’s would 
be a record retention regime whereby 
NRSROs would be required to retain 
records related to their decisions on 
how to treat, and methodology for 
treating, another NRSRO’s credit ratings 
into the credit rating of a structured 
product.
471
S&P stated that requiring an 
NRSRO to explain its reasons for the 
treatment would guard against unfair, 
coercive, or abusive practices.
472
 
The Commission believes that 
recordkeeping requirements aimed at 
these practices are necessary or 
appropriate in the public interest or for 
the protection of investors. 
Consequently, the Commission is 
adopting three recordkeeping 
requirements in this area. These 
requirements will assist the Commission 
in better understanding how these 
practices are developed and employed. 
This information may provide a basis 
for the Commission to determine 
whether it should find a specific 
practice to be unfair, coercive, or 
abusive. The Commission also believes 
that increased scrutiny on the practices 
coupled with the potential for liability 
under Rule 17g–6 will deter an NRSRO 
from acting with anticompetitive intent. 
i. Paragraph (a)(7) of Rule 17g–2 
As adopted, paragraph (a)(7) of Rule 
17g–2 requires an NRSRO to make a 
record that lists each security and its 
corresponding credit rating issued by an 
asset pool or as part of any asset-backed 
or mortgage-backed securities 
transaction where the NRSRO in 
determining the credit rating for the 
security treats assets within such pool 
or as a part of such transaction that are 
not subject to a credit rating of the 
NRSRO by any or a combination of the 
practices described above and identified 
in paragraphs (a)(7)(i) through (iv) of 
Rule 17g–2. 
As discussed above, there are four 
practices by which a credit rating 
agency may treat unrated assets 
underlying a structured product when 
determining a credit rating for the 
structured product.
473
Moreover, the 
credit rating agency may condition the 
issuance of a credit rating for the 
structured product on its employing one 
or more of these practices. First, the 
credit rating agency may require that it 
effectively issue a public credit rating 
for most, if not all, the assets underlying 
the structured product.
474
This practice 
is described in paragraph (a)(7)(i) of 
Rule 17g–2. Second, the credit rating 
agency may require that it provide a 
private credit rating or credit assessment 
for a fee with respect to the unrated 
assets.
475
This practice is described in 
paragraph (a)(7)(ii) of Rule 17g–2. 
Third, the credit rating agency may 
take into consideration the internal 
credit analysis of another person (e.g., 
the underwriter, sponsor, or manager of 
the structured product) with respect to 
the unrated assets to determine a credit 
rating or private credit rating, or 
perform a credit assessment of the 
unrated assets.
476
This practice is 
employed after the credit rating agency 
has done a review of how the person 
performs its credit analysis, including a 
review of the specific procedures and 
methodologies employed by the person. 
This practice is described in paragraph 
(a)(7)(iii) of Rule 17g–2. 
Fourth, the credit rating agency may 
take into consideration but not 
necessarily adopt the credit ratings of 
another credit rating agency for the 
unrated assets to determine a credit 
rating or private credit rating, or 
perform a credit assessment of the 
unrated assets.
477
Under this last 
practice, the credit rating agency may 
employ a standardized methodology to 
discount (notch down) the credit ratings 
of the other credit rating agency based 
on the type of security and category of 
credit rating.
478
This practice is 
described in paragraph (a)(7)(iv) of Rule 
17g–2. 
The intent of the recordkeeping 
provision in paragraph (a)(7) of Rule 
17g–2 is to alert Commission examiners 
to those structured product credit 
ratings issued by an NRSRO that have 
been determined using one or more of 
these practices, which commenters have 
argued are unfair, coercive, or abusive. 
This will assist the examiners in 
requesting the records relating to these 
credit ratings in order to monitor these 
practices and get a better understanding 
of how they are employed. The 
Commission believes this provision is 
necessary or appropriate in the public 
interest or for the protection of investors 
because it will assist the Commission in 
reviewing whether these practices are 
being engaged in with anticompetitive 
intent in violation of Rule 17g–6(a)(4). 
For these reasons, the Commission is 
adopting the provision in Rule 17g–2. 
ii. Paragraph (b)(8) of Rule 17g–2 
As adopted, paragraph (b)(8) of Rule 
17g–2 requires an NRSRO to retain 
internal documents that contain 
information, analysis, or statistics that 
were used to develop a procedure or 
methodology to treat the credit ratings 
of another NRSRO for the purpose of 
determining a credit rating of a security 
or money market instrument issued by 
an asset pool or part of any asset-backed 
or mortgage-backed securities 
transaction. 
As discussed above, the commenters 
who opposed the prohibition in Rule 
17g–6(a)(4), as proposed, stated that 
there were legitimate reasons for using, 
but lowering, another credit rating 
agency’s credit ratings or insisting on 
performing an independent assessment 
of the assets rated by another credit 
rating agency.
479
As noted above, the 
Commission has insufficient 
information at this time to determine 
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33605 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
480
See Moody’s 3rd Letter. 
481
See 17 CFR 240.17g–2(b)(8). 
482
See Fitch Letter. 
483
See R&I Letter; FSR Letter; DBRS Letter; A.M. 
Best Letter; Fitch Letter; S&P Letter; Moody’s Letter; 
Langohr Letter; LACE Letter. 
484
Id. 
485
44 U.S.C. 3501 et seq.; 5 CFR 1320.11. 
486
Pub. L. 109–291 (2006). 
487
Section 15E(a)(1) of the Exchange Act (15 
U.S.C. 78o–7(a)(1)) and Rule 17g–1(a). 
that such practices are a pretext for 
anticompetitive behavior or that such 
practices are appropriate. The records 
that an NRSRO must retain under this 
provision will assist the Commission in 
understanding whether the NRSROs 
that engage in these practices have 
analytical, statistical, or other bases to 
support their methodologies. The 
existence (or absence) and nature of 
such information will assist the 
Commission in analyzing whether the 
practices are employed with the intent 
to improve the quality and accuracy of 
credit ratings or as pretexts for 
anticompetitive behavior. 
For example, the Commission 
understands issuers may ask for pre- 
credit rating assessments for a security 
from three or more credit rating agencies 
and, based on the assessments or other 
considerations, hire one or more, but 
not all, of the credit rating agencies to 
issue the credit rating.
480
A credit rating 
agency that was not hired to issue a 
credit rating for the security may use its 
pre-credit rating assessment as part of 
an analysis of how it would rate this 
type of security as compared to the 
other credit rating agencies. This 
analysis may be used to develop a 
procedure or methodology to treat the 
credit ratings of the other credit rating 
agencies for securities underlying a 
structured product in developing a 
credit rating for the structured 
product.
481
The treatment may include 
a schedule in which the credit ratings of 
the other credit rating agencies are 
notched down to the extent they are 
included in the structured product. 
Under paragraph (b)(8) of Rule 17g–2, 
an NRSRO that uses pre-credit rating 
assessments to develop such a schedule 
will need to retain any records 
documenting its pre-credit rating 
assessments and the process by which 
the pre-credit rating assessments were 
used to arrive at the number of notches 
the securities will be discounted. 
The Commission believes this 
provision is necessary or appropriate in 
the public interest or for the protection 
of investors because it will assist the 
Commission in reviewing whether these 
practices are being engaged in with 
anticompetitive intent in violation of 
Rule 17g–6(a)(4). 
iii. Paragraph (b)(9) of Rule 17g–2 
As adopted, paragraph (b)(9) of Rule 
17g–2 requires an NRSRO to retain for 
each security identified in the record 
required under paragraph (a)(7) of Rule 
17g–2, any document that contains a 
description of how assets within such 
pool or as a part of such transaction not 
rated by the NRSRO but rated by 
another NRSRO were treated for the 
purpose of determining the credit rating 
of the security. 
These records will permit 
Commission examiners to review on a 
case-by-case basis the method by which 
an NRSRO incorporates the credit 
ratings of another NRSRO into the credit 
rating of a structured product. For 
example, examiners will be able to 
compare the methodologies for 
incorporating highly rated assets with 
those for lower rated assets. One 
commenter that strongly supports 
prohibiting these practices states that 
credit rating agencies engaging in these 
practices notch down assets they have 
rated in the highest credit rating 
categories even though studies suggest 
that its credit ratings perform 
comparably.
482
 
The Commission believes this 
provision is necessary or appropriate in 
the public interest or for the protection 
of investors because it will assist the 
Commission in reviewing whether these 
practices are being engaged in with 
anticompetitive intent in violation of 
Rule 17g–6(a)(4). 
5. Unsolicited credit ratings 
In the proposing release, the 
Commission preliminarily determined 
that it would be unfair, coercive, or 
abusive to issue an unsolicited credit 
rating and communicate with the issuer 
or obligor to induce or attempt to induce 
them to pay for the credit rating or 
another product or service of the 
NRSRO or its affiliates. Consequently, 
paragraph (a)(5) of proposed Rule 17g– 
6 would have prohibited this practice. 
Commenters raised a number of 
concerns with respect to how this 
prohibition would operate in 
practice.
483
For the most part, they 
worried it was overbroad and, 
consequently, would prohibit legitimate 
business activities that are not 
coercive.
484
As discussed with respect 
to Exhibit 2, issuers and obligors, for 
example, may consent to the issuance, 
and participate in the determination, of 
a credit rating even if they did not 
specifically request that the credit rating 
be issued. The Commission wants to 
gain a better understanding through its 
examination function of how credit 
rating agencies define ‘‘unsolicited 
credit ratings’’ and the practices they 
employ with respect to these ratings. 
The Commission believes it must gain 
this understanding before prohibiting 
any practices in this area. 
For these reasons, the prohibition has 
been eliminated from Rule 17g–6. 
V. Paperwork Reduction Act 
Certain provisions of the rules contain 
a ‘‘collection of information’’ within the 
meaning of the Paperwork Reduction 
Act of 1995 (‘‘PRA’’).
485
The 
Commission published a notice 
requesting comment on the collection of 
information requirements in the 
proposing release and submitted the 
proposed rules to the Office of 
Management and Budget (‘‘OMB’’) for 
review in accordance with the PRA. The 
Commission will publish notice in the 
Federal Register when it receives 
clearance from OMB. The Commission 
did not receive any comments on the 
burden estimates in the proposing 
release. 
An agency may not conduct or 
sponsor, and a person is not required to 
comply with, a collection of information 
unless it displays a currently valid 
control number. The titles for the 
collections of information are: 
(1) Rule 17g–1, Application for 
registration as a nationally recognized 
statistical rating organization; Form 
NRSRO and the Instructions for Form 
NRSRO; 
(2) Rule 17g–2, Records to be made 
and retained by national recognized 
statistical rating organizations; 
(3) Rule 17g–3, Annual financial 
reports to be furnished by nationally 
recognized statistical rating 
organizations; and 
(4) Rule 17g–4, Prevention of Misuse 
of Material Nonpublic Information. 
A. Collections of Information in the 
Rules 
The rules being adopted implement 
registration, recordkeeping, financial 
reporting, and oversight provisions of 
the Credit Rating Agency Reform Act of 
2006 (the ‘‘Rating Agency Act’’).
486
The 
rules contain recordkeeping and 
disclosure requirements that are subject 
to the PRA for registered NRSROs and 
impose mandatory collection of 
information obligations. 
In summary, the rules require a credit 
rating agency that wishes to register as 
an NRSRO to furnish an initial 
application to the Commission for 
registration on Form NRSRO;
487
and a 
credit rating agency or NRSRO to 
furnish a written notice to the 
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33606 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
488
Rule 17g–1(d); see also Section 15E(a)(1) of the 
Exchange Act (15 U.S.C. 78o–7(a)(1)). 
489
Rule 17g–1(b). 
490
Rule 17g–1(c). 
491
Section 15E(b)(1) of the Exchange Act (15 
U.S.C. 78o–7(b)(1)) and Rule 17g–1(e). 
492
Section 15E(b)(2) of the Exchange Act (15 
U.S.C. 78o–7(b)(2)) and Rule 17g–1(f). 
493
Section 15E(e)(1) of the Exchange Act (15 
U.S.C. 78o–7(e)(1)) and Rule 17g–1(g). 
494
Section 15E(a)(3) of the Exchange Act (15 
U.S.C. 78o–7(a)(3)) and Rule 17g–1(i). 
495
Rule 17g–2 under authority in Section 17(a)(1) 
of the Exchange Act (15 U.S.C. 78q(a)(1)). 
496
Rule 17g–2(e) under authority in Section 
17(a)(1) of the Exchange Act (15 U.S.C. 78q(a)(1)). 
497
Section 15E(k) of the Exchange Act (15 U.S.C. 
78o–7(k)) and Rule 17g–3. 
498
Section 15E(g) of the Exchange Act (15 U.S.C. 
78o–7(g)) and Rule 17g–4. 
499
See 15 U.S.C. 78o–7. 
500
15 U.S.C. 78o–7. 
501
See Report of the Senate Committee on 
Banking, Housing, and Urban Affairs to Accompany 
S. 3850, Credit Rating Agency Reform Act of 2006, 
S. Report No. 109–326, 109th Cong., 2d Sess. (Sept. 
6, 2006) (‘‘Senate Report’’). 
502
15 U.S.C. 78c. 
503
See Section 3 of the Rating Agency Act. 
504
Section 3(a)(62) of the Exchange Act (15 U.S.C. 
78c(a)(62)). Section 3(a)(64) of the Exchange Act (15 
U.S.C. 78c(a)(64)) defines the term ‘‘qualified 
institutional buyer’’ (‘‘QIB’’) as having the 
‘‘meaning given such term in [17 CFR 230.144A(a)] 
or any successor thereto.’’ 
505
Section 3(a)(61) of the Exchange Act (15 U.S.C. 
78c(a)(61)). 
506
Section 3(a)(61)(A) of the Exchange Act (15 
U.S.C. 78c(a)(61)(A)). 
507
Section 3(a)(60) of the Exchange Act (15 U.S.C. 
78c(a)(60)). 
508
The Basel Committee on Banking Supervision 
is comprised of members from Belgium, Canada, 
France, Germany, Italy, Japan, Luxembourg, the 
Netherlands, Spain, Sweden, Switzerland, the 
United Kingdom and the United States. Countries 
are represented by their central bank and also by 
the authority with formal responsibility for the 
prudential supervision of banking business where 
this is not the central bank. More information about 
the Basel Committee for Banking Supervision can 
be found at: http://www.bis.org/. 
509
Credit Ratings and Complementary Sources of 
Credit Quality Information, Working group of the 
Basel Committee on Banking Supervision, No. 3— 
August 2000 (‘‘Basel Report’’). 
510
Id. 
511
Id. 
512
Id. 
Commission to withdraw an initial 
application or application to be 
registered in an additional class of 
credit ratings prior to final action by the 
Commission.
488
Further, the rules 
require an NRSRO to (1) furnish an 
application to the Commission on Form 
NRSRO for registration in an additional 
class of credit ratings;
489
(2) furnish an 
application supplement on Form 
NRSRO to update information for an 
initial application or for an application 
to register an additional class of credit 
ratings prior to final Commission 
action;
490
(3) furnish an amendment to 
the Commission on Form NRSRO to 
update information in the application 
after registration;
491
(4) furnish an 
annual certification to the Commission 
on Form NRSRO;
492
(5) furnish a 
withdrawal of registration to the 
Commission on Form NRSRO;
493
(6) 
make the current Form NRSRO and 
Exhibits 1 through 9 publicly available 
on its Web site, or through another 
comparable, readily accessible 
means;
494
(7) make, retain, and preserve 
certain records;
495
(8) furnish an 
undertaking to the Commission if a 
third-party custodian makes or retains 
these records;
496
(9) furnish the 
Commission with annual financial 
reports;
497
and (10) establish certain 
procedures to prevent the misuse of 
material nonpublic information.
498
 
Many of these requirements are 
prescribed in Section 15E of the 
Exchange Act.
499
 
B. Use of the Information 
Rules 17g–1 through 17g–6, Form 
NRSRO, and the Instructions for Form 
NRSRO establish a framework for 
Commission oversight of NRSROs. The 
collections of information in the rules 
are designed to allow the Commission to 
determine whether an entity should be 
registered as an NRSRO. Further, they 
will assist the Commission in effectively 
monitoring, through its examination 
function, whether an NRSRO is 
conducting its activities in accordance 
with Section 15E of the Exchange 
Act
500
and the rules thereunder. The 
rules also are designed to assist users of 
credit ratings by requiring the disclosure 
of information that may be used to 
compare the credit ratings quality of 
different NRSROs. The disclosures 
include information about methods for 
determining credit ratings, 
organizational structure, policies for 
safeguarding non-public information, 
conflicts of interest, policies for 
managing conflicts of interest, and 
credit analyst qualifications. As noted in 
the Senate Report accompanying the 
Rating Agency Act, this information 
‘‘will facilitate informed decisions by 
giving investors the opportunity to 
compare ratings quality of different 
firms.’’
501
 
C. Respondents 
The number of respondents will 
depend, in part, on the number of 
entities that meet the statutory 
requirements to be eligible for 
registration. The Rating Agency Act, by 
adding definitions to Section 3 of the 
Exchange Act,
502
identifies the types of 
entities that may apply for registration 
with the Commission as an NRSRO.
503
 
First, it defines an ‘‘NRSRO’’ as a 
‘‘credit rating agency’’ that, in pertinent 
part, has been in business as a credit 
rating agency for at least three 
consecutive years immediately 
preceding the date of its application for 
registration; issues credit ratings 
certified by 10 QIBs (unless exempted 
from that requirement) with respect to 
financial institutions, brokers, dealers, 
insurance companies, corporate issuers, 
issuers of asset-backed securities (as that 
term defined in 17 CFR 229.1101(c)), 
issuers of government securities, issuers 
of municipal securities, or issuers of 
foreign government securities; and is 
registered with the Commission.
504
 
Section 3 of the Exchange Act also 
defines the term ‘‘credit rating agency’’ 
as, in pertinent part, any person engaged 
in the business of issuing credit ratings 
on the Internet or through another 
readily accessible means, for free or for 
a reasonable fee; employing either a 
quantitative or qualitative model, or 
both, to determine credit ratings; and 
receiving fees from either issuers, 
investors, or other market participants, 
or a combination of these persons.
505
 
The definition specifically excludes a 
commercial credit reporting 
company.
506
Finally, Section 3 of the 
Exchange Act defines the term ‘‘credit 
rating’’ to mean ‘‘an assessment of the 
creditworthiness of an obligor as an 
entity or with respect to specific 
securities or money market 
instruments.’’
507
 
These definitions create threshold 
eligibility requirements with respect to 
the entities that are eligible to apply for 
registration as an NRSRO. Because 
NRSROs have not previously been 
supervised as such, and because credit 
rating agencies include publicly and 
privately held companies located 
throughout the world, it is difficult to 
estimate the number of entities that are 
eligible to register as NRSROs. 
In 2000, a working group of the Basel 
Committee on Banking Supervision
508
 
issued a report on credit rating agencies 
that was based, in part, on surveys of 28 
credit rating agencies located around the 
world, including the five credit rating 
agencies currently identified as NRSROs 
through the Commission’s no-action 
letter process.
509
In its report, the 
working group estimated that there were 
approximately 150 credit rating agencies 
located world-wide.
510
The working 
group also noted that there was a wide 
disparity in size among credit rating 
agencies in terms of number of 
employees and credit ratings issued.
511
 
In addition, the working group noted 
that some credit rating agencies focus 
exclusively on issuers in the countries 
where they are located.
512
 
The Web site http:// 
www.DefaultRisk.com, which has 
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33607 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
513
See http://www.defaultrisk.com 
(‘‘DefaultRisk.com’’). 
514
Id. 
515
Section 15E(a)(1) of the Exchange Act makes 
registration voluntary (15 U.S.C. 78o–7(a)(1)). 
516
15 U.S.C. 78o–7. 
517
15 U.S.C. 78o–7. 
518
This total is derived from the total annual 
hours set forth in the order that the totals appear 
in the text: 1 + 1,500 + 300 + 1 + 300 + 7,620 + 
6,000 = 15,722 hours. 
519
This total is derived from the total one-time 
hours set forth in the order that the totals appear 
in the text: 9,000 + 1,200 + 125 + 900 + 9,000 + 
50 + 1,500 = 21,775 hours. 
520
15 U.S.C. 78o–7(a)(1)(B). 
521
15 U.S.C. 78o–7. 
522
Id. 
523
15 U.S.C. 78o–7(a)(1). 
524
See paragraphs (a), (c), and (h) of Rule 17g– 
1. 
tracked the number of credit rating 
agencies, identifies 57 credit rating 
agencies as of February 2006 and 
indicates that this count reflects a 
decrease from a previous count of 74.
513
 
The Web site attributed the decrease to 
smaller firms either being consolidated 
into larger firms or ceasing 
operations.
514
 
The estimates in the 2000 Basel 
Report and by DefaultRisk.Com provide 
some basis upon which to estimate the 
number of entities engaging in the 
business of issuing credit ratings. We 
cannot determine how many of the 
entities included in these estimates 
meet the statutory requirements to apply 
for, and be registered as, an NRSRO. 
In addition, it is difficult to estimate 
with certitude how many credit rating 
agencies ultimately would volunteer to 
be registered as NRSROs.
515
Some credit 
rating agencies may decide not to seek 
registration because, for example, they 
do not believe that being an NRSRO 
would benefit them based on their 
business model. The Commission staff’s 
experience with the expiring no-action 
letter process of identifying NRSROs 
provides some support for the 
conclusion that a substantial number of 
credit rating agencies may not apply for 
registration. Specifically, if the number 
of credit rating agencies has fluctuated 
over the years from between 
approximately 150 as of 2000 (Basel 
Report) and 57 as of February 2006 
(DefaultRisk.com), then a large majority 
of these firms have not applied to the 
Commission to be identified as NRSROs 
under the no-action letter process. It is 
possible that certain firms that did not 
seek NRSRO status previously will seek 
it under Section 15E of the Exchange 
Act.
516
In addition, the use of QIB 
certifications as a prerequisite to 
registration (as opposed to the no-action 
letter process which evaluated national 
recognition) also may increase the 
number of credit rating agencies that are 
eligible for registration as an NRSRO. 
For all these reasons, we estimated 
that the number of credit rating agencies 
applying for registration would be larger 
than the sum of the number of credit 
rating agencies currently identified as 
NRSROs plus the handful of entities 
that requested no-action letters. At the 
same time, the Commission did not 
believe that all of the 57 credit rating 
agencies identified by DefaultRisk.Com 
would apply for, or be granted, 
registration. Consequently, the 
Commission estimated that 
approximately 30 credit rating agencies 
would be registered as NRSROs under 
Section 15E of the Exchange Act.
517
 
The Commission requested comment 
on this estimate and whether more or 
fewer credit rating agencies would be 
registered as NRSROs. The Commission 
also requested comment on whether the 
sources of industry information 
referenced in the proposing release (the 
Basel Report and the DefaultRisk.Com 
Web site) provided a reasonable basis 
for arriving at the estimate of 30 
NRSROs. The Commission further 
requested comment on whether there 
were other industry sources that could 
provide credible statistics that could be 
used to determine the number of credit 
rating agencies that would be registered 
as NRSROs. 
The Commission did not receive any 
comments in response to these requests. 
The Commission continues to estimate, 
for purposes of this PRA, that 
approximately 30 credit rating agencies 
will be registered as NRSROs. 
D. Total Annual Recordkeeping and 
Reporting Burden 
The Commission estimates the total 
recordkeeping burden resulting from 
these rules is approximately 15,722 
hours
518
on an annual basis and 21,755 
hours
519
on a one-time basis. 
The total annual and one-time hour 
burden estimates are averages across all 
types of expected NRSROs. The size and 
complexity of NRSROs will range from 
small entities to entities that are part of 
complex global organizations employing 
thousands of credit analysts. Larger 
NRSROs generally have established 
written policies and procedures and 
recordkeeping systems that comply with 
a substantial portion of the requirements 
in the rules. For example, many of the 
requirements in the rules are consistent 
with the IOSCO Code, which a number 
of credit rating agencies have adopted. 
The Commission assumed in its 
estimate that these firms would be 
required to augment or modify existing 
policies and procedures and 
recordkeeping systems to comply with 
the rules. 
The Commission further estimated 
that some smaller entities also have 
implemented the policies, procedures, 
and recordkeeping systems that 
substantially would comply with the 
proposed rules. Moreover, given their 
smaller size and simpler structure, the 
Commission assumed that smaller 
entities would require significantly 
fewer hours to comply with a 
substantial portion of the requirements 
in the proposed rules. 
Consequently, the burden hour 
estimates in the proposing release were 
designed to represent the average time 
across all NRSROs (regardless of size) 
and taking into account that many firms 
would only be required to augment 
existing policies, procedures, and 
recordkeeping systems and processes to 
comply with the proposed rules. The 
Commission noted that, given the 
significant variance in size between the 
largest credit rating agencies and the 
smaller firms, the burden estimates, as 
averages across all NRSROs, were 
skewed higher by the largest firms. 
Furthermore, because the Commission 
proposed to require additional 
information in Form NRSRO beyond 
that prescribed in Section 15E(1)(B) of 
the Exchange Act,
520
the burden 
estimates for Rule 17g–1 included 
estimates arising from requirements of 
Section 15E of the Exchange Act.
521
The 
intent was to quantify the incremental 
burden of complying with these 
statutory requirements as a result of the 
additional information that would be 
required under Rule 17g–1. Thus, the 
estimates did not seek to capture 
paperwork burden that would be solely 
attributable to requirements in Section 
15E of the Exchange Act.
522
 
The Commission sought comment on 
whether these factors were reasonably 
incorporated into the burden estimates. 
The Commission did not receive any 
comments in response to this request. 
The Commission continues to believe 
that it is appropriate to incorporate 
these factors into the final estimates, 
and has done so. 
1. Rule 17g–1, Form NRSRO, and 
Instructions for Form NRSRO 
Section 15E(a)(1) of the Exchange Act 
requires a credit rating agency applying 
for registration with the Commission to 
furnish an application containing 
certain specified information and such 
other information as the Commission 
prescribes as necessary or appropriate in 
the public interest or for the protection 
of investors.
523
Rule 17g–1
524
 
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33608 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
525
15 U.S.C. 78o–7. 
526
As a comparison, the proposing release noted 
that Form ADV, the registration form for investment 
advisers, is estimated to take approximately 22.25 
hours to complete. See Investment Advisor Act of 
1940 Release No. 2266 (July 20, 2004). The 
Commission estimated that the hour burden under 
Rule 17g–1 would be greater, given the substantially 
larger amount of information that will be required 
in Form NRSRO. 
527
300 hours × 30 entities = 9,000 hours. 
528
40 hours × 30 entities = 1,200 hours. 
529
$400 per hour × 40 hours = $16,000. 
530
$16,000 × 30 NRSROs = $480,000. 
531
See paragraphs (c), (d), and (h) of Rule 17g– 
1. 
532
As noted above, the Commission’s burden 
estimate for Form ADV is approximately 22.25 
hours to complete. See Investment Advisor Act of 
1940 Release No. 2266 (July 20, 2004). 
533
Section 3(a)(62)(B) of the Exchange Act (15 
U.S.C. 78c(a)(62)(B)). 
534
Section 3(a)(62)(B)(v) of the Exchange Act (15 
U.S.C. 78c(a)(62)(B)(v)). 
535
Section 3(a)(62)(B)(iv) of the Exchange Act (15 
U.S.C. 78c(a)(62)(B)(iv)). 
536
25 hours × 5 NRSROs = 125 hours. 
537
See paragraph (d) of Rule 17g–1. 
538
See Exchange Act Release No. 49830 (June 8, 
2004); see also 17 CFR 240.17a–11. 
implements this statutory provision by 
requiring a credit rating agency to 
furnish a completed initial application 
on Form NRSRO to the Commission to 
apply to be registered under Section 15E 
of the Exchange Act.
525
The 
Commission estimated that the average 
time necessary to complete the initial 
Form NRSRO, and compile the various 
attachments, would be approximately 
300 hours per applicant. This estimate 
was based on staff experience with the 
current NRSRO no-action letter 
process.
526
The Commission, therefore, 
estimated that the total one-time burden 
to the industry as a result of this 
requirement would be approximately 
9,000 hours.
527
 
The Commission did not receive any 
comments on these specific estimates. 
The Commission notes that Form 
NRSRO has been changed to ease the 
burden of completing the Form. For 
example, applicants will not be required 
to provide information about each credit 
analyst, credit analyst supervisor, and 
compliance employee that assists the 
designated compliance officer. As 
discussed above, we developed these 
estimates based on the rules as 
proposed. We continue to believe the 
estimates are appropriate for the rules as 
now modified. Indeed, because we have 
in a variety of respects narrowed the 
requirements of the rules, we believe the 
estimates are likely to be conservative. 
We also note that NRSROs with small 
staffs will be less impacted by these 
modifications. 
The Commission also noted that an 
NRSRO likely would engage outside 
counsel to assist it in the process of 
completing and submitting a Form 
NRSRO. The Commission estimated that 
the amount of time an outside attorney 
will spend on this work would depend 
on the size and complexity of the 
NRSRO. Therefore, the Commission 
estimated that, on average, an outside 
counsel would spend approximately 40 
hours assisting an NRSRO in preparing 
its application for registration for a one- 
time aggregate burden to the industry of 
1,200 hours.
528
The Commission further 
estimated that this work would be split 
between a partner and associate, with an 
associate performing a majority of the 
work. Therefore, the Commission 
estimated that the average hourly cost 
for an outside counsel would be 
approximately $400 per hour. For these 
reasons, the Commission estimated that 
the average one-time cost to an NRSRO 
would be $16,000
529
and the one-time 
cost to the industry would be 
$480,000.
530
The Commission did not 
receive any comments on these specific 
estimates and continues to believe that 
they are appropriate. Therefore, the 
Commission is retaining these estimates 
without revision. 
Rule 17g–1 requires that an NRSRO 
registered for fewer than the five classes 
of credit ratings listed in Section 
3(a)(62)(B) of the Exchange Act apply to 
be registered for an additional class by 
furnishing an amendment on a 
completed Form NRSRO.
531
The 
Commission estimated that it would 
take an NRSRO substantially less time 
to update the Form NRSRO for this 
purpose than to prepare the initial 
application. For example, much of the 
information on the Form and many of 
the Exhibits would still be current and 
not have to be updated. Based on the 
burden estimate to complete a Form 
ADV, the Commission estimated that 
furnishing an application on Form 
NRSRO for this purpose would take an 
average of approximately 25 hours per 
NRSRO.
532
 
The Commission further estimated 
based on staff experience that 
approximately five of the 30 credit 
rating agencies expected to register with 
the Commission would apply to register 
for additional classes of credit ratings 
within the first year. The Commission 
explained that almost all NRSROs 
would initially apply to register for the 
first three classes of credit ratings 
identified in the definition of NRSRO: 
(1) Financial institutions, brokers, or 
dealers; (2) insurance companies; and 
(3) corporate issuers.
533
These are the 
most common types of credit ratings 
issued, particularly since some credit 
rating agencies limit their credit ratings 
to domestic companies. The 
Commission explained that, after these 
three classes, the next largest class of 
credit ratings for which most NRSROs 
would be registered would be for credit 
ratings with respect to issuers of 
government securities, municipal 
securities, and foreign government 
securities.
534
These types of credit 
ratings take additional expertise. 
Finally, the Commission explained that 
the class of credit ratings for which the 
least number of NRSROs would be 
registered would be credit ratings of 
issuers of asset-backed securities (as that 
term is defined in 17 CFR 
229.1101(c)).
535
This assumption was 
based on the fact that determining a 
credit rating for an asset-backed security 
takes specialized expertise beyond that 
for determining credit ratings of 
corporate issuers and obligors. For 
example, it requires analysis of complex 
legal structures. 
For these reasons, the Commission 
anticipated that some NRSROs might 
register for less than all five classes of 
credit ratings. Moreover, these NRSROs, 
in time, may develop their businesses to 
include issuing credit ratings in a class 
for which they are not initially 
registered. Based on staff experience, 
the Commission estimated that 
approximately five of the 30 NRSROs 
would apply to add another class of 
credit ratings to their registration within 
the first year. Therefore, given the 25 
hour per NRSRO average burden 
estimate, the total aggregate one-time 
burden to the industry for filing the 
amended Form NRSRO to change the 
scope of registration was estimated be 
approximately 125 hours.
536
The 
Commission did not receive any 
comments on these specific estimates 
and continues to believe that they are 
appropriate. Therefore, the Commission 
is retaining these estimates without 
revision. 
Rule 17g–1 requires a credit rating 
agency to provide the Commission with 
a written notice if it intends to 
withdraw its application prior to final 
Commission action.
537
Based on staff 
experience, the Commission estimated 
that one credit rating agency per year 
would withdraw a Form NRSRO prior to 
final Commission action on the 
application and, consequently, would 
furnish a notice of its intent to withdraw 
the application. Based on current 
estimates for a broker-dealer to file a 
notice under Rule 17a–11, the 
Commission estimated the average 
burden to an NRSRO to furnish the 
notice of withdrawal would be one 
hour.
538
Thus, the Commission 
estimated that the aggregate annual 
burden to the industry of providing a 
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33609 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
539
1 hour × 1 entity = 1 hour. 
540
15 U.S.C. 78o–7(b)(1). 
541
See paragraph (e) of Rule 17g–1. 
542
This estimate also is based on the estimates for 
the collection of information on Rule 17i–2 under 
the Exchange Act (17 CFR 240.17i–2). 
543
25 hours per amendment × 2 amendments × 
30 NRSROs = 1,500 hours. 
544
15 U.S.C. 78o–7(b)(2). 
545
See paragraph (f) of Rule 17g–1. 
546
See 17 CFR 240.17h–1T and 2T. 
547
10 hour × 30 NRSROs = 300 hours. 
548
See paragraph (g) of Rule 17g–1. 
549
See Exchange Act Release No. 49830 (June 8, 
2004); see also 17 CFR 240.17a–11. 
550
1 hour × 1 entity = 1 hour. 
551
15 U.S.C. 78o–7(a)(3). 
552
See Rule 17g–1(i). 
553
30 hours × 30 NRSROs = 900 hours. 
554
10 hours × 30 NRSROs = 300 hours. 
555
See Section 5 of the Rating Agency Act. 
556
See Section 5 of the Rating Agency Act and 
15 U.S.C 78q(a)(1). 
557
15 U.S.C. 78o–7. 
558
See 17 CFR 15c3–1g. 
notice of withdrawal prior to final 
Commission action would be one hour 
per year.
539
The Commission did not 
receive any comments on these specific 
estimates and continues to believe that 
they are appropriate. Therefore, the 
Commission is retaining these estimates 
without revision. 
Section 15E(b)(1) of the Exchange Act 
requires an NRSRO to promptly amend 
its application for registration if any 
information or document provided in 
the application becomes materially 
inaccurate.
540
Rule 17g–1 requires an 
NRSRO to comply with this statutory 
requirement by furnishing the 
amendment on Form NRSRO.
541
Based 
on staff experience, the Commission 
estimated that an NRSRO would file two 
amendments of its Form NRSRO per 
year on average. Furthermore, for the 
reasons discussed above, the 
Commission estimated that it would 
take an average of approximately 25 
hours to prepare and furnish an 
amendment on Form NRSRO.
542
 
Therefore, the Commission estimated 
that the total aggregate annual burden to 
the industry to update Form NRSRO 
would be approximately 1,500 hours 
each year.
543
The Commission did not 
receive any comments on these specific 
estimates and continues to believe that 
they are appropriate. Therefore, the 
Commission is retaining these estimates 
without revision. 
Section 15E(b)(2) of the Exchange Act 
requires an NRSRO to furnish an annual 
certification.
544
Rule 17g–1 requires an 
NRSRO to furnish the annual 
certification on Form NRSRO.
545
The 
Commission estimated that the annual 
certification, generally, would take less 
time than an amendment to Form 
NRSRO because it would be done on a 
regular basis (albeit yearly) and, 
therefore, become more a matter of 
routine over time. Consequently, the 
Commission estimated that the burden 
would be similar to that of broker- 
dealers filing the quarterly reports 
required under Rules 17h–1T and 17h– 
2T, which is approximately 10 hours 
per year for each respondent.
546
 
Therefore, the Commission estimated it 
would take an NRSRO approximately 10 
hours to complete the annual 
certification for a total aggregate annual 
hour burden to the industry of 300 
hours.
547
The Commission did not 
receive any comments on these specific 
estimates and continues to believe that 
they are appropriate. Therefore, the 
Commission is retaining these estimates 
without revision. 
Rule 17g–1 has been modified to 
require an NRSRO to furnish the 
Commission with a withdrawal of 
registration on Form NRSRO.
548
As 
proposed, the Commission required a 
written notice without prescribing the 
form of the notice. The Commission 
expects that the furnishing of these 
withdrawals will be rare, given that only 
30 credit rating agencies are expected to 
register. Based on staff experience, the 
Commission estimates that one NRSRO 
per year will withdraw its registration. 
Further, the instructions to Form 
NRSRO provide that only the items on 
the Form are required to be completed 
in the case of a withdrawal; an NRSRO 
would not be required to update or 
attach any of the information required 
in the Exhibits. Based on current 
estimates for a broker-dealer to file a 
notice under Rule 17a–11, the 
Commission estimates the average 
burden to an NRSRO to furnish the 
notice of withdrawal would be one 
hour.
549
Thus, the Commission 
estimates that the aggregate annual 
burden to the industry of providing a 
notice of withdrawal prior to final 
Commission action would be one hour 
per year.
550
 
Section 15E(a)(3) of the Exchange Act 
requires an NRSRO to make certain 
information and documents submitted 
in its application publicly available on 
its Web site, or through another 
comparable, readily accessible 
means.
551
Rule 17g–1 requires that this 
be done within 10 business days of the 
granting of an NRSRO’s registration or 
the furnishing of an amendment, annual 
certification, or withdrawal.
552
The 
Commission believed that each NRSRO 
already would have a Web site and 
would choose to use its Web site to 
comply with Section 15E(a)(3) of the 
Exchange Act (15 U.S.C. 78o–7(a)(3)). 
Therefore, based on staff experience, the 
Commission estimated that, on average, 
an NRSRO would spend 30 hours to 
disclose the information in its initial 
application on its Web site and, 
thereafter, 10 hours per year to disclose 
updated information. Accordingly, the 
total aggregate one-time burden to the 
industry to make Form NRSRO publicly 
available would be 900 hours
553
and the 
total aggregate annual burden would be 
300 hours.
554
The Commission did not 
receive any comments on these specific 
estimates and continues to believe that 
they are appropriate. Therefore, the 
Commission is retaining these estimates 
without revision. 
2. Rule 17g–2 
Section 17(a)(1) of the Exchange Act 
(as amended by the Rating Agency 
Act)
555
provides the Commission with 
authority to require an NRSRO to make 
and maintain such records as the 
Commission prescribes by rule as 
necessary or appropriate in the public 
interest, for the protection of investors, 
or otherwise in furtherance of the 
Exchange Act.
556
Rule 17g–2 
implements this rulemaking authority 
by requiring an NRSRO to make and 
keep current certain records relating to 
its business. In addition, the rule 
requires an NRSRO to preserve these 
and other records for certain prescribed 
time periods. This rule is designed to 
assist the Commission in monitoring, 
through its examination function, 
whether NRSROs are complying with 
the requirements of Section 15E of the 
Exchange Act
557
and the regulations 
thereunder. The Commission estimated 
that the average one-time burden of 
implementing a recordkeeping system to 
comply with this rule would be 
approximately 300 hours. This estimate 
was based on the Commission’s 
experience with, and burden estimates 
for, certain recordkeeping requirements 
of consolidated supervised entities 
(‘‘CSEs’’) subject to Commission 
supervision.
558
 
The Commission also estimated that 
an NRSRO might be required to 
purchase recordkeeping system software 
to establish a recordkeeping system in 
conformance with the rule. The 
Commission estimated that the cost of 
the software would vary based on the 
size and complexity of the NRSRO. 
Also, the Commission estimated that 
some NRSRO’s would not require such 
software because they already have 
adequate recordkeeping systems or, 
given their small size, such software 
would not be necessary. Based on these 
estimates, the Commission estimated 
that the average cost for recordkeeping 
software across all NRSROs would be 
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33610 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
559
See 17 CFR 240.17a–4 (recordkeeping 
requirements for broker-dealers). This rule has 
previously been subject to notice and comment and 
has been approved by OMB. The Commission noted 
in the proposing release that Rule 17g–2 is based, 
in part, on Exchange Act Rules 17a–3 (17 CFR 
240.17a–3) and 17a–4 (17 CFR 240.17a–4). The 
annual hour burden estimate for the rule, however, 
was based only on the PRA estimate for Rule 17a– 
4. The rule requires substantially less records to be 
made and maintained than Rules 17a–3 and 17a– 
4. Therefore, the Commission based its estimate 
only on the estimate for Rule 17a–4 (as opposed to 
Rules 17a–3 and 17a–4 combined). 
560
300 hours × 30 NRSROs = 9,000 hours. 
561
254 hours × 30 NRSROs = 7,620 hours. 
562
The estimated 10 hours includes drafting, 
legal review and receiving corporate authorization 
to file the undertaking with the Commission. 
563
10 hours × 5 NRSROs = 50 hours. 
564
15 U.S.C. 78o–7(k). An applicant can request 
that the Commission keep this information 
confidential. See 17 CFR 200.80 and 17 CFR 200.83. 
565
Id. 
566
See 17 CFR 240.15c3–1g and 17 CFR 240.17i– 
5. 
567
200 hours × 30 NRSROs = 6,000 hours. 
568
$15,000 × 30 NRSROs = $450,000. 
569
15 U.S.C. 78o–7(g)(1). 
570
15 U.S.C. 78a et seq. 
571
15 U.S.C. 78o–7(g)(2). 
572
15 U.S.C. 78o–7(g)(1). 
approximately $1000 per firm. 
Therefore, the one-time cost to the 
industry would be $30,000. 
Additionally, the Commission 
estimated that the average annual 
amount of time that an NRSRO would 
spend to make and maintain these 
records would be approximately 254 
hours per year. The estimate for annual 
hours was based on the Commission’s 
present estimate for the amount of time 
it would take a broker-dealer to comply 
with the recordkeeping rule, Rule 17a– 
4.
559
Therefore, the Commission 
estimated that the one-time hour burden 
for making and preserving the records 
under proposed Rule 17g–2 would be 
approximately 9,000 hours
560
and the 
total annual hour burden would be 
approximately 7,620 hours per year.
561
 
Rule 17g–2 also requires an NRSRO 
that uses a third-party record custodian 
to furnish the Commission with an 
undertaking from the custodian. Based 
on staff experience, the Commission 
estimated that approximately five 
NRSROs would file this undertaking on 
a one-time basis. The Commission 
estimated, based on staff experience, it 
would take an NRSRO approximately 10 
hours to process an undertaking prior to 
furnishing it to the Commission.
562
 
Therefore, the Commission estimated 
the total one-time hour burden for these 
undertakings would be 50 hours.
563
 
The Commission did not receive any 
comments on these specific burden 
estimates. The Commission notes that 
Rule 17g–2 has been modified in certain 
respects that decrease the burden, but 
also in other respects that will increase 
burden. For example, requirements to 
make records identifying the 
methodology used to determine each 
credit rating and how the credit rating 
was made readily available have been 
eliminated. Further, the retention 
periods for all the records have been 
harmonized and the requirement for a 
non-resident NRSRO to furnish an 
undertaking has been eliminated. On 
the other hand, the rule now requires an 
NRSRO to document its methodologies 
for determining credit ratings and, if 
applicable, to make and retain certain 
records relating to practices with respect 
to rating structured products. The 
Commission believes that these 
adjustments will largely offset each 
other or result in a net decrease in 
burden. For example, the elimination of 
the requirement to identify the 
methodology used to determine a credit 
rating would have impacted all NRSROs 
and required them to make a record for 
each credit rating (which could be in the 
many thousands). Conversely, the 
requirements with respect to structured 
products only will impact NRSROs that 
rate these types of securities, which the 
Commission estimates is less than five. 
While the Commission could reduce its 
burden estimate, it is taking a 
conservative approach to the net results 
of these changes. For these reasons, the 
Commission is retaining the rule’s 
overall burden estimates without 
revision. 
3. Rule 17g–3 
Section 15E(k) of the Exchange Act 
requires an NRSRO to furnish to the 
Commission, on a confidential basis and 
at intervals determined by the 
Commission, such financial statements 
and information concerning its financial 
condition that the Commission, by rule, 
may prescribe as necessary or 
appropriate in the public interest or for 
the protection of investors.
564
The 
section also provides that the 
Commission may, by rule, require that 
the financial statements be certified by 
an independent public accountant.
565
 
Rule 17g–3 implements this statutory 
provision by requiring an NRSRO to 
furnish financial reports to the 
Commission. We estimated that, on 
average, it would take an NRSRO 
approximately 200 hours to prepare for 
and file the annual financial reports. 
This estimate was based on the current 
PRA estimates used for CSEs under 
Appendix G to Exchange Act Rule 
15c3–1, as well as the PRA estimates for 
supervised investment bank holding 
companies under Rule 17i–5.
566
 
Therefore, the Commission estimated 
that the total annual hour burden to 
prepare and furnish annual audited 
financial statements with the 
Commission would be approximately 
6,000 hours.
567
 
To comply with Rule 17g–3, an 
NRSRO would be required to engage the 
services of an independent public 
accountant. The Commission estimated 
that the cost of hiring an accountant 
would vary substantially based on the 
size and complexity of the NRSRO. For 
example, the Commission noted that, 
based on staff experience, the annual 
audit costs of a small broker-dealer 
generally range from $3,000 to $5,000 
per year. The Commission estimated 
that the annual audit costs for a small 
NRSRO would be comparable. The costs 
for a large NRSRO would be much 
greater. However, many of these firms 
already are audited by a public 
accountant for other regulatory 
purposes. For these reasons, the 
Commission estimated that the average 
annual cost across all NRSROs to engage 
the services of an independent public 
accountant would be approximately 
$15,000. Therefore, the annual cost to 
the industry would be $450,000.
568
 
The Commission did not receive any 
comments on these specific estimates. 
The Commission notes that Rule 17g–3 
has been modified to decrease the 
burden. For example, the requirement to 
comply with all provisions of 
Regulation S–X has been eliminated, as 
has the requirement to have the 
information in the proposed schedules 
audited. As discussed above, we 
developed these estimates based on the 
rule as proposed. We continue to 
believe the estimates are appropriate for 
the rule as now modified. Indeed, 
because we have in a variety of respects 
narrowed the requirements of the rule, 
we believe the estimates are likely to be 
conservative. 
4. Rule 17g–4 
Section 15E(g)(1) of the Exchange 
Act
569
requires an NRSRO to establish, 
maintain, and enforce written policies 
and procedures to prevent the misuse of 
material, nonpublic information in 
violation of the Exchange Act.
570
 
Section 15E(g)(2) of the Exchange Act 
provides that the Commission shall 
adopt rules requiring an NRSRO to 
establish specific policies and 
procedures to prevent the misuse of 
material, non-public information.
571
 
Rule 17g–4 implements this statutory 
provision by requiring that an NRSRO’s 
policies and procedures established 
pursuant to Section 15E(g)(1) of the 
Exchange Act
572
include three specific 
types of procedures. 
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33611 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
573
For example, the IOSCO Code requires credit 
rating agencies to develop such procedures. 
574
50 hours × 30 NRSROs = 1,500 hours. 
575
15 U.S.C. 78o–7(k). 
576
For the purposes of this cost/benefit analysis, 
the Commission is using salary data from the SIA 
Report on Management and Professional Earnings 
in the Securities Industry 2005 (‘‘SIA Management 
Report 2005’’), which provides base salary and 
bonus information for middle-management and 
professional positions within the securities 
industry. The positions in the report are divided 
into the following categories: Accounting, 
Administration & Finance, Compliance, Customer 
Service, Floor/Trading, Human Resources 
Management, Internal Audit, Legal, Marketing/ 
Corporate Communications, New Business 
Development, Operations, Research, Systems/ 
Technology, Wealth Management, and Business 
Continuity Planning. The Commission believes that 
the salaries for these securities industry positions 
would be comparable to the salaries of similar 
positions in the credit rating industry. The 
Commission also notes that it is using salaries for 
New York-based employees, which tend to be 
higher than the salaries for comparable positions 
located outside of New York. This conservative 
approach is intended to capture unforeseen costs. 
Finally, the salary costs derived from the SIA 
Management Report 2005 and referenced in this 
cost benefit section, are modified to account for an 
1800-hour work year and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits 
and overhead. 
577
15 U.S.C. 78o–7. 
578
Pub. L. 109–291 (2006). 
579
See Report of the Senate Committee on 
Banking, Housing, and Urban Affairs to Accompany 
S. 3850, Credit Rating Agency Reform Act of 2006, 
S. Report No. 109–326, 109th Cong., 2d Sess. (Sept. 
6, 2006) (‘‘Senate Report’’). 
580
Id. 
581
Section 15E of the Exchange Act (15 U.S.C. 
78o–7). 
582
Sections 15E(a)(1) and (b)(1) of the Exchange 
Act (15 U.S.C. 78o–7(a)(1) and (b)(1)). 
583
Section 15E(k) of the Exchange Act (15 U.S.C. 
78o–7(k)). 
The Commission assumed that most 
credit rating agencies already have 
procedures in place to address the 
specific misuses of material nonpublic 
information identified in Rule 17g–4.
573
 
Nonetheless, the Commission 
anticipated that some NRSROs might 
need to modify their procedures to 
comply with the rule. Based on staff 
experience, the Commission estimated 
that it would take approximately 50 
hours for an NRSRO to establish 
procedures in conformance with the 
rule for a total one-time burden of 1,500 
hours.
574
The Commission did not 
receive any comments on these specific 
estimates and continues to believe that 
they are appropriate. Therefore, the 
Commission is retaining these estimates 
without revision. 
E. Collection of Information Is 
Mandatory 
These recordkeeping and notice 
requirements are mandatory. 
F. Confidentiality 
Pursuant to section 15E(a)(1)(B) of the 
Exchange Act, certain information 
collected in Form NRSRO required 
under Rule 17g–1(a) will not be 
confidential. However, credit rating 
agencies and NRSROs may seek 
confidential treatment of information 
furnished to the Commission under 
existing rules, and the Commission will 
keep this information confidential to the 
extent permitted by law. The books and 
records information collected under 
Rules 17g–2 and 17g–4 will be stored by 
the NRSRO and made available to the 
Commission and its representatives as 
required in connection with 
examinations, investigations, and 
enforcement proceedings. 
The information collected under Rule 
17g–3 (the annual financial reports) will 
be generated from the internal records of 
the NRSRO. Pursuant to Section 15E(k) 
of the Exchange Act, the annual 
financial reports will be furnished to the 
Commission on a confidential basis, to 
the extent permitted by law.
575
 
G. Record Retention Period 
Paragraph (c) of Rule 17g–2 requires 
an NRSRO to retain the records for at 
least three years. 
H. Request for Comment 
The Commission requested comment 
on the collections of information in 
order to: (1) Evaluate whether the 
proposed collection of information is 
necessary for the proper performance of 
the functions of the Commission, 
including whether the information 
would have practical utility; (2) evaluate 
the accuracy of the Commission’s 
estimate of the burden of the proposed 
collection of information; (3) determine 
whether there are ways to enhance the 
quality, utility, and clarity of the 
information to be collected; (4) evaluate 
whether there are ways to minimize the 
burden of the collection of information 
on those who respond, including 
through the use of automated collection 
techniques or other forms of information 
technology; and (5) evaluate whether 
the proposed rules would have any 
effects on any other collection of 
information not previously identified in 
this section. 
VI. Costs and Benefits of the Rules 
The Commission is sensitive to the 
costs and benefits that result from its 
rules. The Commission identified 
certain costs and benefits arising from 
these rules and requested comment on 
all aspects of the cost-benefit analysis 
contained therein, including 
identification and assessment of any 
costs and benefits not discussed in the 
analysis.
576
The Commission sought 
comment and data on the value of the 
benefits identified. The Commission 
also elicited comment on the accuracy 
of the cost estimates in each section of 
the cost-benefit analysis, and requested 
those commenters to provide data so the 
Commission could improve the cost 
estimates, including identification of 
industry statistics relied on by 
commenters to reach conclusions on 
cost estimates. The Commission also 
sought comment on the extent to which 
costs were attributable to requirements 
set forth in Section 15E of the Exchange 
Act,
577
rather than the rules. Finally, the 
Commission requested estimates and 
views regarding the costs and benefits 
for particular types of market 
participants, as well as any other costs 
or benefits that might result from the 
rules. 
As discussed below, the Commission 
received very limited comment on the 
cost-benefit analysis in the proposing 
release. Except as discussed below, the 
Commission continues to believe that 
the specific estimates are appropriate 
and is retaining these estimates 
generally without revision. 
A. Benefits 
The purposes of the Credit Rating 
Agency Reform Act of 2006 (the ‘‘Rating 
Agency Act’’)
578
are to improve ratings 
quality for the protection of investors 
and in the public interest by fostering 
accountability, transparency, and 
competition in the credit rating 
industry.
579
As the Senate Report states, 
the Rating Agency Act establishes 
‘‘fundamental reform and improvement 
of the designation process,’’ and 
‘‘eliminating the artificial barrier to 
entry will enhance competition and 
provide investors with more choices, 
higher quality ratings, and lower 
costs.’’
580
 
To these ends, the Rating Agency Act 
establishes—through statutory 
provisions and the grant of Commission 
rulemaking authority—a regulatory 
program for credit rating agencies opting 
to have their credit ratings qualify for 
purposes of laws and rules using the 
term ‘‘NRSRO.’’ Specifically, the Rating 
Agency Act sets out a voluntary 
mechanism for credit rating agencies to 
register with the Commission as an 
NRSRO.
581
It requires an NRSRO to 
make public certain information to help 
users of credit ratings assess the 
NRSRO’s credibility and compare the 
NRSRO with other NRSROs.
582
The 
Rating Agency Act also requires an 
NRSRO to furnish the Commission with 
periodic financial reports.
583
Further, 
the Rating Agency Act requires an 
NRSRO to implement policies to 
manage the handling of material non- 
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33612 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
584
Sections 15E(g) and (h) of the Exchange Act 
(15 U.S.C. 78o–7(g) and (h)). 
585
Section 15E(i) of the Exchange Act (15 U.S.C. 
78o–7(i)). 
586
See Report of the Senate Committee on 
Banking, Housing, and Urban Affairs to Accompany 
S. 3850, Credit Rating Agency Reform Act of 2006, 
S. Report No. 109–326, 109th Cong., 2d Sess. (Sept. 
6, 2006) (‘‘Senate Report’’). 
587
Section 3(a)(61) of the Exchange Act (15 U.S.C. 
78c(a)(61)). 
588
15 U.S.C. 78o–7. 
589
See Section 15E(a)(1)(B) of the Exchange Act 
(15 U.S.C. 78o–7(a)(1)(B)). 
590
See 15 U.S.C. 78o–7(a)(2)(C)(ii)(I). 
591
15 U.S.C. 78o–7(a)(1)(B). 
592
15 U.S.C. 78o–7(g), (h), (i) and (j). 
593
15 U.S.C. 78q(a)(1). 
594
15 U.S.C. 78o–7(k). 
595
Id. 
public information and conflicts of 
interest.
584
Pursuant to authority under 
the Rating Agency Act, the Commission 
must prohibit certain acts and practices 
the Commission finds to be unfair, 
coercive, or abusive.
585
 
The rules the Commission is adopting 
under the Rating Agency Act are being 
issued pursuant to specific statutory 
mandates and grants of rulemaking 
authority. They are designed to further 
the goals of the Rating Agency Act, 
including fostering ‘‘competition in the 
credit rating agency business.’’
586
The 
practice of identifying NRSROs through 
staff no-action letters has been criticized 
as a process that lacks transparency and 
creates a barrier for credit rating 
agencies seeking wider recognition and 
market share. The Commission believes 
that these rules further the goal of 
increasing competition because they 
provide credit rating agencies with a 
transparent process to apply for 
registration as an NRSRO that does not 
favor a particular business model or 
larger, established firms. This will make 
it easier for more credit rating agencies 
to apply for registration. Increased 
competition in the credit ratings 
business could lower the cost to issuers, 
obligors, and underwriters of obtaining 
credit ratings. 
In addition, the Rating Agency Act 
requires NRSROs to make their credit 
ratings and information about 
themselves available to the public. Part 
of the Rating Agency Act’s definition of 
‘‘credit rating agency’’ is that the entity 
must be in the business of issuing credit 
ratings on the Internet or through 
another readily accessible means, for 
free or for a reasonable fee.
587
Under the 
Rating Agency Act and the rules 
adopted thereunder, an NRSRO will be 
required to disclose information about 
its credit ratings performance statistics, 
its methods for determining credit 
ratings, its organizational structure, its 
procedures to prevent the misuse of 
material non-public information, the 
conflicts of interest that arise from its 
business activities, its code of ethics, 
and the qualifications of its credit 
analysts and credit analyst supervisors. 
The Commission believes that these 
disclosures will allow users of the credit 
ratings to compare the credit ratings 
quality of different NRSROs. Although 
the information an NRSRO will provide 
on its Form NRSRO and to comply with 
the rules cannot substitute for an 
investor’s due diligence in evaluating a 
credit rating, it will aid investors by 
providing a publicly accessible 
foundation of basic information about 
an NRSRO. 
In addition, the rules implement 
provisions of the Rating Agency Act that 
are designed to improve the integrity of 
NRSROs. For example, the registration 
of a credit rating agency as an NRSRO 
will allow the Commission to conduct 
regular examinations of the credit rating 
agency to evaluate compliance with the 
regulatory scheme set forth in Section 
15E of the Exchange Act
588
and the 
rules thereunder and will subject an 
NRSRO to disclosure, recordkeeping, 
and annual financial reporting 
requirements, as well as requirements 
regarding the prevention of misuse of 
material, nonpublic information, the 
management of conflicts of interest, and 
certain prohibited acts and practices. 
Increased confidence in the integrity of 
NRSROs and the credit ratings they 
issue could promote participation in the 
securities markets. Better quality ratings 
could also reduce the likelihood of an 
unexpected collapse of a rated issuer or 
obligor, reducing risks to individual 
investors and to the financial markets. 
In addition to improving the quality of 
credit ratings, increased oversight of 
NRSROs could increase the 
accountability of an NRSRO to its 
subscribers, investors, and other persons 
who rely on the credibility and 
objectivity of credit ratings in making an 
investment decision. 
Rule 17g–1 prescribes a process for a 
credit rating agency to register with the 
Commission as an NRSRO. The rule 
requires a credit rating agency to apply 
for registration using Form NRSRO. 
Form NRSRO requires that a credit 
rating agency provide information 
required under Section 15E(a)(1)(B) of 
the Exchange Act and certain additional 
information.
589
The additional 
information will assist the Commission 
in making the assessment regarding 
financial and managerial resources 
required under Section 15E(a)(2)(C)(ii)(I) 
of the Exchange Act.
590
This section 
directs the Commission to grant a credit 
rating agency’s application for 
registration as an NRSRO unless, among 
other things, the Commission finds that 
the applicant does not have adequate 
financial and managerial resources to 
consistently issue ratings with integrity 
and to materially comply with its 
procedures and methodologies 
disclosed under Sections 15E(a)(1)(B) of 
the Exchange Act
591
and with the 
requirements in Sections 15E(g), (h), (i) 
and (j) of the Exchange Act.
592
Certain 
other additional information required to 
be made public will assist users of 
credit ratings in assessing the credibility 
of the NRSRO and in comparing the 
NRSRO with other NRSROs. 
Rule 17g–2 implements the 
Commission’s recordkeeping and 
rulemaking authority under Section 
17(a) of the Exchange Act
593
by 
requiring an NRSRO to make and retain 
certain records related to its business as 
a credit rating agency. This 
recordkeeping rule will assist the 
Commission in monitoring whether an 
NRSRO is complying with provisions of 
Section 15E of the Exchange Act and the 
rules thereunder by requiring 
information about each NRSRO’s 
financial condition, management, and 
operations. This information will permit 
the Commission to observe differences 
between NRSROs and changes over time 
in individual NRSROs. The information 
also will permit the Commission to 
review whether an NRSRO is operating 
consistently with the methodologies and 
procedures it establishes to determine 
credit ratings and its policies and 
procedures designed to ensure the 
impartiality of its credit ratings. 
Section 15E(k) of the Exchange Act 
requires an NRSRO to furnish to the 
Commission, on a confidential basis and 
at intervals determined by the 
Commission, such financial statements 
and information concerning its financial 
condition that the Commission, by rule, 
may prescribe as necessary or 
appropriate in the public interest or for 
the protection of investors.
594
The 
section also provides that the 
Commission may, by rule, require that 
an independent public accountant 
certify the financial statements.
595
Rule 
17g–3 implements this rulemaking 
authority by requiring an NRSRO to 
furnish annual financial reports to the 
Commission. This rule will enhance 
Commission oversight of an NRSRO. 
Specifically, it will aid the Commission 
in monitoring whether the initiation of 
a proceeding under Section 15E(d) of 
the Exchange Act will be appropriate 
because the NRSRO ‘‘fails to maintain 
adequate financial and managerial 
resources to consistently produce credit 
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33613 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
596
15 U.S.C. 78o–7(d). 
597
See, e.g., Rule 17g–5(c)(1) prohibiting an 
NRSRO from issuing or maintaining a credit rating 
for a person that, in the most recently ended fiscal 
year, provided the NRSRO with net revenue 
equaling or exceeding 10% of the NRSRO’s total 
revenue for the year. 
598
15 U.S.C. 78o–7(g)(1). 
599
15 U.S.C. 78a et seq. 
600
15 U.S.C. 78o–7(g)(2). 
601
15 U.S.C. 78o–7(g)(1). 
602
15 U.S.C. 78o–7(g). 
603
15 U.S.C. 78o–7(h)(2). 
604
15 U.S.C. 78o–7(a)(1)(B)(vi) and (h). 
605
15 U.S.C. 78o–7(c)(2). 
606
44 U.S.C. 3501 et seq. 5 CFR 1320.11. 
607
15 U.S.C. 78o–7(a)(1)(B). 
608
15 U.S.C. 78o–7. 
609
Id. 
610
See Lace Letter. 
611
Id. 
612
Id. 
613
This total is derived from the total one-time 
costs set forth in the order that they appear in the 
text: $2,007,000 + $480,000 + $25,625 + $241,200 
+ $1,845,000 + $30,000 + $307,500 = $4,936,325. 
614
This total is derived from the total annual 
costs set forth in the order that they appear in the 
text: $307,500 + $61,500 + $80,400 + $1,562,100 + 
$1,494,000 + $450,000 = $3,955,500. 
ratings with integrity.’’
596
In addition, 
the financial reports also will assist the 
Commission in monitoring potential 
conflicts of interests of a financial 
nature arising from the operation of an 
NRSRO.
597
 
Section 15E(g)(1) of the Exchange 
Act
598
requires an NRSRO to establish, 
maintain, and enforce written policies 
and procedures to prevent the misuse of 
material, nonpublic information in 
violation of the Exchange Act.
599
 
Section 15E(g)(2) of the Exchange Act 
provides that the Commission shall 
adopt rules requiring an NRSRO to 
establish specific policies and 
procedures to prevent the misuse of 
material, nonpublic information.
600
 
Rule 17g–4 implements this statutory 
provision by requiring that an NRSRO’s 
policies and procedures established 
pursuant to Section 15E(g)(1) of the 
Exchange Act
601
include three specific 
types of procedures. These specific 
procedures establish a baseline for the 
type of procedures an NRSRO must 
implement to meet the statutory 
requirement in Section 15E(g) of the 
Exchange Act.
602
By providing this 
baseline, the rule is designed to ensure 
that an NRSRO establishes adequate 
procedures and controls to protect 
material nonpublic information. 
Rule 17g–5 implements Section 
15E(h)(2) of the Exchange Act
603
by 
requiring an NRSRO to disclose and 
manage certain conflicts of interest, as 
well as specifically prohibiting other 
conflicts of interest. This rule will 
promote the disclosure and management 
of conflicts of interest required by 
Sections 15E(a)(1)(B)(vi) and 15E(h) of 
the Exchange Act and mitigate potential 
undue influences on an NRSRO’s credit 
rating process.
604
 
Rule 17g–6 prohibits an NRSRO from 
engaging in certain unfair, abusive, or 
coercive acts or practices. These 
prohibitions are designed to enhance 
the integrity of NRSROs, promote 
competition and fulfill a statutory 
mandate. 
The Commission requested comment 
on available metrics to quantify these 
benefits and any other benefits the 
commenter may identify, including the 
identification of sources of empirical 
data that could be used for such metrics. 
The Commission did not receive any 
comments in response to this request. 
B. Costs 
The Rating Agency Act requires that 
the rules and regulations that the 
Commission may prescribe ‘‘be 
narrowly tailored’’ to meet its 
requirements.
605
The rules being 
adopted by the Commission are 
designed to adhere to this statutory 
mandate and, thereby, keep compliance 
costs as low as possible. 
The cost of compliance to a given 
NRSRO will depend on its size and the 
complexity of its business activities. As 
discussed above, the size and 
complexity of credit rating agencies 
varies significantly. Therefore, it is 
difficult to quantify a cost per NRSRO. 
Instead, the Commission provided 
estimates of the average cost per NRSRO 
taking into consideration the range in 
size and complexity of NRSROs and the 
fact that many already may have 
established policies, procedures, and 
recordkeeping systems and processes 
that will comply substantially with the 
requirements. 
The Commission believes that larger 
NRSROs generally already have 
established written policies and 
procedures and recordkeeping systems 
that will comply with a substantial 
portion of the requirements in the rules. 
Many of the requirements in the rules 
are consistent with the IOSCO Code 
principles, which a number of credit 
rating agencies (including the largest) 
have implemented. These firms will be 
required to augment or modify existing 
policies and procedures and 
recordkeeping systems to comply with 
the rules (rather than establish new 
ones). Some smaller credit rating 
agencies also have implemented the 
policies, procedures, and recordkeeping 
systems necessary to comply with the 
rules. Moreover, given their smaller size 
and simpler structure, smaller entities 
will require less effort and incur less 
cost to comply with a substantial 
portion of the requirements in these 
rules. 
For these reasons, the cost estimates 
represent the average cost across all 
NRSROs (regardless of size) and take 
into account that many firms will only 
be required to augment existing policies, 
procedures, and recordkeeping systems 
and processes to come into compliance 
with the rules. Furthermore, as 
discussed with respect to the Paperwork 
Reduction Act of 1995 (‘‘PRA’’),
606
the 
Commission is requiring additional 
information in Form NRSRO beyond 
that prescribed in Section 15E(1)(B) of 
the Exchange Act.
607
Therefore, the cost 
estimates for Rule 17g–1 include 
estimates that arise from requirements 
imposed by Section 15E of the Exchange 
Act.
608
The intent is to quantify the 
incremental burden of complying with 
these statutory requirements as a result 
of the additional information that will 
be required under Rule 17g–1. Thus, 
those estimates do not seek to capture 
costs that are solely attributable to 
requirements in Section 15E of the 
Exchange Act.
609
 
The Commission requested 
commenters to provide data for the costs 
that would be solely attributable to the 
requirements of Section 15E of the 
Exchange Act. The Commission 
received one comment from an entity 
that the overall cost of complying with 
the rules would be $207,515.
610
The 
commenter did not provide any further 
detail on how these costs would be 
solely attributable to the Commission’s 
proposed rules (as opposed to 
provisions of the Rating Agency Act).
611
 
The commenter also did not identify the 
specific costs that would arise from each 
discreet rule provision.
612
The 
Commission believes that the estimated 
costs the commenter would incur if 
registered as an NRSRO are included in 
the cost estimates discussed below. 
Given the estimates set forth below, 
the Commission estimates that the total 
one-time estimated cost to NRSROs 
resulting from these rule proposals 
would be approximately $4,936,325
613
 
and the total estimated annual cost to 
NRSROs resulting from these rule 
proposals would be approximately 
$3,955,500 per year.
614
 
1. Rule 17g–1, Form NRSRO and 
Instructions to Form NRSRO 
Section 15E(a)(1) of the Exchange Act 
requires a credit rating agency applying 
for registration with the Commission to 
furnish an application containing 
certain specified information and such 
other information as the Commission 
prescribes as necessary or appropriate in 
the public interest or for the protection 
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33614 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
615
15 U.S.C. 78o–7(a)(1). 
616
See paragraphs (a), (c) and (h) of Rule 17g–1. 
617
15 U.S.C. 78o–7. 
618
There is no filing fee for a Form NRSRO. 
619
The Commission estimates that a credit rating 
agency will have a senior compliance examiner 
perform these responsibilities. The SIA 
Management Report 2005 (Senior Compliance 
Examiner) indicates that the average hourly cost for 
a senior compliance examiner is $223. Therefore, 
the average one-time cost per NRSRO will be 
approximately $66,900 [(300 hours) × ($223 per/ 
hour)]. 
620
30 NRSROs × $66,900 = $2,007,000. 
621
$400 per hour × 40 hours = $16,000. 
622
$16,000 × 30 NRSROs = $480,000. 
623
See paragraph (b) of Rule 17g–1. 
624
The Commission estimates an NRSRO will 
have a senior compliance person perform these 
responsibilities. The SIA Management Report 2005 
(Compliance Officer) indicates that the average 
hourly cost for a compliance manager is $205. 
Therefore, the average cost to an NRSRO will be 
$5,125 [(25 hours for one year) × ($205)]. 
625
5 NRSROs × $5,125 = $25,625. 
626
15 U.S.C. 78o–7(b)(1). 
627
See paragraph (e) of Rule 17g–1. 
628
Based on the PRA estimates, an NRSRO will 
spend approximately 50 hours each year updating 
its application on Form NRSRO (25 hours per 
amendment × two amendments). The Commission 
estimates an NRSRO will have a senior compliance 
person perform these responsibilities. The SIA 
Management Report 2005 (Compliance Officer) 
indicates that the average hourly cost for a 
compliance manager is $205. Therefore, the total 
average annual cost to an NRSRO to update its 
registration on Form NRSRO will be $10,250 [(50 
hours per year) × ($205 per hour)]. 
629
$10,250 × 30 NRSROs = $307,500. 
630
15 U.S.C. 78o–7(b)(2). 
631
See paragraph (f) Rule 17g–1. 
632
The Commission estimates an NRSRO will 
have a senior compliance person perform these 
responsibilities. The SIA Management Report 2005 
(Compliance Officer) indicates that the average 
hourly cost for a compliance manager is $205. 
Therefore, the average annual cost will be $2,050 
[(10 hours per year) × ($205 per hour)]. 
633
$2,050 × 30 NRSROs = $61,500. 
634
15 U.S.C. 78o–7(a)(3). 
635
See paragraph (i) of Rule 17g–1. 
636
The Commission estimates that an NRSRO 
will have a Senior Programmer perform this work. 
The SIA Management Report 2005 (Senior 
Programmer) indicates that the average hourly cost 
for a senior programmer is $268. Therefore, the 
average one-time cost will be $8,040 [(30 hours) × 
($268 per hour)] and the average annual cost will 
be $2,680 [(10 hours per year) × ($268 per hour)]. 
637
$8,040 × 30 NRSROs = $241,200. 
638
$2,680 × 30 NRSROs = $80,400. 
of investors.
615
Rule 17g–1
616
 
implements this statutory provision by 
requiring a credit rating agency to 
furnish an initial application on a 
completed Form NRSRO to apply to be 
registered under section 15E of the 
Exchange Act.
617
 
NRSROs will incur costs to register 
under Section 15E of the Exchange Act 
and Rule 17g–1.
618
As discussed above 
with respect to PRA, the Commission 
estimates that an NRSRO will spend 
approximately 300 hours to complete 
and furnish an initial Form NRSRO. 
Also, as discussed with respect to the 
PRA, the Commission estimates there 
will be 30 NRSROs. For these reasons, 
the Commission estimates that the 
average one-time cost to an NRSRO will 
be $66,900
619
and the total aggregate 
one-time cost to the industry will be 
$2,007,000.
620
 
Also, as discussed with respect to the 
PRA, the Commission anticipates that 
an NRSRO likely will engage outside 
counsel to assist in the process of 
completing and submitting a Form 
NRSRO. The amount of time an outside 
attorney will spend on this work will 
depend on the size and complexity of 
the NRSRO. Therefore, the Commission 
estimates that, on average, an outside 
counsel will spend approximately 40 
hours assisting an NRSRO in preparing 
its application for registration. The 
Commission further estimates that this 
work will be split between a partner and 
associate, with an associate performing 
a majority of the work. Therefore, the 
Commission estimates that the average 
hourly cost for an outside counsel will 
be approximately $400 per hour. For 
these reasons, the Commission estimates 
that the average one-time cost to an 
NRSRO will be $16,000
621
and the one- 
time cost to the industry will be 
$480,000.
622
 
Under Rule 17g–1, an NRSRO 
applying to be registered for an 
additional class of credit ratings will be 
required to file an amended Form 
NRSRO with the Commission.
623
As 
discussed with respect to the PRA, the 
Commission estimates, on average, an 
NRSRO will spend 25 hours completing 
and furnishing a Form NRSRO for this 
purpose. The Commission also 
estimates with respect to the PRA that 
five of the 30 NRSROs will apply to 
register for an additional class of credit 
ratings. For these reasons, the 
Commission estimates that the average 
one-time cost to an NRSRO will be 
$5,125
624
and the total aggregate one- 
time cost to the industry will be 
$25,625.
625
 
Section 15E(b)(1) of the Exchange Act 
requires an NRSRO to promptly amend 
its application for registration if any 
information or document provided in 
the application becomes materially 
inaccurate.
626
Rule 17g–1 requires an 
NRSRO to comply with this statutory 
requirement by furnishing the 
amendment on Form NRSRO.
627
As 
discussed with respect to the PRA, the 
Commission estimates that an NRSRO 
will furnish two amendments on Form 
NRSRO per year on average. The 
Commission also estimates with respect 
to the PRA that it will take 
approximately 25 hours to prepare and 
furnish an amendment and that there 
will be 30 NRSROs. For these reasons, 
the Commission estimates that the 
average annual cost to an NRSRO will 
be $10,250
628
and the total aggregate 
annual cost to the industry will be 
$307,500.
629
 
Section 15E(b)(2) of the Exchange Act 
requires an NRSRO to furnish an annual 
certification.
630
Rule 17g–1 will require 
an NRSRO to furnish the annual 
certification on Form NRSRO.
631
As 
discussed with respect to the PRA, the 
Commission estimates an NRSRO will 
spend approximately 10 hours per year 
completing and furnishing the annual 
certification and that there will be 30 
NRSROs. For these reasons, the 
Commission estimates that the average 
annual cost to an NRSRO will be 
$2,050
632
and the total aggregate annual 
cost to the industry will be $61,500.
633
 
Section 15E(a)(3) of the Exchange Act 
requires an NRSRO to make certain 
information and documents submitted 
in its application publicly available on 
its Web site, or through another 
comparable, readily accessible 
means.
634
Rule 17g–1 requires that this 
be done within 10 business days of the 
granting of an NRSRO’s application or 
the furnishing of an amendment to the 
form or annual certification.
635
As 
discussed with respect to the PRA, the 
Commission estimates that the average 
hour burden for an NRSRO to disclose 
this information on its Web site will be 
approximately 30 hours on a one-time 
basis and 10 hours per year. 
Furthermore, as discussed with respect 
to the PRA, the Commission estimates 
that there will be 30 NRSROs. For these 
reasons, the Commission estimates that 
an NRSRO will incur an average one- 
time cost of $8,040 and an average 
annual cost of $2,680.
636
Consequently, 
the total aggregate one-time cost to the 
industry will be $241,200
637
and total 
aggregate annual cost to the industry 
will be $80,400 per year.
638
 
The Commission believes the 
requirements in Rule 17g–1 to furnish a 
notice on Form NRSRO when an 
NRSRO withdraws its registration will 
result in de minimis costs. 
The Commission requested comment 
on these cost estimates. We also 
requested comment on whether there 
would be costs in addition to those 
identified above, such as costs arising 
from systems changes. Comment also 
was sought on whether these 
requirements would impose costs on 
other market participants, including 
persons who use credit ratings to make 
investment decisions or for regulatory 
purposes, and persons who purchase 
services and products from NRSROs. 
Commenters were asked to identify the 
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33615 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
639
See Section 5 of the Rating Agency Act and 
15 U.S.C. 78q(a)(1). 
640
Id. 
641
The Commission estimates that an NRSRO 
will have a compliance manager perform these 
responsibilities. The SIA Management Report 2005 
indicates that the average hourly cost for a 
compliance manager is $205. Therefore, the average 
one-time cost will be $61,500 [(300 hours) × ($205 
per hour)] and the average annual cost will be 
$52,070 [(254 hours per year) × ($205 per hour)]. 
642
$61,500 × 30 NRSROs = $1,845,000. 
643
$52,070 × 30 NRSROs = $1,562,100. 
644
$1,000 × 30 NRSROs = $30,000. 
645
An applicant can request that the Commission 
keep this information confidential to the extent 
permitted by law. See 17 CFR 200.80 and 17 CFR 
200.83. 
646
15 U.S.C. 78o–7(k). 
647
Id. 
648
The Commission estimates that a senior 
internal auditor will perform these responsibilities. 
The SIA Management Report 2005 (Senior Internal 
Auditor) indicates that the average hourly cost for 
a senior internal auditor is $249. Therefore, the 
average annual cost will be $49,800 [(200 hours per 
year) × ($249 per hour)]. 
649
$49,800 × 30 NRSROs = $1,494,000. 
650
See Fitch Letter. 
651
Id. 
652
15 U.S.C. 78o–7(a)(1)(B)(viii). 
metrics and sources of any empirical 
data that supported their costs 
estimates. The Commission did not 
receive any comments in response to 
these requests. 
2. Rule 17g–2 
Section 17(a)(1) of the Exchange 
Act
639
provides the Commission with 
authority to require an NRSRO to make 
and maintain such records as the 
Commission prescribes by rule as 
necessary or appropriate in the public 
interest, for the protection of investors, 
or otherwise in furtherance of the 
Exchange Act.
640
Rule 17g–2 
implements this rulemaking authority 
by requiring an NRSRO to make and 
preserve specified records related to its 
credit rating business. 
As discussed with respect to the PRA, 
the Commission estimates that an 
NRSRO, on average, will spend 
approximately 300 hours on a one-time 
basis to establish a recordkeeping 
system and 254 hours each year 
updating its books and records. For 
these reasons, the Commission estimates 
that an NRSRO will incur an average 
one-time cost of $61,500 and an average 
annual cost of $52,070.
641
 
Consequently, the total aggregate one- 
time cost to the industry will be 
$1,845,000,
642
and the total aggregate 
annual cost to the industry will be 
$1,562,100 per year.
643
 
Furthermore, as discussed above with 
respect to the PRA, the Commission also 
estimates that an NRSRO may be 
required to purchase recordkeeping 
system software to establish a 
recordkeeping system in conformance 
with the rule. The Commission 
estimates that the cost of the software 
will vary based on the size and 
complexity of the NRSRO. Also, the 
Commission estimates that some 
NRSROs will not require such software 
because they already have adequate 
recordkeeping systems or, given their 
small size, such software will not be 
necessary. Based on these estimates, the 
Commission estimates that the average 
cost for recordkeeping software across 
all NRSROs will be approximately 
$1,000 per firm. Therefore, the one-time 
cost to the industry will be $30,000.
644
 
The Commission requested comment 
on these cost estimates. We also 
requested comment on whether there 
would be costs in addition to those 
identified above, such as costs arising 
from restructuring business practices. 
Comment also was sought on whether 
these rules would impose costs on other 
market participants, including persons 
who use credit ratings to make 
investment decisions or for regulatory 
purposes, and persons who purchase 
services and products from NRSROs. 
Commenters were asked to identify the 
metrics and sources of any empirical 
data that supported their costs 
estimates. The Commission did not 
receive any comments in response to 
these requests. 
3. Rule 17g–3 
Section 15E(k) of the Exchange Act 
requires an NRSRO to furnish to the 
Commission, on a confidential basis
645
 
and at intervals determined by the 
Commission, such financial statements 
and information concerning its financial 
condition that the Commission, by rule, 
may prescribe as necessary or 
appropriate in the public interest or for 
the protection of investors.
646
The 
section also provides that the 
Commission may, by rule, require that 
the financial statements be certified by 
an independent public accountant.
647
 
Rule 17g–3 implements this statutory 
provision by requiring an NRSRO to 
furnish annual financial reports to the 
Commission. As discussed above with 
respect to the PRA, the Commission 
estimates that an NRSRO, on average, 
will spend approximately 200 hours per 
year preparing for and furnishing these 
financial reports. For these reasons, the 
Commission estimates that the average 
annual cost to an NRSRO will be 
$49,800
648
and the total aggregate 
annual cost to the industry will be 
$1,494,000.
649
 
As noted above, the average one-time 
and annual costs to NRSROs will vary 
widely depending on the size and 
complexity of the NRSRO. Moreover, 
some large credit rating agencies already 
prepare audited financial statements in 
accordance with other regulatory 
requirements. Nonetheless, these credit 
rating agencies may be required to make 
changes to their accounting systems to 
comply with the requirements in Rule 
17g–3. The Commission believes these 
costs will vary depending on the size 
and complexity of the NRSRO. The 
Commission sought comment on the 
costs that would be incurred to make 
changes to their accounting systems. 
The Commission received one 
comment in response to this specific 
request from a large credit rating 
agency.
650
The commenter stated that it 
would cost between $6 and $8 million 
to develop a system that could capture 
revenues received by the credit rating 
agency and its affiliates from customers 
in order to create the list of large 
customers that could be audited.
651
The 
Commission notes, as an initial matter, 
that Section 15E(a)((B)(viii) of the 
Exchange Act requires an NRSRO to 
create this list with respect to issuers 
and subscribers.
652
Consequently, the 
costs of developing a system that can 
capture this information can largely be 
attributed to the statute. Nonetheless, 
Rule 17g–3 has been modified in ways 
that the Commission believes will 
largely reduce these costs. First, an 
NRSRO is not required to include 
revenue received by affiliates that are 
not part of the credit rating organization 
in determining this list. Second, the list 
is now a separate financial report that is 
not required to be audited. Third, the 
definition of net revenue was modified 
to refer to revenues ‘‘earned’’ by the 
NRSRO (as opposed to revenues 
‘‘received’’). This is designed to provide 
flexibility so that each NRSRO can 
define ‘‘revenues’’ consistent with how 
its accounting system recognizes 
revenues. The Commission believes 
these modifications significantly reduce 
the operational difficulties in 
determining the list of large customers. 
As discussed above with respect to 
the PRA, an NRSRO will be required to 
engage the services of independent 
public accountant to comply with Rule 
17g–3. The cost of hiring an account 
will vary substantially based on the size 
and complexity of the NRSRO. As the 
noted above, based on staff experience, 
the annual audit costs of a small broker- 
dealer generally range from $3,000 to 
$5,000 a year. As the Commission 
estimated above, the annual audit costs 
for a small NRSRO will likely be 
comparable to the costs incurred by a 
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33616 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
653
$15,000 × 30 NRSROs = $450,000. 
654
15 U.S.C. 78o–7(g)(1). 
655
15 U.S.C. 78a et seq. 
656
15 U.S.C. 78o–7(g)(2). 
657
15 U.S.C. 78o–7(g)(1). 
658
The Commission estimates an NRSRO will 
have a senior compliance person perform these 
responsibilities. The SIA Management Report 2005 
(Compliance Officer) indicates that the average 
hourly cost for a compliance manager is $205. 
Therefore, the average one-time cost to an NRSRO 
will be $10,250 [(50 hours) × ($205)]. 
659
30 NRSROs × $10,250 = $307,500. 
660
15 U.S.C. 78c(f). 
661
15 U.S.C. 78w(a)(2). 
662
Pub. L. 109–291 (2006). 
663
See Report of the Senate Committee on 
Banking, Housing, and Urban Affairs to Accompany 
S. 3850, Credit Rating Agency Reform Act of 2006, 
S. Report No. 109–326, 109th Cong., 2d Sess. (Sept. 
6, 2006) (‘‘Senate Report’’). 
small broker-dealer. The costs for a large 
NRSRO will be much greater. However, 
many of these firms already are audited 
by a public accountant for other 
regulatory purposes. For these reasons, 
the Commission estimates that the 
average annual cost across all NRSROs 
to engage the services of an independent 
public account will be approximately 
$15,000. Therefore, the annual cost to 
the industry will be $450,000.
653
 
The Commission requested comment 
on these cost estimates. We also 
requested comment on whether there 
would be costs in addition to those 
identified above. Comment was sought 
on whether these requirements would 
impose costs on other market 
participants, including persons who use 
credit ratings to make investment 
decisions or for regulatory purposes, 
and persons who purchase services and 
products from NRSROs. Commenters 
were asked to identify the metrics and 
sources of any empirical data that 
supported their costs estimates. Other 
than the one comment discussed above, 
the Commission did not receive any 
comments in response to these requests. 
4. Rule 17g–4 
Section 15E(g)(1) of the Exchange 
Act
654
requires an NRSRO to establish, 
maintain, and enforce written policies 
and procedures to prevent the misuse of 
material, nonpublic information in 
violation of the Exchange Act.
655
 
Section 15E(g)(2) of the Exchange Act 
provides that the Commission shall 
adopt rules requiring an NRSRO to 
establish specific policies and 
procedures to prevent the misuse of 
material, non-public information.
656
 
Rule 17g–4 implements this statutory 
provision by requiring that an NRSRO’s 
policies and procedures established 
pursuant to Section 15E(g)(1) of the 
Exchange Act
657
include three specific 
types of procedures. 
As discussed above with respect to 
PRA, the Commission estimates that it 
will take approximately 50 hours for an 
NRSRO to establish procedures in 
conformance with the rule and that 
there will be 30 NRSROs. For these 
reasons, the Commission estimates that 
the average one-time cost to an NRSRO 
will be $10,250
658
and the total 
aggregate one-time cost to the industry 
will be $307,500.
659
 
The Commission requested comment 
on these cost estimates. We also 
requested comment on whether there 
would be costs in addition to those 
identified above, such as costs arising 
from systems changes and restructuring 
business practices. Comment also was 
sought on whether these requirements 
would impose costs on other market 
participants, including persons who use 
credit ratings to make investment 
decisions or for regulatory purposes, 
and persons who purchase services and 
products from NRSROs. Commenters 
were asked to identify the metrics and 
sources of any empirical data that 
supported their costs estimates. The 
Commission did not receive any 
comments in response to these requests. 
5. Rules 17g–5 and 17g–6 
Rules 17g–5 and 17g–6 are conduct 
rules that require NRSROs respectively 
to avoid certain conflicts of interest and 
unfair, abusive or coercive acts and 
practices and, consequently, do not 
require an NRSRO to make records or 
reports or create recordkeeping or 
accounting systems. Moreover, 
15E(1)(B)(vi) of the Exchange Act 
requires an NRSRO to disclose any 
conflicts of interest. Additionally, 
Section 15E(h) of the Exchange Act 
requires an NRSRO establish, maintain, 
and enforce written policies and 
procedures reasonable designed to 
address and manage any conflicts of 
interest that can arise from its business. 
Therefore, the Commission does not 
anticipate that Rule 17g–5 will result in 
any significant incremental costs. 
Rules 17g–5 and 17g–6 prohibit 
respectively certain conflicts of interest 
and unfair, coercive and abusive acts 
and practices. The Commission believes 
that most entities that will become 
NRSROs do not engage in these types of 
conflicts, acts and practices. Therefore, 
the Commission estimates that these 
rules generally will impose de minimis 
costs. However, the Commission 
recognizes that an NRSRO may incur 
costs related to training employees 
about the requirements in these rules. It 
also is possible that the rules may 
require some NRSROs to restructure 
their business models or activities. The 
Commission, therefore, requested 
comment on such training and 
restructuring costs. The Commission 
also requested comment on whether 
there are any other costs associated with 
these rules. The Commission did not 
receive any comments on these specific 
issues. 
VII. Consideration of Burden on 
Competition and Promotion of 
Efficiency, Competition, and Capital 
Formation 
Under Section 3(f) of the Exchange 
Act,
660
the Commission must, when 
engaging in rulemaking that requires the 
Commission to consider or determine if 
an action is necessary or appropriate in 
the public interest, consider whether the 
action will promote efficiency, 
competition, and capital formation. 
Section 23(a)(2) of the Exchange Act
661
 
requires the Commission to consider the 
anticompetitive effects of any rules the 
Commission adopts under the Exchange 
Act. Section 23(a)(2) prohibits the 
Commission from adopting any rule that 
would impose a burden on competition 
not necessary or appropriate in 
furtherance of the purposes of the 
Exchange Act. 
The Commission’s view is that the 
rules will promote efficiency, 
competition, and capital formation. As 
discussed above with respect to the 
costs and benefits of the rules, the 
primary purpose of the Credit Rating 
Agency Reform Act of 2006 (the ‘‘Rating 
Agency Act’’)
662
is to foster 
‘‘competition in the credit rating agency 
business.’’
663
The practice of 
identifying NRSROs through staff no- 
action letters has been criticized as a 
process that lacks transparency and 
creates a barrier for credit rating 
agencies seeking wider recognition and 
market share. The Commission believes 
that these rules implementing 
provisions of the Rating Agency Act 
further the Rating Agency Act’s goal of 
increasing competition because they 
will provide credit rating agencies with 
a transparent process to apply for 
registration as an NRSRO that does not 
favor a particular business model or 
larger, established firms. This will make 
it easier for more credit rating agencies 
to apply for registration. Increased 
competition in the credit ratings 
business may lower the cost to issuers, 
obligors, and underwriters of obtaining 
credit ratings. 
In addition, the Rating Agency Act 
requires NRSROs to make their credit 
ratings and information about 
themselves available to the public. Part 
of the definition of ‘‘credit rating 
agency’’ in the Rating Agency Act is that 
the entity must be in the business of 
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33617 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
664
Section 3(a)(61) of the Exchange Act (15 U.S.C. 
78c(a)(61)). 
665
See, e.g., Gross Letter; AFP Letter; FSR Letter; 
ICI Letter; AEI Letter. 
666
See, e.g., Gross Letter; AFP Letter; FSR Letter; 
ICI Letter. 
667
See, e.g., AEI Letter. 
668
Id. 
669
See, e.g., DBRS Letter; Fitch Letter; letter dated 
February 13, 2007 from Janet M. Tavakoli, 
President, Tavakoli Structured Finance, Inc.; letter 
dated February 14, 2007 from Gregory G. Raab, 
Chief Executive Officer, Axon; letter dated February 
16, 2007 from Emile Van den Bol, Managing 
Director, Deutsche Bank; letter dated February 16, 
2007 from Kent D. Born, Senior Managing Director, 
PPM America; letter dated February 23, 2007 from 
Patti Unti, Managing Director, Capmark Investments 
LP; letter dated February 23, 2007 from David 
Lazarus, Managing Director, Capmark Securities, 
Inc.; letter dated February 28, 2007 from Ronald E. 
Schrager, Chief Executive Officer, LNR Property 
Corporation; letter dated March 5, 2007 from David 
Hynes, Partner, Northcross Capital LLP; letter dated 
March 6, 2007 from S. Trezevant Moore, Jr., 
President & COO, Luminent Mortgage Capital, Inc.; 
letter dated March 7, 2007 from Bruce E. Stern, 
Chairman, Government Affairs Committee, 
Association of Financial Guaranty Insurers; letter 
dated March 8, 2007 from Majorie E. Gross; letter 
dated March 9, 2007 from Petra Spiegel, Eurohypo 
AG; letter dated March 9, 2007 from Landon D. 
Parsons, Managing Director, G–Bass; letter dated 
March 9, 2007 from Pat G. Halter, Chief Executive 
Officer, Principal Real Estate Investors; letter dated 
March 12, 2007 from Charles Covell, Executive Vice 
President, Citigroup Alternative Investments; letter 
dated March 12, 2007 from Rodney J. Dillman, 
General Counsel, Babson Capital Management LLC; 
letter dated March 12, 2007 from Louis C. Lucido, 
Group Managing Director, Trust Company of the 
West; letter dated March 12, 2007 from Daniel 
Ivascyn, Managing Director, PIMCO. 
670
See, e.g., S&P Letter; Moody’s Letter; R&I 
Letter; FSR Letter; Rutherfurd Letter; Langohr 
Letter; AST Letter. 
671
15 U.S.C. 78o–7. 
issuing credit ratings on the Internet or 
through another readily accessible 
means, for free or for a reasonable fee.
664
 
Under the Rating Agency Act and the 
rules adopted thereunder, an NRSRO 
will be required to disclose information 
about its credit ratings performance 
statistics, its methods for determining 
credit ratings, its organizational 
structure, its procedures to prevent the 
misuse of material non-public 
information, the conflicts of interest that 
arise from its business activities, its 
code of ethics, and the qualifications of 
its credit analysts and credit analyst 
supervisors. The Commission believes 
that these disclosures will allow users of 
the credit ratings to compare the ratings 
quality of different NRSROs. Although 
the information an NRSRO will provide 
on its Form NRSRO and to comply with 
the rules cannot substitute for an 
investor’s due diligence in evaluating a 
credit rating, it will aid investors by 
providing a publicly accessible 
foundation of basic information about 
an NRSRO. 
In addition, the rules implement 
provisions of the Rating Agency Act that 
are designed to improve the integrity of 
NRSROs. For example, the registration 
of a credit rating agency as an NRSRO 
will allow the Commission to conduct 
regular examinations of the credit rating 
agency to evaluate compliance with the 
regulatory scheme set forth in Section 
15E of the Exchange Act and the rules 
thereunder and will subject an NRSRO 
to disclosure, recordkeeping, and 
annual audit requirements, as well as 
requirements regarding the prevention 
of misuse of material, nonpublic 
information, the management of 
conflicts of interest, and certain 
prohibited acts and practices. Increased 
confidence in the integrity of NRSROs 
and the credit ratings they issue may 
promote participation in the securities 
markets and facilitate capital formation. 
Better quality credit ratings could also 
reduce the likelihood of an unexpected 
collapse of a rated issuer or obligor, 
reducing risks to individual investors 
and to the financial markets. In addition 
to improving the quality of credit 
ratings, increased oversight of NRSROs 
may increase the accountability of an 
NRSRO to its subscribers, investors, and 
other persons who rely on the 
credibility and objectivity of credit 
ratings in making an investment 
decision. 
The Commission sought comment on 
these matters. In particular, the 
Commission solicited comment on 
whether the rules would have an 
adverse effect on competition that is 
neither necessary nor appropriate in 
furtherance of the purposes of the 
Exchange Act. In addition, comment 
was sought on whether the rules would 
promote efficiency, competition, and 
capital formation. Commenters were 
requested to provide empirical data and 
other factual support for their views, if 
possible. 
The Commission received several 
comments on how the rules will impact 
competition.
665
Many commenters 
weighing in on this issue stated that the 
rules will further the goals of the Rating 
Agency Act by fostering more 
competition.
666
Other commenters 
stated that the rules create undue 
burden and would be a barrier to entry 
for new or smaller credit rating 
agencies.
667
In response to this concern, 
the Commission notes that the rules 
have been modified in ways designed to 
decrease burden. Some of these 
modifications address specific issues 
raised by the commenters. For example, 
one commenter stated that the 
requirements to provide background 
information on each credit analyst and 
for non-resident NRSROs to provide a 
special undertaking should be 
eliminated.
668
As discussed above with 
respect to Form NRSRO and Rule 17g– 
2, these requirements have been 
eliminated. As discussed above in the 
sections on each rule, the Commission 
believes that the requirements in the 
rules that have been retained are 
necessary and narrowly tailored. The 
Commission believes these 
requirements represent a proper balance 
in promoting competition and the 
quality and integrity of credit ratings, 
and in fulfilling the Commission’s 
statutory mandate to create a regulatory 
framework for NRSROs. 
Finally, the Commission also notes 
that most of the commenters that 
weighed in on the prohibition in Rule 
17g–6(a)(4) expressed an opinion as to 
how the provision, as proposed, would 
impact competition. For example, many 
of the commenters stated that the 85% 
threshold in the proposed rule was too 
high and, therefore, the prohibition 
would not achieve the desired goal of 
increasing competition insomuch as it 
would maintain the status quo in which 
the two largest credit rating agencies 
dominate the market for rating 
structured products.
669
On the other 
side of the issue, as discussed in the 
section describing Rule 17g–6, 
commenters argued that the 
Commission has insufficient data upon 
which to make a finding that a specific 
practice is unfair, abusive, or coercive 
and, consequently, the prohibition, as 
proposed, would interfere with natural 
market forces.
670
 
The Commission notes that the rule 
has been modified to eliminate the 85% 
threshold. The rule now prohibits the 
practices where the practice is engaged 
in for an anticompetitive purpose. In 
this way, the rule is designed to prohibit 
conduct that inappropriately stifles 
competition and, at the same time, 
avoid the establishment of artificial 
constraints that could interfere with 
natural market forces. The Commission 
recognizes that the two largest credit 
rating agencies dominate the market for 
rating structured products. 
Consequently, the Commission 
intends—aided by the enhanced 
recordkeeping requirements around 
rating structured products—to monitor 
closely the practices NRSROs employ in 
this area. 
VIII. Final Regulatory Flexibility 
Analysis 
The Commission proposed Rules 17g– 
1, 17g–2, 17g–3, 17g–4, 17g–5, and 17g– 
6 and Form NRSRO in the proposing 
release under Section 15E of the 
Exchange Act.
671
An Initial Regulatory 
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33618 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
672
5 U.S.C. 603. 
673
15 U.S.C. 78o–7. 
674
Pub. L. 109–291 (2006). 
675
See Report of the Senate Committee on 
Banking, Housing, and Urban Affairs to Accompany 
S. 3850, Credit Rating Agency Reform Act of 2006, 
S. Report No. 109–326, 109th Cong., 2d Sess. (Sept. 
6, 2006) (‘‘Senate Report’’). 
676
See AEI Letter. 
677
See, e.g., Fitch Letter; AEI Letter; AST Letter; 
ASF Letter. 
678
15 U.S.C. 78a et seq. 
679
15 U.S.C. 78o–7. 
680
17 CFR 240.0–10(a). 
681
See 17 CFR 240.0–10(a). 
682
Id. 
683
Rule 17g–1. 
684
Id. 
685
Rule 17g–2. 
Flexibility Analysis (‘‘IRFA’’) was 
published in the proposing release. The 
Commission has prepared the following 
Final Regulatory Flexibility Analysis 
(FRFA), in accordance with the 
provisions of the Regulatory Flexibility 
Act,
672
regarding Rules 17g–1, 17g–2, 
17g–3, 17g–4, 17g–5, and 17g–6 and 
Form NRSRO under Section 15E of the 
Exchange Act.
673
 
A. Need for and Objective of the Rules 
The rules implement specific 
provisions of the Credit Rating Agency 
Reform Act of 2006 (the ‘‘Rating Agency 
Act’’).
674
The Rating Agency Act defines 
the term ‘‘nationally recognized 
statistical rating organization’’ as a 
credit rating agency registered with the 
Commission, provides authority for the 
Commission to implement registration, 
recordkeeping, financial reporting, and 
oversight rules with respect to registered 
credit rating agencies, and directs the 
Commission to issue final implementing 
rules no later than 270 days after its 
enactment. 
The objectives of the Rating Agency 
Act are ‘‘to improve ratings quality for 
the protection of investors and in the 
public interest by fostering 
accountability, transparency, and 
competition in the credit rating 
industry.’’
675
The rules are designed to 
further these objectives and to: Assist 
the Commission in determining whether 
an entity should be registered as an 
NRSRO; assist the Commission in 
reviewing whether an NRSRO complies 
with the provisions of the Rating 
Agency Act and rules thereunder; 
adhere to the Commission’s statutory 
mandate to adopt rules to implement 
the NRSRO regulatory program; and 
provide information regarding NRSROs 
to the public and to users of credit 
ratings. 
B. Significant Issues Raised by 
Commenters 
The Commission sought comment 
with respect to every aspect of the IRFA, 
including comments with respect to the 
number of small entities that may be 
affected by the proposed rules. 
Commenters were asked to specify the 
costs of compliance with the proposed 
rules and suggest alternatives that 
would accomplish the goals of the rules. 
The Commission did not receive any 
specific comments on the IRFA. The 
Commission did, however, receive a 
limited number of comments that 
discussed the effect the rules might have 
on smaller credit rating agencies, 
although these commenters did not 
address whether their comments 
pertained to entities that would be small 
businesses for purposes of Regulatory 
Flexibility Act analysis. For example, 
one commenter stated that the rules, as 
proposed, created an undue burden and 
would be a barrier to entry for new or 
smaller credit rating agencies.
676
Several 
commenters stated that the prohibition 
in Rule 17g–5 from having a conflict 
with respect to a client that has 
provided 10% or more of the NRSRO’s 
annual revenues could prevent smaller 
credit rating agencies from registering as 
NRSROs.
677
 
C. Legal Basis 
The Commission is adopting the rules 
pursuant to the Exchange Act
678
and, 
particularly, Section 15E of the 
Exchange Act.
679
 
D. Small Entities Subject to the Rule 
Paragraph (a) of Rule 0–10 provides 
that for purposes of the Regulatory 
Flexibility Act, a small entity ‘‘[w]hen 
used with reference to an ‘issuer’ or a 
‘person’ other than an investment 
company’’ means ‘‘an ‘issuer’ or ‘person’ 
that, on the last day of its most recent 
fiscal year, had total assets of $5 million 
or less.’’
680
The Commission believes 
that an NRSRO with total assets of $5 
million or less would qualify as a 
‘‘small’’ entity for purposes of the 
Regulatory Flexibility Act. 
As noted above, the Commission 
believes that approximately 30 credit 
rating agencies will be registered as 
NRSROs. Moreover, as also noted above, 
the Senate Report accompanying the 
Rating Agency Act states that the two 
largest credit rating agencies have about 
80% of the market share as measured by 
revenues. The Senate Report also states 
that these two firms rate more than 99% 
of the debt obligations and preferred 
stock issues publicly traded in the 
United States. Given these figures, the 
Commission believes that the majority 
of the credit rating agencies registered 
with the Commission will be ‘‘small’’ 
entities.
681
Consequently, the 
Commission estimates that, of the 
approximately 30 credit rating agencies 
estimated to be registered with the 
Commission, approximately 20 would 
be ‘‘small’’ entities for purposes of the 
Regulatory Flexibility Act.
682
 
E. Reporting, Recordkeeping, and Other 
Compliance Requirements 
A credit rating agency seeking to 
apply to the Commission for registration 
as an NRSRO will apply using Form 
NRSRO.
683
The Form elicits certain 
information and requires the credit 
rating agency to attach a number of 
documents as Exhibits (some of which 
would have to be made publicly 
available) and certifications from 
qualified institutional buyers. The 
public Exhibits consist of information 
about credit ratings performance data, 
the credit rating agency’s organizational 
structure, the methods used by the 
credit rating agency for issuing credit 
ratings, the policies used by the credit 
rating agency to manage activities that 
could potentially risk the impartiality of 
its credit ratings, and the credit rating 
agency’s credit analysts. To the extent 
permitted by law, the confidential 
Exhibits consist of information about 
the credit rating agency’s financial 
condition, revenues, and credit analyst 
compensation. 
After registration, the credit rating 
agency (now an NRSRO) generally will 
be required to promptly update the 
public information on its Form NRSRO 
whenever an Item or Exhibit becomes 
materially inaccurate. To update 
information, the NRSRO must furnish 
the Commission with an amendment 
using Form NRSRO. In addition, the 
NRSRO must furnish the Commission 
with an annual certification on Form 
NRSRO.
684
In the annual certification, 
the NRSRO must represent that all 
information on the Form, as amended, 
continues to be accurate, list any 
material changes made during the 
previous year, and include an update to 
the public Exhibit relating to the 
performance statistics of its credit 
ratings. After its application for 
registration is approved, the NRSRO 
must make Form NRSRO and the public 
Exhibits submitted to the Commission, 
and all amendments, readily accessible 
to the public. 
NRSROs also are subject to a 
recordkeeping rule.
685
This rule requires 
an NRSRO to make and retain certain 
records relating to the business of 
issuing credit ratings. These records will 
assist the Commission, through its 
examination process, in monitoring 
whether the NRSRO continues to 
maintain adequate financial and 
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33619 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
686
Rule 17g–3. 
687
Rule 17g–4. 
688
Rule 17g–5. 
689
Id. 
690
Rule 17g–6. 
691
5 U.S.C. 603(c). 
692
See AEI letter. 
693
Id. 
694
Id. 
695
The Commission intends to monitor how the 
prohibition operates in practice, particularly with 
respect to structured products. If the prohibition 
interferes with how NRSROs as a matter of course 
deal with structured product sponsors, the 
Commission will evaluate whether the rule should 
be modified to accommodate this business practice 
or whether an exemption would be appropriate. 
696
15 U.S.C. 78c(b), 78o–7, 78q, 78w, and 78mm. 
managerial resources to consistently 
produce credit ratings with integrity (as 
required under the Rating Agency Act) 
and whether the NRSRO is complying 
with the provisions of the Rating 
Agency Act, the rules adopted 
thereunder, and the NRSRO’s disclosed 
policies and procedures. 
On an annual fiscal year basis, an 
NRSRO must furnish the Commission 
with audited financial statements.
686
 
This requirement is designed to assist 
the Commission in monitoring whether 
the NRSRO continues to maintain 
adequate financial resources to 
consistently produce credit ratings with 
integrity. It also is designed to assist the 
Commission in monitoring whether the 
NRSRO is complying with provisions of 
the Rating Agency Act and the rules 
adopted thereunder regarding potential 
conflicts of interest arising from 
dealings with large customers in terms 
of revenues earned. 
Finally, all NRSROs will be subject to 
requirements designed to protect their 
impartiality with respect to issuing 
credit ratings. First, they must establish, 
maintain, and enforce specific written 
policies designed to prevent the misuse 
of material non-public information.
687
 
Second, an NRSRO is prohibited from 
having certain general conflicts unless 
it, as required under the Rating Agency 
Act, disclosed the conflict and adopted 
procedures to manage the conflict.
688
 
Further certain conflicts of interest—for 
example, rating a security owned by the 
NRSRO—are prohibited.
689
Third, 
NRSROs are prohibited from engaging 
in certain practices that the Commission 
has found to be unfair, coercive, or 
abusive practices.
690
 
F. Duplicative, Overlapping, or 
Conflicting Federal Rules 
The Commission believes that there 
are no federal rules that duplicate, 
overlap, or conflict with the rules. 
G. Significant Alternatives 
Pursuant to section 3(a) of the RFA,
691
 
the Commission must consider certain 
types of alternatives, including: (1) The 
establishment of differing compliance or 
reporting requirements or timetables 
that take into account the resources 
available to small entities; (2) the 
clarification, consolidation, or 
simplification of compliance and 
reporting requirements under the rule 
for small entities; (3) the use of 
performance rather than design 
standards; and (4) an exemption from 
coverage of the rule, or any part of the 
rule, for small entities. 
The Commission does not believe it is 
appropriate to establish different 
compliance or reporting requirements or 
timetables; clarify, consolidate, or 
simplify compliance and reporting 
requirements under the rules for small 
entities; or exempt small entities from 
coverage of the rules, or any part of the 
rules. The Rating Agency Act and the 
rules establish a voluntary program of 
registration and supervision that allows 
all NRSROs the flexibility to develop 
procedures tailored to their specific 
organizational structures and business 
models. Further, many of the rules, as 
adopted, are due to a direct statutory 
mandate. The Commission also does not 
believe that it is necessary to consider 
whether small entities should be 
permitted to use performance rather 
than design standards to comply with 
the rules as the rules already propose 
performance standards and do not 
dictate for entities of any size any 
particular design standards that must be 
employed to achieve the objectives of 
the rules. 
As for the comment that the rules will 
be a barrier to entry for small entities, 
the Commission notes that the 
commenter did not specify how the 
rules would disproportionately burden 
small entities, nor did it provide cost 
estimates for small entities.
692
The 
Commission believes the burden 
associated with the rules will impact all 
NRSROs in a proportionate manner 
based on their size and complexity. 
Therefore, the Commission does not 
believe it would be appropriate to 
prescribe lesser requirements for small 
entities, nor have any commenters 
suggested lesser requirements. 
Further, the Commission notes that 
the rules, as adopted, have been 
modified in ways designed to decrease 
burden. Some of these modifications 
address specific issues raised by the 
commenter.
693
For example, the 
commenter stated that the requirements 
to provide background information on 
each credit analyst and for non-resident 
NRSROs to provide a special 
undertaking should be eliminated.
694
 
These requirements have been 
eliminated. As discussed above in the 
sections on each rule, the Commission 
believes that the requirements in the 
rules that have been retained are 
necessary and narrowly tailored. 
As for the comment that the 
prohibition on having a conflict with 
respect to a client that has provided 
10% or more of the NRSRO’s revenues, 
the Commission notes that the 
commenters did not provide any 
supporting data. In addition, no 
commenter specifically identifying itself 
as a small entity raised this prohibition 
as an issue.
695
The Commission believes 
that it would be highly unusual for a 
small credit rating agency to derive 10% 
or more of its revenues from a single 
client and, if this was the case, that it 
would very difficult for the credit rating 
agency to issue an impartial rating 
requested by the client. The 
Commission notes that the smaller 
credit rating agencies tend to use a 
subscriber fee-based business model. 
Thus, they are not paid to determine 
specific credit ratings and, 
consequently, would not be impacted by 
this prohibition. 
IX. Statutory Authority 
The Commission is adopting Form 
NRSRO and Rules 17g–1, 17g–2, 17g–3, 
17g–4, 17g–5 and 17g–6 under the 
Exchange Act pursuant to the authority 
conferred by the Exchange Act, 
including Sections 3(b), 15E, 17, 23(a) 
and 36.
696
 
Text of Rules 
List of Subjects 
17 CFR Parts 240 and 249b 
Brokers, Reporting and recordkeeping 
requirements, Securities. 

In accordance with the foregoing, the 
Commission hereby amends Title 17, 
Chapter II of the Code of Federal 
Regulation as follows. 
PART 240—GENERAL RULES AND 
REGULATIONS, SECURITIES 
EXCHANGE ACT OF 1934 

1. The authority for part 240 
continues to read in part as follows: 
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 
77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 
77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 
78j–l, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p, 
78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 80a– 
20, 80a–23, 80a–29, 80a–37, 80b–3, 80b–4, 
80b–11, and 7201 et seq.; and 18 U.S.C. 1350, 
unless otherwise noted. 
*       *       *       *       *       
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33620 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  

2. An undesignated center heading 
and §§240.17g–1 through 240.17g–6 are 
added to read as follows: 
Nationally Recognized Statistical Rating 
Organizations 
Sec. 
240.17g–1    Application for registration as a 
nationally recognized statistical rating 
organization. 
240.17g–2    Records to be made and retained 
by nationally recognized statistical rating 
organizations. 
240.17g–3    Annual financial reports to be 
furnished by nationally recognized 
statistical rating organizations. 
240.17g–4    Prevention of misuse of material 
nonpublic information. 
240.17g–5    Conflicts of interest. 
240.17g–6    Prohibited acts and practices. 
Nationally Recognized Statistical 
Rating Organizations 
§240.17g–1    Application for registration as 
a nationally recognized statistical rating 
organization. 
(a) Initial application. A credit rating 
agency applying to the Commission to 
be registered under section 15E of the 
Act (15 U.S.C. 78o–7) as a nationally 
recognized statistical rating organization 
must furnish the Commission with an 
initial application on Form NRSRO 
(§249b.300 of this chapter) that follows 
all applicable instructions for the Form. 
(b) Application to register for an 
additional class of credit ratings. A 
nationally recognized statistical rating 
organization applying to register for an 
additional class of the credit ratings 
described in section 3(a)(62)(B) of the 
Act (15 U.S.C. 78c(a)(62)(B)) must 
furnish the Commission with an 
application to add a class of credit 
ratings on Form NRSRO that follows all 
applicable instructions for the Form. 
The application will be subject to the 
requirements of section 15E(a)(2) of the 
Act (15 U.S.C. 78o–7(a)(2)). 
(c) Supplementing an application 
prior to final action by the Commission. 
An applicant must promptly furnish the 
Commission with a written notice if 
information submitted to the 
Commission in an initial application to 
be registered as a nationally recognized 
statistical rating organization or in an 
application to register for an additional 
class of credit ratings is found to be or 
becomes materially inaccurate prior to 
the date of a Commission order granting 
or denying the application. The notice 
must identify the information that was 
found to be materially inaccurate. The 
applicant also must promptly furnish 
the Commission with an application 
supplement on Form NRSRO that 
follows all applicable instructions for 
the Form. 
(d) Withdrawing an application. An 
applicant may withdraw an initial 
application to be registered as a 
nationally recognized statistical rating 
organization or an application to register 
for an additional class of credit ratings 
prior to the date of a Commission order 
granting or denying the application. To 
withdraw the application, the applicant 
must furnish the Commission with a 
written notice of withdrawal executed 
by a duly authorized person. 
(e) Update of registration. A 
nationally recognized statistical rating 
organization amending materially 
inaccurate information in its application 
for registration pursuant to section 
15E(b)(1) of the Act (15 U.S.C. 78o– 
7(b)(1)) must promptly furnish the 
Commission with the update of its 
registration on Form NRSRO that 
follows all applicable instructions for 
the Form. 
(f) Annual certification. A nationally 
recognized statistical rating organization 
amending its application for registration 
pursuant to section 15E(b)(2) of the Act 
(15 U.S.C. 78o–7(b)(2)) must furnish the 
Commission with the annual 
certification on Form NRSRO that 
follows all applicable instructions for 
the Form not later than 90 days after the 
end of each calendar year. 
(g) Withdrawal from registration. A 
nationally recognized statistical rating 
organization withdrawing from 
registration pursuant to section 
15E(e)(1) of the Act (15 U.S.C. 78o– 
7(e)(1)) must furnish the Commission 
with a notice of withdrawal from 
registration on Form NRSRO that 
follows all applicable instructions for 
the Form. The withdrawal from 
registration will become effective 45 
calendar days after the notice is 
furnished to the Commission upon such 
terms and conditions as the Commission 
may establish as necessary in the public 
interest or for the protection of 
investors. 
(h) Furnishing Form NRSRO. A Form 
NRSRO submitted under any paragraph 
of this section will be considered 
furnished to the Commission on the 
date the Commission receives a 
complete and properly executed Form 
NRSRO that follows all applicable 
instructions for the Form. Information 
submitted on a confidential basis and 
for which confidential treatment has 
been requested pursuant to applicable 
Commission rules will be accorded 
confidential treatment to the extent 
permitted by law. 
(i) Public availability of Form NRSRO. 
A nationally recognized statistical rating 
organization must make its current 
Form NRSRO and information and 
documents submitted in Exhibits 1 
through 9 to Form NRSRO publicly 
available on its Web site, or through 
another comparable, readily accessible 
means within 10 business days after the 
date of the Commission order granting 
an initial application for registration as 
a nationally recognized statistical rating 
organization or an application to register 
for an additional class of credit ratings 
and within 10 business days after 
furnishing a Form NRSRO to the 
Commission under paragraphs (e), (f), or 
(g) of this section. 
§240.17g–2    Records to be made and 
retained by nationally recognized statistical 
rating organizations. 
(a) Records required to be made and 
retained. A nationally recognized 
statistical rating organization must make 
and retain the following books and 
records, which must be complete and 
current: 
(1) Records of original entry into the 
accounting system of the nationally 
recognized statistical rating organization 
and records reflecting entries to and 
balances in all general ledger accounts 
of the nationally recognized statistical 
rating organization for each fiscal year. 
(2) Records with respect to each 
current credit rating of the nationally 
recognized statistical rating organization 
indicating (as applicable): 
(i) The identity of any credit analyst(s) 
that participated in determining the 
credit rating; 
(ii) The identity of the person(s) that 
approved the credit rating before it was 
issued; 
(iii) Whether the credit rating was 
solicited or unsolicited; and 
(iv) The date the credit rating action 
was taken. 
(3) An account record for each person 
(for example, an obligor, issuer, 
underwriter, or other user) that has paid 
the nationally recognized statistical 
rating organization for the issuance or 
maintenance of a credit rating 
indicating: 
(i) The identity and address of the 
person; and 
(ii) The credit rating(s) determined or 
maintained for the person. 
(4) An account record for each 
subscriber to the credit ratings and/or 
credit analysis reports of the nationally 
recognized statistical rating organization 
indicating the identity and address of 
the subscriber. 
(5) A record listing the general types 
of services and products offered by the 
nationally recognized statistical rating 
organization. 
(6) A record documenting the 
established procedures and 
methodologies used by the nationally 
recognized statistical rating organization 
to determine credit ratings. 
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33621 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
(7) A record that lists each security 
and money market instrument and its 
corresponding credit rating issued by an 
asset pool or as part of any asset-backed 
or mortgage-backed securities 
transaction where the nationally 
recognized statistical rating 
organization, in determining the credit 
rating for the security or money market 
instrument, treats assets within such 
pool or as a part of such transaction that 
are not subject to a credit rating of the 
nationally recognized statistical rating 
organization by any or a combination of 
the following methods: 
(i) Determining credit ratings for the 
unrated assets; 
(ii) Performing credit assessments or 
determining private credit ratings for 
the unrated assets; 
(iii) Determining credit ratings or 
private credit ratings, or performing 
credit assessments for the unrated assets 
by taking into consideration the internal 
credit analysis of another person; or 
(iv) Determining credit ratings or 
private credit ratings, or performing 
credit assessments for the unrated assets 
by taking into consideration (but not 
necessarily adopting) the credit ratings 
of another nationally recognized 
statistical rating organization. 
(b) Records required to be retained. A 
nationally recognized statistical rating 
organization must retain the following 
books and records (excluding drafts of 
documents) that relate to its business as 
a credit rating agency: 
(1) Significant records (for example, 
bank statements, invoices, and trial 
balances) underlying the information 
included in the annual financial reports 
furnished by the nationally recognized 
statistical rating organization to the 
Commission pursuant to §240.17g–3. 
(2) Internal records, including 
nonpublic information and work papers, 
used to form the basis of a credit rating 
issued by the nationally recognized 
statistical rating organization. 
(3) Credit analysis reports, credit 
assessment reports, and private credit 
rating reports of the nationally 
recognized statistical rating organization 
and internal records, including 
nonpublic information and work papers, 
used to form the basis for the opinions 
expressed in these reports. 
(4) Compliance reports and 
compliance exception reports. 
(5) Internal audit plans, internal audit 
reports, documents relating to internal 
audit follow-up measures, and all 
records identified by the internal 
auditors of the nationally recognized 
statistical rating organization as 
necessary to perform the audit of an 
activity that relates to its business as a 
credit rating agency. 
(6) Marketing materials of the 
nationally recognized statistical rating 
organization that are published or 
otherwise made available to persons 
that are not associated with the 
nationally recognized statistical rating 
organization. 
(7) External and internal 
communications, including electronic 
communications, received and sent by 
the nationally recognized statistical 
rating organization and its employees 
that relate to initiating, determining, 
maintaining, changing, or withdrawing 
a credit rating. 
(8) Internal documents that contain 
information, analysis, or statistics that 
were used to develop a procedure or 
methodology to treat the credit ratings 
of another nationally recognized 
statistical rating organization for the 
purpose of determining a credit rating 
for a security or money market 
instrument issued by an asset pool or 
part of any asset-backed or mortgage- 
backed securities transaction. 
(9) For each security or money market 
instrument identified in the record 
required to be made and retained under 
paragraph (a)(7) of this section, any 
document that contains a description of 
how assets within such pool or as a part 
of such transaction not rated by the 
nationally recognized statistical rating 
organization but rated by another 
nationally recognized statistical rating 
organization were treated for the 
purpose of determining the credit rating 
of the security or money market 
instrument. 
(10) Form NRSROs (including 
Exhibits and accompanying information 
and documents) submitted to the 
Commission by the nationally 
recognized statistical rating 
organization. 
(c) Record retention periods. The 
records required to be retained pursuant 
to paragraphs (a) and (b) of this section 
must be retained for three years after the 
date the record is made or received. 
(d) Manner of retention. An original, 
or a true and complete copy of the 
original, of each record required to be 
retained pursuant to paragraphs (a) and 
(b) of this section must be maintained in 
a manner that, for the applicable 
retention period specified in paragraph 
(c) of this section, makes the original 
record or copy easily accessible to the 
principal office of the nationally 
recognized statistical rating organization 
and to any other office that conducted 
activities causing the record to be made 
or received. 
(e) Third-party record custodian. The 
records required to be retained pursuant 
to paragraphs (a) and (b) of this section 
may be made or retained by a third- 
party record custodian, provided the 
nationally recognized statistical rating 
organization furnishes the Commission 
at its principal office in Washington, DC 
with a written undertaking of the 
custodian executed by a duly authorized 
person. The undertaking must be in 
substantially the following form: 
The undersigned acknowledges that books 
and records it has made or is retaining for 
[the nationally recognized statistical rating 
organization] are the exclusive property of 
[the nationally recognized statistical rating 
organization]. The undersigned undertakes 
that upon the request of [the nationally 
recognized statistical rating organization] it 
will promptly provide the books and records 
to [the nationally recognized statistical rating 
organization] or the U.S. Securities and 
Exchange Commission (‘‘Commission’’) or its 
representatives and that upon the request of 
the Commission it will promptly permit 
examination by the Commission or its 
representatives of the records at any time or 
from time to time during business hours and 
promptly furnish to the Commission or its 
representatives a true and complete copy of 
any or all or any part of such books and 
records. 
A nationally recognized statistical rating 
organization that engages a third-party 
record custodian remains responsible 
for complying with every provision of 
this section. 
(f) A nationally recognized statistical 
rating organization must promptly 
furnish the Commission or its 
representatives with legible, complete, 
and current copies, and, if specifically 
requested, English translations of those 
records of the nationally recognized 
statistical rating organization required to 
be retained pursuant to paragraphs (a) 
and (b) this section, or any other records 
of the nationally recognized statistical 
rating organization subject to 
examination under section 17(b) of the 
Act (15 U.S.C. 78q(b)) that are requested 
by the Commission or its 
representatives. 
§240.17g–3    Annual financial reports to be 
furnished by nationally recognized 
statistical rating organizations. 
(a) A nationally recognized statistical 
rating organization must annually, not 
more than 90 calendar days after the 
end of its fiscal year (as indicated on its 
current Form NRSRO), furnish the 
Commission, at the Commission’s 
principal office in Washington, DC, with 
the following financial reports as of the 
end of its most recent fiscal year: 
(1) Audited financial statements of the 
nationally recognized statistical rating 
organization or audited consolidated 
financial statements of its parent if the 
nationally recognized statistical rating 
organization is a separately identifiable 
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33622 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
division or department of the parent. 
The audited financial statements must: 
(i) Include a balance sheet, an income 
statement and statement of cash flows, 
and a statement of changes in 
ownership equity; 
(ii) Be prepared in accordance with 
generally accepted accounting 
principles in the jurisdiction in which 
the nationally recognized statistical 
rating organization or its parent is 
incorporated, organized, or has its 
principal office; and 
(iii) Be certified by an accountant who 
is qualified and independent in 
accordance with paragraphs (a), (b), and 
(c)(1), (2), (3), (4), (5) and (8) of §210.2– 
01 of this chapter. The accountant must 
give an opinion on the financial 
statements in accordance with 
paragraphs (a) through (d) of §210.2–02 
of this chapter. 
(2) If applicable, unaudited 
consolidating financial statements of the 
parent of the nationally recognized 
statistical rating organization that 
include the nationally recognized 
statistical rating organization. 
Note to paragraph (a)(2): This financial 
report must be furnished only if the audited 
financial statements provided pursuant to 
paragraph (a)(1) of this section are 
consolidated financial statements of the 
parent of the nationally recognized statistical 
rating organization. 
(3) An unaudited financial report 
providing information concerning the 
revenue of the nationally recognized 
statistical rating organization in each of 
the following categories (as applicable) 
for the fiscal year: 
(i) Revenue from determining and 
maintaining credit ratings; 
(ii) Revenue from subscribers; 
(iii) Revenue from granting licenses or 
rights to publish credit ratings; and 
(iv) Revenue from all other services 
and products (include descriptions of 
any major sources of revenue). 
(4) An unaudited financial report 
providing the total aggregate and 
median annual compensation of the 
credit analysts of the nationally 
recognized statistical rating organization 
for the fiscal year. 
Note to paragraph (a)(4): In calculating 
total and median annual compensation, the 
nationally recognized statistical rating 
organization may exclude deferred 
compensation, provided such exclusion is 
noted in the report. 
(5) An unaudited financial report 
listing the 20 largest issuers and 
subscribers that used credit rating 
services provided by the nationally 
recognized statistical rating organization 
by amount of net revenue attributable to 
the issuer or subscriber during the fiscal 
year. Additionally, include on the list 
any obligor or underwriter that used the 
credit rating services provided by the 
nationally recognized statistical rating 
organization if the net revenue 
attributable to the obligor or underwriter 
during the fiscal year equaled or 
exceeded the net revenue attributable to 
the 20th largest issuer or subscriber. 
Include the net revenue amount for each 
person on the list. 
Note to paragraph (a)(5): A person is 
deemed to have ‘‘used the credit rating 
services’’ of the nationally recognized 
statistical rating organization if the person is 
any of the following: an obligor that is rated 
by the nationally recognized statistical rating 
organization (regardless of whether the 
obligor paid for the credit rating); an issuer 
that has securities or money market 
instruments subject to a credit rating of the 
nationally recognized statistical rating 
organization (regardless of whether the issuer 
paid for the credit rating); any other person 
that has paid the nationally recognized 
statistical rating organization to determine a 
credit rating with respect to a specific 
obligor, security, or money market 
instrument; or a subscriber to the credit 
ratings, credit ratings data, or credit analysis 
of the nationally recognized statistical rating 
organization. In calculating net revenue 
attributable to a person, the nationally 
recognized statistical rating organization 
should include all revenue earned by the 
nationally recognized statistical rating 
organization for any type of service or 
product, regardless of whether related to 
credit rating services, and net of any rebates 
and allowances paid or owed to the person 
by the nationally recognized statistical rating 
organization. 
(b) The nationally recognized 
statistical rating organization must 
attach to each financial report furnished 
pursuant to paragraph (a) of this section 
a signed statement by a duly authorized 
person associated with the nationally 
recognized statistical rating organization 
that the person has responsibility for the 
report and, to the best knowledge of the 
person, the financial report fairly 
presents, in all material respects, the 
financial condition, results of 
operations, cash flows, revenues, and 
analyst compensation, as applicable, of 
the nationally recognized statistical 
rating organization for the period 
presented. 
(c) The Commission may grant an 
extension of time or an exemption with 
respect to any requirements in this 
section either unconditionally or on 
specified terms and conditions on the 
written request of a nationally 
recognized statistical rating organization 
if the Commission finds that such 
extension or exemption is necessary or 
appropriate in the public interest and 
consistent with the protection of 
investors. 
§240.17g–4    Prevention of misuse of 
material nonpublic information. 
(a) The written policies and 
procedures a nationally recognized 
statistical rating organization 
establishes, maintains, and enforces to 
prevent the misuse of material, 
nonpublic information pursuant to 
section 15E(g)(1) of the Act (15 U.S.C. 
78o–7(g)(1)) must include policies and 
procedures reasonably designed to 
prevent: 
(1) The inappropriate dissemination 
within and outside the nationally 
recognized statistical rating organization 
of material nonpublic information 
obtained in connection with the 
performance of credit rating services; 
(2) A person within the nationally 
recognized statistical rating organization 
from purchasing, selling, or otherwise 
benefiting from any transaction in 
securities or money market instruments 
when the person is aware of material 
nonpublic information obtained in 
connection with the performance of 
credit rating services that affects the 
securities or money market instruments; 
and 
(3) The inappropriate dissemination 
within and outside the nationally 
recognized statistical rating organization 
of a pending credit rating action before 
issuing the credit rating on the Internet 
or through another readily accessible 
means. 
(b) For the purposes of this section, 
the term person within a nationally 
recognized statistical rating 
organization means a nationally 
recognized statistical rating 
organization, its credit rating affiliates 
identified on Form NRSRO, and any 
partner, officer, director, branch 
manager, and employee of the 
nationally recognized statistical rating 
organization or its credit rating affiliates 
(or any person occupying a similar 
status or performing similar functions). 
§240.17g–5    Conflicts of interest. 
(a) A person within a nationally 
recognized statistical rating organization 
is prohibited from having a conflict of 
interest relating to the issuance or 
maintenance of a credit rating identified 
in paragraph (b) of this section, unless: 
(1) The nationally recognized 
statistical rating organization has 
disclosed the type of conflict of interest 
in Exhibit 6 to Form NRSRO in 
accordance with section 15E(a)(1)(B)(vi) 
of the Act (15 U.S.C. 78o–7(a)(1)(B)(vi)) 
and §240.17g–1; and 
(2) The nationally recognized 
statistical rating organization has 
established and is maintaining and 
enforcing written policies and 
procedures to address and manage 
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33623 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
conflicts of interest in accordance with 
section 15E(h) of the Act (15 U.S.C. 
78o–7(h)). 
(b) Conflicts of interest. For purposes 
of this section, each of the following is 
a conflict of interest: 
(1) Being paid by issuers or 
underwriters to determine credit ratings 
with respect to securities or money 
market instruments they issue or 
underwrite. 
(2) Being paid by obligors to 
determine credit ratings with respect to 
the obligors. 
(3) Being paid for services in addition 
to determining credit ratings by issuers, 
underwriters, or obligors that have paid 
the nationally recognized statistical 
rating organization to determine a credit 
rating. 
(4) Being paid by persons for 
subscriptions to receive or access the 
credit ratings of the nationally 
recognized statistical rating organization 
and/or for other services offered by the 
nationally recognized statistical rating 
organization where such persons may 
use the credit ratings of the nationally 
recognized statistical rating organization 
to comply with, and obtain benefits or 
relief under, statutes and regulations 
using the term nationally recognized 
statistical rating organization. 
(5) Being paid by persons for 
subscriptions to receive or access the 
credit ratings of the nationally 
recognized statistical rating organization 
and/or for other services offered by the 
nationally recognized statistical rating 
organization where such persons also 
may own investments or have entered 
into transactions that could be favorably 
or adversely impacted by a credit rating 
issued by the nationally recognized 
statistical rating organization. 
(6) Allowing persons within the 
nationally recognized statistical rating 
organization to directly own securities 
or money market instruments of, or 
having other direct ownership interests 
in, issuers or obligors subject to a credit 
rating determined by the nationally 
recognized statistical rating 
organization. 
(7) Allowing persons within the 
nationally recognized statistical rating 
organization to have a business 
relationship that is more than an arms 
length ordinary course of business 
relationship with issuers or obligors 
subject to a credit rating determined by 
the nationally recognized statistical 
rating organization. 
(8) Having a person associated with 
the nationally recognized statistical 
rating organization that is a broker or 
dealer engaged in the business of 
underwriting securities or money 
market instruments. 
(9) Any other type of conflict of 
interest relating to the issuance of credit 
ratings by the nationally recognized 
statistical rating organization that is 
material to the nationally recognized 
statistical rating organization and that is 
identified by the nationally recognized 
statistical rating organization in Exhibit 
6 to Form NRSRO in accordance with 
section 15E(a)(1)(B)(vi) of the Act (15 
U.S.C. 78o–7(a)(1)(B)(vi)) and §240.17g– 
1. 
(c) Prohibited conflicts. A nationally 
recognized statistical rating organization 
is prohibited from having the following 
conflicts of interest relating to the 
issuance or maintenance of a credit 
rating as a credit rating agency: 
(1) The nationally recognized 
statistical rating organization issues or 
maintains a credit rating solicited by a 
person that, in the most recently ended 
fiscal year, provided the nationally 
recognized statistical rating organization 
with net revenue (as reported under 
§240.17g–3) equaling or exceeding 10% 
of the total net revenue of the nationally 
recognized statistical rating organization 
for the fiscal year; 
(2) The nationally recognized 
statistical rating organization issues or 
maintains a credit rating with respect to 
a person (excluding a sovereign nation 
or an agency of a sovereign nation) 
where the nationally recognized 
statistical rating organization, a credit 
analyst that participated in determining 
the credit rating, or a person responsible 
for approving the credit rating, directly 
owns securities of, or has any other 
direct ownership interest in, the person 
that is subject to the credit rating; 
(3) The nationally recognized 
statistical rating organization issues or 
maintains a credit rating with respect to 
a person associated with the nationally 
recognized statistical rating 
organization; or 
(4) The nationally recognized 
statistical rating organization issues or 
maintains a credit rating where a credit 
analyst who participated in determining 
the credit rating, or a person responsible 
for approving the credit rating, is an 
officer or director of the person that is 
subject to the credit rating. 
(d) For the purposes of this section, 
the term person within a nationally 
recognized statistical rating 
organization means a nationally 
recognized statistical rating 
organization, its credit rating affiliates 
identified on Form NRSRO, and any 
partner, officer, director, branch 
manager, and employee of the 
nationally recognized statistical rating 
organization or its credit rating affiliates 
(or any person occupying a similar 
status or performing similar functions). 
§240.17g–6    Prohibited acts and practices. 
(a) Prohibitions. A nationally 
recognized statistical rating organization 
is prohibited from engaging in any of 
the following unfair, coercive, or 
abusive practices: 
(1) Conditioning or threatening to 
condition the issuance of a credit rating 
on the purchase by an obligor or issuer, 
or an affiliate of the obligor or issuer, of 
any other services or products, 
including pre-credit rating assessment 
products, of the nationally recognized 
statistical rating organization or any 
person associated with the nationally 
recognized statistical rating 
organization. 
(2) Issuing, or offering or threatening 
to issue, a credit rating that is not 
determined in accordance with the 
nationally recognized statistical rating 
organization’s established procedures 
and methodologies for determining 
credit ratings, based on whether the 
rated person, or an affiliate of the rated 
person, purchases or will purchase the 
credit rating or any other service or 
product of the nationally recognized 
statistical rating organization or any 
person associated with the nationally 
recognized statistical rating 
organization. 
(3) Modifying, or offering or 
threatening to modify, a credit rating in 
a manner that is contrary to the 
nationally recognized statistical rating 
organization’s established procedures 
and methodologies for modifying credit 
ratings based on whether the rated 
person, or an affiliate of the rated 
person, purchases or will purchase the 
credit rating or any other service or 
product of the nationally recognized 
statistical rating organization or any 
person associated with the nationally 
recognized statistical rating 
organization. 
(4) Issuing or threatening to issue a 
lower credit rating, lowering or 
threatening to lower an existing credit 
rating, refusing to issue a credit rating, 
or withdrawing or threatening to 
withdraw a credit rating, with respect to 
securities or money market instruments 
issued by an asset pool or as part of any 
asset-backed or mortgage-backed 
securities transaction, unless all or a 
portion of the assets within such pool or 
part of such transaction also are rated by 
the nationally recognized statistical 
rating organization, where such practice 
is engaged in by the nationally 
recognized statistical rating organization 
for an anticompetitive purpose. 
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33624 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
PART 249b—FURTHER FORMS, 
SECURITIES EXCHANGE ACT OF 1934 

3. The authority citation for part 249b 
continues to read in part as follows. 
Authority: 15 U.S.C. 78a et seq., unless 
otherwise noted. 
*       *       *       *       *       

4. Section 249b.300 and Form NRSRO 
are added to read as follows: 
§249b.300    FORM NRSRO, application for 
registration as a nationally recognized 
statistical rating organization pursuant to 
section 15E of the Securities Exchange Act 
of 1934 and §240.17g–1 of this chapter. 
This Form shall be used for an initial 
application for and an application to 
add a class of credit ratings to, a 
supplement to an initial application for 
and an application to add a class of 
credit ratings to, an update and 
amendment to an application for, and a 
withdrawal from a registration as a 
nationally recognized statistical rating 
organization pursuant to section 15E of 
the Securities Exchange Act of 1934 (15 
U.S.C. 78o–7) and §240.17g–1 of this 
chapter. 
Note: The text of Form NRSRO will not 
appear in the Code of Federal Regulations. 
Form NRSRO—Application for 
Registration as a Nationally Recognized 
Statistical Rating Organization 
(NRSRO) 
OMB Approval 
OMB Number: 3235–0625. 
Expires: May 31, 2010. 
Estimated average burden hours per 
response: 300. 
Persons who respond to the collection 
of information contained in this form 
are not required to respond unless the 
form displays a currently valid OMB 
control number. 
SEC 1541 (2–07) 
BILLING  CODE  8010–01–P 
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33625 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
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33626 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
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33627 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
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33628 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
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33629 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
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33630 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
BILLING  CODE  8010–01–C 
Form NRSRO Instructions 
A. General Instructions 
1. Form NRSRO is the Application for 
Registration as a Nationally Recognized 
Statistical Rating Organization 
(‘‘NRSRO’’) under Section 15E of the 
Securities Exchange Act of 1934 
(‘‘Exchange Act’’) and Exchange Act 
Rule 17g–1. Exchange Act Rule 17g–1 
requires an Applicant/NRSRO to use 
Form NRSRO to furnish the U.S. 
Securities and Exchange Commission 
(‘‘Commission’’) with: 
•An initial application to be 
registered as an NRSRO; 
•An application to register for an 
additional class of credit ratings; 
•An application supplement; 
•An update of registration pursuant 
to Section 15E(b)(1) of the Exchange 
Act; 
•An annual certification pursuant to 
Section 15E(b)(2) of the Exchange Act; 
and 
•A withdrawal of registration 
pursuant to Section 15E(e) of the 
Exchange Act. 
2. Exchange Act Rule 17g–1(c) 
requires that an Applicant/NRSRO 
promptly provide the Commission with 
a written notice if information 
submitted to the Commission in an 
initial application for registration or in 
an application to register for an 
additional class of credit ratings is 
found to be or becomes materially 
inaccurate before the Commission has 
granted or denied the application. The 
notice must identify the information 
found to be materially inaccurate. The 
Applicant/NRSRO must also promptly 
furnish the Commission with accurate 
and complete information as an 
application supplement on Form 
NRSRO. 
3. Pursuant to Exchange Act Rule 
17g–1(i), an NRSRO must make its 
current Form NRSRO and information 
and documents furnished in Exhibits 1 
through 9 to Form NRSRO publicly 
available on its Web site, or through 
another comparable, readily accessible 
means within 10 business days after the 
date of the Commission Order granting 
an initial application for registration as 
an NRSRO or an application to register 
for an additional class of credit ratings 
and within 10 business days after 
submitting an update of registration, 
annual certification, or withdrawal from 
registration to the Commission on Form 
NRSRO. The certifications from 
qualified institutional buyers, disclosure 
reporting pages, and Exhibits 10 through 
13 are not required to be made publicly 
available by the NRSRO pursuant to 
Rule 17g–1(i). An Applicant/NRSRO 
may request that the Commission keep 
confidential the certifications from 
qualified institutional buyers, the 
disclosure reporting pages, and the 
information and documents in Exhibits 
10–13 submitted to the Commission. An 
Applicant/NRSRO seeking confidential 
treatment for these submissions should 
mark each page ‘‘Confidential 
Treatment’’ and comply with 
Commission rules governing 
confidential treatment (See 17 CFR 
200.80 and 17 CFR 200.83). The 
Commission will keep this information 
confidential to the extent permitted by 
law. 
4. Section 15E(a)(2) of the Exchange 
Act prescribes time periods and 
requirements for the Commission to 
grant or deny an initial application for 
registration as an NRSRO. These time 
periods also apply to an application to 
register for an additional class of credit 
ratings. 
5. Type or clearly print all 
information. Use only the current 
version of Form NRSRO or a 
reproduction of it. 
6. Section 15E of the Exchange Act 
(15 U.S.C. 78o–7) authorizes the 
Commission to collect the Information 
on Form NRSRO from an Applicant/ 
NRSRO. The principal purposes of Form 
NRSRO are to determine whether an 
Applicant should be granted registration 
as an NRSRO, whether an NRSRO 
should be granted registration in an 
additional class of credit ratings, 
whether an NRSRO continues to meet 
the criteria for registration as an 
NRSRO, to withdraw a registration, and 
to provide information about an NRSRO 
to users of credit ratings. Intentional 
misstatements or omissions may 
constitute federal criminal violations 
under 18 U.S.C. 1001. 
The information collection is in 
accordance with the clearance 
requirements of Section 3507 of the 
Paperwork Reduction Act of 1995 (44 
U.S.C. 3507). The Commission may not 
conduct or sponsor, and you are not 
required to respond to, a collection of 
information unless it displays a valid 
Office of Management and Budget 
(OMB) control number. The time 
required to complete and furnish this 
form will vary depending on individual 
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33631 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
circumstances. The estimated average 
time to complete an initial application 
is displayed on the facing page of this 
Form. Send comments regarding this 
burden estimate or suggestions for 
reducing the burden to Director, Office 
of Information Technology, Securities 
and Exchange Commission, 100 F 
Street, NE, Washington, DC 20549. 
7. Under Exchange Act Rule 17g– 
2(b)(10), an NRSRO must retain copies 
of all Form NRSROs (including Exhibits, 
accompanying information, and 
documents) submitted to the 
Commission. Exchange Act Rule 17g– 
2(c) requires that these records be 
retained for three years after the date the 
record is made. 
8. ADDRESS—The mailing address 
for Form NRSRO is: U.S. Securities and 
Exchange Commission, 100 F Street, 
NE., Washington, DC 20549. 
9. A Form NRSRO will be considered 
furnished to the Commission on the 
date the Commission receives a 
complete and properly executed Form 
NRSRO that follows all applicable 
instructions for the Form. 
B. Instructions for an Initial Application 
An Applicant applying to be 
registered with the Commission as an 
NRSRO must furnish the Commission 
with an initial application on Form 
NRSRO. To complete an initial 
application: 
•Check the ‘‘INITIAL 
APPLICATION’’ box at the top of Form 
NRSRO. 
•Complete Items 1, 2, 3, 4, 5, 6, and 
8. (See Instructions below for each 
Item). Enter ‘‘None’’ or ‘‘N/A’’ where 
appropriate. 
•Unless exempt from the 
requirement, attach certifications from 
qualified institutional buyers, marked 
‘‘Certification from Qualified 
Institutional Buyer’’ (See Instructions 
below for Item 6C). 
•Attach Exhibits 1 through 13 (See 
Instructions below for each Exhibit). 
•Execute the Form. 
The Applicant must promptly furnish 
the Commission with a written notice if 
information submitted to the 
Commission in an initial application is 
found to be or becomes materially 
inaccurate prior to the date of a 
Commission order granting or denying 
the application. The notice must 
identify the information found to be 
materially inaccurate. The Applicant 
also must promptly furnish the 
Commission with an application 
supplement on Form NRSRO (See 
instructions below for an application 
supplement). 
C. Instructions for an Application to 
Add a Class of Credit Ratings 
An NRSRO applying to register for an 
additional class of credit ratings must 
furnish the Commission with an 
application on Form NRSRO. To 
complete an application to register for 
an additional class of credit ratings: 
•Check the ‘‘APPLICATION TO ADD 
CLASS OF CREDIT RATINGS’’ box at 
the top of Form NRSRO. 
•Complete Items 1, 2, 3, 4, 5, 6, 7, 
and 8 on the Form following all 
applicable instructions for each Item 
(See Instructions below for each Item). 
If any information in an Item on the 
previously furnished Form NRSRO is 
materially inaccurate, update that 
information. Enter ‘‘None’’ or ‘‘N/A’’ 
where appropriate. Complete each Item 
even if the Item is not being updated. 
•Unless exempt from the 
requirement, attach certifications from 
qualified institutional buyers for the 
additional class of credit ratings marked 
‘‘Certification from Qualified 
Institutional Buyer’’ (See Instructions 
below for Item 6C). 
•If any information in an Exhibit 
previously furnished is materially 
inaccurate, update that information. 
•Execute the Form. 
The Applicant must promptly furnish 
the Commission with a written notice if 
information submitted to the 
Commission in an application to add a 
class of credit ratings is found to be or 
becomes materially inaccurate prior to 
the date of a Commission order granting 
or denying the application. The notice 
must identify the information found to 
be materially inaccurate. The Applicant 
also must promptly furnish the 
Commission with an application 
supplement on Form NRSRO (See 
instructions below for an application 
supplement). 
D. Instructions for an Application 
Supplement 
An Applicant must furnish an 
application supplement to the 
Commission on Form NRSRO if 
information submitted to the 
Commission in a pending initial 
application for registration as an NRSRO 
or a pending application to register for 
an additional class of credit ratings is 
found to be or becomes materially 
inaccurate. To complete an application 
supplement: 
•Check the ‘‘APPLICATION 
SUPPLEMENT’’ box at the top of Form 
NRSRO. 
•Indicate on the line provided under 
the box the Item(s) or Exhibit(s) being 
supplemented. 
•Complete Items 1, 2, 3, 4, 5 and 8 
on the Form following all applicable 
instructions for each Item (See 
Instructions below for each Item). If 
supplementing an initial application, 
also complete Item 6. If supplementing 
an application for registration in an 
additional class of credit ratings, also 
complete Items 6 and 7. If any 
information in an Item on the 
previously furnished Form NRSRO is 
materially inaccurate, update that 
information. Enter ‘‘None’’ or ‘‘N/A’’ 
where appropriate. Complete each Item 
even if the Item is not being updated. 
•If a certification from a qualified 
institutional buyer is being updated or 
a new certification is being added, 
attach the updated or new certification. 
•If an Exhibit is being updated, 
attach the updated Exhibit. 
•Execute the Form. 
E. Instructions for an Update of 
Registration 
After registration is granted, Section 
15E(b)(1) of the Exchange Act requires 
that an NRSRO must promptly amend 
its application for registration if 
information or documents provided in 
the previously furnished Form NRSRO 
become materially inaccurate. This 
requirement does not apply to Item 7 
and Exhibit 1, which only are required 
to be updated annually with the annual 
certification. It also does not apply to 
Exhibits 10–13 and the certifications 
from qualified institutional buyers, 
which are not required to be updated on 
Form NRSRO after registration. An 
NRSRO amending its application for 
registration must furnish the 
Commission with an update of its 
registration on Form NRSRO. To 
complete an update of registration: 
•Check the ‘‘UPDATE OF 
REGISTRATION’’ box at the top of Form 
NRSRO. 
•Indicate on the line provided under 
the box the Item(s) or Exhibit(s) being 
updated. 
•Complete Items 1, 2, 3, 4, 5, 7, and 
8 on the Form following all applicable 
instructions for each Item (See 
Instructions below for each Item). If any 
information in an Item on the 
previously furnished Form NRSRO is 
materially inaccurate, update that 
information. Enter ‘‘None’’ or ‘‘N/A’’ 
where appropriate. Complete each Item 
even if the Item is not being updated. 
•If an Exhibit is being updated, 
attach the updated Exhibit. 
•Execute the Form. 
F. Instructions for Annual Certifications 
After registration is granted, Section 
15E(b)(2) of the Exchange Act requires 
that an NRSRO furnish the Commission 
with an annual certification not later 
than 90 days after the end of each 
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33632 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
calendar year. The annual certification 
must be furnished to the Commission on 
Form NRSRO and must include an 
update of the information in Item 7 and 
the credit ratings performance 
measurement statistics furnished in 
Exhibit 1, a certification that the 
information and documents furnished 
on or with Form NRSRO continue to be 
accurate (use the certification on the 
Form), and a list of material changes to 
the application for registration that 
occurred during the previous calendar 
year. To complete an annual 
certification: 
•Check the ‘‘ANNUAL 
CERTIFICATION’’ box at the top of 
Form NRSRO. 
•Complete Items 1, 2, 3, 4, 5, 7, and 
8 on the Form following all applicable 
instructions for each Item (See 
Instructions below for each Item). If any 
information in an Item on the 
previously furnished Form NRSRO is 
materially inaccurate, update that 
information. Enter ‘‘None’’ or ‘‘N/A’’ 
where appropriate. Complete each Item 
even if the Item is not being updated. 
•If any information in an Exhibit 
previously furnished is materially 
inaccurate, update that information. 
•Attach a list of all material changes 
made to the information or documents 
in the application for registration of the 
NRSRO that occurred during the 
previous calendar year. 
•Execute the Form. 
G. Instructions for a Withdrawal From 
Registration 
Section 15E(e)(1) of the Exchange Act 
provides that an NRSRO may 
voluntarily withdraw its registration 
with the Commission. To withdraw 
from registration, an NRSRO must 
furnish the Commission with a notice of 
withdrawal from registration on Form 
NRSRO. The withdrawal from 
registration will become effective 45 
calendar days after the withdrawal from 
registration is furnished to the 
Commission upon such terms and 
conditions as the Commission may 
establish as necessary in the public 
interest or for the protection of 
investors. To complete a withdrawal 
from registration: 
•Check the ‘‘WITHDRAWAL FROM 
REGISTRATION’’ box at the top of Form 
NRSRO. 
•Complete Items 1, 2, 3, 4, 5, 7, and 
8 on the Form following all applicable 
instructions for each Item (See 
Instructions below for each Item). If any 
information on the previously furnished 
Form NRSRO is materially inaccurate, 
update that information. Enter ‘‘None’’ 
or ‘‘N/A’’ where appropriate. Complete 
each Item even if the Item is not being 
updated. 
•Execute the Form. 
H. Instructions for Specific Line Items 
Item 1A. Provide the name of the 
person (e.g., XYZ Corporation) that is 
furnishing the Form NRSRO to the 
Commission. This means the name of 
the person that is applying for 
registration as an NRSRO or is registered 
as an NRSRO and not the name of the 
individual that is executing the Form. 
Item 1E. The individual listed as the 
contact person must be authorized to 
receive all communications and papers 
from the Commission and must be 
responsible for their dissemination 
within the Applicant/NRSRO. 
Certification. The certification must 
be executed by the Chief Executive 
Officer or the President of the person 
that is furnishing the Form NRSRO to 
the Commission or an individual with 
similar responsibilities. 
Item 3. Identify credit rating affiliates 
that issue credit ratings on behalf of the 
person furnishing the Form NRSRO to 
the Commission in one or more of the 
classes of credit ratings identified in 
Item 6 or Item 7. A ‘‘credit rating 
affiliate’’ is a separate legal entity or a 
separately identifiable department or 
division thereof that determines credit 
ratings that are credit ratings of the 
person furnishing the Form NRSRO to 
the Commission. The information in 
Items 4–8 and all the Exhibits must 
incorporate information about the credit 
ratings, methodologies, procedures, 
policies, financial condition, results of 
operations, personnel, and 
organizational structure of each credit 
rating affiliate identified in Item 3, as 
applicable. Any credit rating 
determined by a credit rating affiliate 
identified in Item 3 will be treated as a 
credit rating issued by the person 
furnishing the Form NRSRO to the 
Commission for purposes of Section 15E 
of the Exchange Act and the 
Commission’s rules thereunder. The 
terms ‘‘Applicant’’ and ‘‘NRSRO’’ as 
used on Form NRSRO and the 
Instructions for the Form mean the 
person furnishing the Form NRSRO to 
the Commission and any credit rating 
affiliate identified in Item 3. 
Item 4. Section 15E(j) of the Exchange 
Act requires an NRSRO to designate a 
compliance officer responsible for 
administering the policies and 
procedures of the NRSRO established 
pursuant to Sections 15E(g) and (h) of 
the Exchange Act (respectively, to 
prevent the misuse of material 
nonpublic information and address and 
manage conflicts of interest) and for 
ensuring compliance with applicable 
securities laws, rules, and regulations. 
Item 5. Section 15E(a)(3) of the 
Exchange Act and Exchange Act Rule 
17g–1(i) require an NRSRO to make 
Form NRSRO and Exhibits 1–9 to Form 
NRSRO furnished to the Commission 
publicly available on the NRSRO’s Web 
site, or through another comparable, 
readily accessible means within 10 
business days after the date of the 
Commission order granting an initial 
application for registration as an NRSRO 
or an application to register for an 
additional class of credit ratings and 
within 10 business days after furnishing 
the Commission with an amendment, 
annual certification, or withdrawal of 
registration on Form NRSRO. The 
certifications from qualified 
institutional investors, Disclosure 
Reporting Pages, and Exhibits 10 
through 13 are not required to be made 
publicly available on the NRSRO’s Web 
site, or through another comparable, 
readily accessible means. Describe how 
the current Form NRSRO and Exhibits 
1–9 will be made publicly available. If 
they will be posted on a Web site, for 
example, give the Internet address and 
link to the Form and Exhibits. 
Item 6. Complete Item 6 only if 
furnishing an initial application for 
registration, an application to be 
registered in an additional class of 
credit ratings, or an application 
supplement. 
Item 6A. Pursuant to Section 
15E(a)(1)(B)(vii) of the Exchange Act, an 
Applicant applying for registration as an 
NRSRO must disclose in the application 
the classes of credit ratings for which 
the Applicant/NRSRO is applying to be 
registered. Indicate these classes by 
checking the appropriate box or boxes. 
For each class of credit ratings, provide 
in the appropriate box the approximate 
number of credit ratings the Applicant/ 
NRSRO presently has outstanding as of 
the date of the application. Pursuant to 
the definition of ‘‘nationally recognized 
statistical rating organization’’ in 
Section 3(a)(62) of the Exchange Act, an 
Applicant/NRSRO must have been in 
business as a ‘‘credit rating agency’’ for 
at least the 3 consecutive years 
immediately preceding the date of its 
application for registration as an 
NRSRO. For each class of credit ratings, 
also provide in the appropriate box the 
approximate date the Applicant/NRSRO 
began issuing and making readily 
accessible credit ratings in the class on 
a continuous basis through the present 
as a ‘‘credit rating agency,’’ as that term 
is defined in Section 3(a)(61) of the 
Exchange Act. If there was a period 
when the Applicant/NRSRO stopped 
issuing credit ratings in a particular 
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33633 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
class or stopped operating as a credit 
rating agency, provide the approximate 
date the Applicant/NRSRO resumed 
issuing and making readily accessible 
credit ratings in that class as a credit 
rating agency. Refer to the definition of 
‘‘credit rating agency’’ in the 
instructions below (also at 15 U.S.C. 
78c(a)(61)) to determine when the 
Applicant/NRSRO began operating as a 
‘‘credit rating agency.’’ 
Item 6B. To meet the definition of 
‘‘credit rating agency’’ pursuant to 
Section 3(a)(61)(A) of the Exchange Act, 
the Applicant must, among other things, 
issue ‘‘credit ratings on the Internet or 
through another readily accessible 
means, for free or for a reasonable fee.’’ 
Briefly describe how the Applicant/ 
NRSRO makes the credit ratings in the 
classes indicated in Item 6A readily 
accessible for free or for a reasonable 
fee. If a person must pay a fee to obtain 
a credit rating made readily accessible 
by the Applicant/NRSRO, provide a fee 
schedule or describe the price(s) 
charged. 
Item 6C. If the Applicant/NRSRO is 
required to furnish qualified 
institutional buyer certifications, under 
Section 15E(a)(1)(C) of the Exchange 
Act, submit a minimum of 10 
certifications from qualified 
institutional buyers, none of which is 
affiliated with the Applicant/NRSRO. 
Each certification may address more 
than one class of credit ratings. To be 
registered as an NRSRO for a class of 
credit ratings identified in Item 6A 
under ‘‘Applying for Registration,’’ the 
Applicant/NRSRO must submit at least 
two certifications that address the class 
of credit ratings. If this is an application 
of an NRSRO to be registered in one or 
more additional classes of credit ratings, 
furnish at least two certifications that 
address each additional class of credit 
ratings. The required certifications must 
be signed by a person duly authorized 
by the certifying entity, must be 
notarized, must be marked 
‘‘Certification from Qualified 
Institutional Buyer,’’ and must be in 
substantially the following form: 
‘‘I, [Executing official], am authorized by 
[Certifying entity] to execute this certification 
on behalf of [Certifying entity]. I certify that 
all actions by stockholders, directors, general 
partners, and other bodies necessary to 
authorize me to execute this certification 
have been taken and that [Certifying entity]: 
(i) Meets the definition of a ’qualified 
institutional buyer’ as set forth in section 
3(a)(64) of the Securities Exchange Act of 
1934 (15 U.S.C. 78c(a)(64)) pursuant to the 
following subsection(s) of 17 CFR 
230.144A(a)(1) [insert applicable citations]; 
(ii) Has seriously considered the credit 
ratings of [the Applicant/NRSRO] in the 
course of making some of its investment 
decisions for at least the three years 
immediately preceding the date of this 
certification, in the following classes of credit 
ratings: [Insert applicable classes of credit 
ratings]; and 
(iii) Has not received compensation either 
directly or indirectly from [the Applicant/ 
NRSRO] for executing this certification. 
[Signature] 
Print Name and Title 
You are not required to make a 
Certification from a Qualified 
Institutional Buyer submitted with this 
Form NRSRO publicly available on your 
Web site, or through another 
comparable, readily accessible means 
pursuant to Exchange Act Rule 17g–1(i). 
You may request that the Commission 
keep these certifications confidential by 
marking each page ‘‘Confidential 
Treatment’’ and complying with 
Commission rules governing 
confidential treatment (See 17 CFR 
200.80 and 17 CFR 200.83). The 
Commission will keep the certifications 
confidential upon request to the extent 
permitted by law. 
Item 7. An Applicant furnishing Form 
NRSRO to apply for registration as an 
NRSRO should not complete Item 7. An 
NRSRO furnishing Form NRSRO for any 
other reason must complete Item 7. The 
information in Item 7 must be updated 
on an annual basis with the furnishing 
of the annual certification. 
Item 7A. Indicate the classes of credit 
ratings for which the NRSRO is 
currently registered by checking the 
appropriate box or boxes. For each class 
of credit ratings, provide in the 
appropriate box the approximate 
number of credit ratings the NRSRO had 
outstanding as of the end of the most 
recently ended calendar year. For each 
class of credit ratings, also provide in 
the appropriate box the approximate 
date the NRSRO began issuing and 
making readily accessible credit ratings 
in the class on a continuous basis 
through the present as a ‘‘credit rating 
agency,’’ as that term is defined in 
Section 3(a)(61) of the Exchange Act. If 
there was a period when the NRSRO 
stopped issuing credit ratings in a 
particular class or stopped operating as 
a credit rating agency, provide the 
approximate date the NRSRO resumed 
issuing and making readily accessible 
credit ratings in that class as a credit 
rating agency. Refer to the definition of 
‘‘credit rating agency’’ in the 
instructions below (also at 15 U.S.C. 
78c(a)(61)) to determine when the 
NRSRO began operating as a ‘‘credit 
rating agency.’’ 
Item 7B. Briefly describe how the 
NRSRO makes the credit ratings in the 
classes indicated in Item 7A readily 
accessible for free or for a reasonable 
fee. If a person must pay a fee to obtain 
a credit rating made readily accessible 
by the NRSRO, provide a fee schedule 
or describe the price(s) charged. 
Item 8. Answer each question by 
checking the appropriate box. Refer to 
the definition of ‘‘person within an 
Applicant/NRSRO’’ set forth below to 
determine the persons to which the 
questions apply. Information that relates 
to an affirmative answer must be 
provided on a Disclosure Reporting Page 
(NRSRO) and furnished with Form 
NRSRO. Submit a separate Disclosure 
Reporting Page (NRSRO) for each person 
that: (a) has committed or omitted any 
act, or has been subject to an order or 
finding, enumerated in subparagraphs 
(A), (D), (E), (G), or (H) of section 
15(b)(4) of the Securities Exchange Act 
of 1934, has been convicted of any 
offense specified in section 15(b)(4)(B) 
of the Securities Exchange Act of 1934, 
or has been enjoined from any action, 
conduct, or practice specified in section 
15(b)(4)(C) of the Securities Exchange 
Act of 1934; (b) has been convicted of 
any crime that is punishable by 
imprisonment for 1 or more years, and 
that is not described in section 15(b)(4) 
of the Securities Exchange Act of 1934, 
or has been convicted of a substantially 
equivalent crime by a foreign court of 
competent jurisdiction; or (c) is subject 
to any order of the Commission barring 
or suspending the right of the person to 
be associated with an NRSRO. The 
Disclosure Reporting Page (NRSRO) is 
attached to these instructions. Note: the 
definition of ‘‘person within an 
Applicant/NRSRO’’ is narrower than the 
definition of ‘‘person associated with a 
nationally recognized statistical rating 
organization’’ in Section 3(a)(63) of the 
Exchange Act. 
You are not required to make any 
disclosure reporting pages submitted 
with this Form NRSRO publicly 
available on your Web site, or through 
another comparable, readily accessible 
means pursuant to Exchange Act Rule 
17g–1(i). You may request that the 
Commission keep any disclosure 
reporting pages confidential by marking 
each page ‘‘Confidential Treatment’’ and 
complying with Commission rules 
governing confidential treatment. The 
Commission will keep the disclosure 
reporting pages confidential upon 
request to the extent permitted by law. 
Item 9. Exhibits. Section 15E(a)(1)(B) 
of the Exchange Act requires a credit 
rating agency’s application for 
registration as an NRSRO to contain 
certain specific information and 
documents and, pursuant to Section 
15E(a)(1)(B)(x), any other information 
and documents concerning the 
applicant and any person associated 
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33634 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
with the applicant that the Commission 
requires as necessary or appropriate in 
the public interest or for the protection 
of investors. If any information or 
document required to be included with 
any Exhibit is maintained in a language 
other than English, provide a copy of 
the original document and a version of 
the document translated into English. 
Attach a certification by an authorized 
person that the translated version is a 
true, accurate, and complete English 
translation of the information or 
document. Attach the Exhibits to Form 
NRSRO in numerical order. Bind each 
Exhibit separately, and mark each 
Exhibit or bound volume of the Exhibit 
with the appropriate Exhibit number. 
The information provided in the 
Exhibits must be sufficiently detailed to 
allow for verification. The information 
and documents provided in Exhibits 1 
through 9 must be made publicly 
available on the NRSRO’s Web site, or 
through another comparable, readily 
accessible means pursuant to Exchange 
Act Rule 17g–1(i). The information and 
documents required to be provided in 
Exhibits 10 through 13 are not required 
to be made publicly available on the 
NRSRO’s Web site, or through another 
comparable, readily accessible means 
pursuant to Exchange Act Rule 17g–1(i). 
An NRSRO may request that the 
Commission keep these Exhibits 
confidential by marking each page of 
them ‘‘Confidential Treatment’’ and 
complying with Commission rules 
governing confidential treatment (See 17 
CFR 200.80 and 17 CFR 200.83). The 
Commission will keep the information 
and documents in these Exhibits 
confidential upon request to the extent 
permitted by law. 
Exhibit 1. Provide in this Exhibit 
performance measurement statistics of 
the credit ratings of the Applicant/ 
NRSRO over short-term, mid-term, and 
long-term periods (as applicable) 
through the most recent calendar year- 
end, including, as applicable: historical 
down-grade and default rates within 
each of the credit rating categories, 
notches, grades, or rankings used by the 
Applicant/NRSRO as an indicator of the 
assessment of the creditworthiness of an 
obligor, security, or money market 
instrument. As part of this Exhibit, 
define the credit rating categories, 
notches, grades, and rankings used by 
the Applicant/NRSRO and explain the 
performance measurement statistics, 
including the inputs, time horizons, and 
metrics used to determine the statistics. 
Exhibit 2. Provide in this Exhibit a 
general description of the procedures 
and methodologies used by the 
Applicant/NRSRO to determine credit 
ratings, including unsolicited credit 
ratings within the classes of credit 
ratings for which the Applicant/NRSRO 
is seeking registration or is registered. 
The description must be sufficiently 
detailed to provide users of credit 
ratings with an understanding of the 
processes employed by the Applicant/ 
NRSRO in determining credit ratings, 
including, as applicable, descriptions of: 
policies for determining whether to 
initiate a credit rating; a description of 
the public and non-public sources of 
information used in determining credit 
ratings, including information and 
analysis provided by third-party 
vendors; the quantitative and qualitative 
models and metrics used to determine 
credit ratings; the methodologies by 
which credit ratings of other credit 
rating agencies are treated to determine 
credit ratings for securities or money 
market instruments issued by an asset 
pool or as part of any asset-backed or 
mortgaged-backed securities transaction; 
the procedures for interacting with the 
management of a rated obligor or issuer 
of rated securities or money market 
instruments; the structure and voting 
process of committees that review or 
approve credit ratings; procedures for 
informing rated obligors or issuers of 
rated securities or money market 
instruments about credit rating 
decisions and for appeals of final or 
pending credit rating decisions; 
procedures for monitoring, reviewing, 
and updating credit ratings; and 
procedures to withdraw, or suspend the 
maintenance of, a credit rating. An 
Applicant/NRSRO may provide in 
Exhibit 2 the location on its Web site 
where additional information about the 
procedures and methodologies is 
located. 
Exhibit 3. Provide in this Exhibit a 
copy of the written policies and 
procedures established, maintained, and 
enforced by the Applicant/NRSRO to 
prevent the misuse of material, 
nonpublic information pursuant to 
Section 15E(g) of the Exchange Act and 
17 CFR 240.17g–4. Do not include any 
information that is proprietary or that 
would diminish the effectiveness of a 
specific policy or procedure if made 
publicly available. 
Exhibit 4. Provide in this Exhibit 
information about the organizational 
structure of the Applicant/NRSRO, 
including, as applicable, an 
organizational chart that identifies, as 
applicable, the ultimate and sub-holding 
companies, subsidiaries, and material 
affiliates of the Applicant/NRSRO; an 
organizational chart showing the 
divisions, departments, and business 
units of the Applicant/NRSRO; and an 
organizational chart showing the 
managerial structure of the Applicant/ 
NRSRO, including the designated 
compliance officer identified in Item 4. 
Exhibit 5. Provide in this Exhibit a 
copy of the written code of ethics the 
Applicant/NRSRO has in effect or a 
statement of the reasons why the 
Applicant/NRSRO does not have a 
written code of ethics in effect. 
Exhibit 6. Identify in this Exhibit the 
types of conflicts of interest relating to 
the issuance of credit ratings by the 
Applicant/NRSRO that are material to 
the Applicant/NRSRO. First, identify 
the conflicts described in the list below 
that apply to the Applicant/NRSRO. The 
Applicant/NRSRO may use the 
descriptions below to identify an 
applicable conflict of interest and is not 
required to provide any further details. 
Second, briefly describe any other type 
of conflict of interest relating to the 
issuance of credit ratings by the 
Applicant/NRSRO that is not covered in 
the descriptions below that is material 
to the Applicant/NRSRO (for example, 
one the Applicant/NRSRO has 
established specific policies and 
procedures to address): 
•The Applicant/NRSRO is paid by 
issuers or underwriters to determine 
credit ratings with respect to securities 
or money market instruments they issue 
or underwrite. 
•The Applicant/NRSRO is paid by 
obligors to determine credit ratings of 
the obligors. 
•The Applicant/NRSRO is paid for 
services in addition to determining 
credit ratings by issuers, underwriters, 
or obligors that have paid the 
Applicant/NRSRO to determine a credit 
rating. 
•The Applicant/NRSRO is paid by 
persons for subscriptions to receive or 
access the credit ratings of the 
Applicant/NRSRO and/or for other 
services offered by the Applicant/ 
NRSRO where such persons may use the 
credit ratings of the Applicant/NRSRO 
to comply with, and obtain benefits or 
relief under, statutes and regulations 
using the term ‘‘nationally recognized 
statistical rating organization.’’ 
•The Applicant/NRSRO is paid by 
persons for subscriptions to receive or 
access the credit ratings of the 
Applicant/NRSRO and/or for other 
services offered by the Applicant/ 
NRSRO where such persons also may 
own investments or have entered into 
transactions that could be favorably or 
adversely impacted by a credit rating 
issued by the Applicant/NRSRO. 
•The Applicant/NRSRO allows 
persons within the Applicant/NRSRO 
to: 
ÆDirectly own securities or money 
market instruments of, or have other 
direct ownership interests in, obligors or 
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33635 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
issuers subject to a credit rating 
determined by the Applicant/NRSRO. 
ÆHave business relationships that are 
more than arms length ordinary course 
business relationships with obligors or 
issuers subject to a credit rating 
determined by the Applicant/NRSRO. 
•A person associated with the 
Applicant/NRSRO is a broker or dealer 
engaged in the business of underwriting 
securities or money market instruments 
(identify the person). 
•The Applicant/NRSRO has any 
other material conflict of interest that 
arises from the issuances of credit 
ratings (briefly describe). 
Exhibit 7. Provide in this Exhibit a 
copy of the written policies and 
procedures established, maintained, and 
enforced by the Applicant/NRSRO to 
address and manage conflicts of interest 
pursuant to Section 15E(h) of the 
Exchange Act. Do not include any 
information that is proprietary or that 
would diminish the effectiveness of a 
specific policy or procedure if made 
publicly available. 
Exhibit 8. Provide in this Exhibit the 
following information about the 
Applicant/NRSRO’s credit analysts (See 
definition below) and the persons who 
supervise the credit analysts: 
•The total number of credit analysts. 
•The total number of credit analyst 
supervisors. 
•A general description of the 
minimum qualifications required of the 
credit analysts, including education 
level and work experience (if 
applicable, distinguish between junior, 
mid, and senior level credit analysts). 
•A general description of the 
minimum qualifications required of the 
credit analyst supervisors, including 
education level and work experience. 
Exhibit 9. Provide in this Exhibit the 
following information about the 
designated compliance officer 
(identified in Item 4) of the Applicant/ 
NRSRO: 
•Name. 
•Employment history. 
•Post secondary education. 
•Whether employed by the 
Applicant/NRSRO full-time or part- 
time. 
Exhibit 10. Provide in this Exhibit a 
list of the largest users of credit rating 
services of the Applicant by the amount 
of net revenue earned by the Applicant 
attributable to the person during the 
fiscal year ending immediately before 
the date of the initial application. First, 
determine and list the 20 largest issuers 
and subscribers in terms of net revenue. 
Next, add to the list any obligor or 
underwriter that, in terms of net revenue 
during the fiscal year, equaled or 
exceeded the 20th largest issuer or 
subscriber. In making the list, rank the 
persons in terms of net revenue from 
largest to smallest and include the net 
revenue amount for each person. For 
purposes of this Exhibit: 
Net revenue means revenue earned by 
the Applicant for any type of service or 
product provided to the person, 
regardless of whether related to credit 
rating services, and net of any rebates 
and allowances the Applicant paid or 
owes to the person; and 
Credit rating services means any of 
the following: rating an obligor 
(regardless of whether the obligor or any 
other person paid for the credit rating); 
rating an issuer’s securities or money 
market instruments (regardless of 
whether the issuer, underwriter, or any 
other person paid for the credit rating); 
and providing credit ratings, credit 
ratings data, or credit ratings analysis to 
a subscriber. 
An NRSRO is not required to make 
this Exhibit publicly available on its 
Web site, or through another 
comparable, readily accessible means 
pursuant to Exchange Act Rule 17g–1(i). 
An NRSRO may request that the 
Commission keep this Exhibit 
confidential by marking each page 
‘‘Confidential Treatment’’ and 
complying with Commission rules 
governing confidential treatment (See 17 
CFR 200.80 and 17 CFR 200.83). The 
Commission will keep the information 
and documents in the Exhibit 
confidential upon request to the extent 
permitted by law. 
Exhibit 11. Provide in this Exhibit the 
financial statements of the Applicant, 
which must include a balance sheet, an 
income statement and statement of cash 
flows, and a statement of changes in 
ownership equity, audited by an 
independent public accountant, for each 
of the three fiscal or calendar years 
ending immediately before the date of 
the Applicant’s initial application to the 
Commission, subject to the following: 
If the Applicant is a division, unit, or 
subsidiary of a parent company, the 
Applicant may provide audited 
consolidated financial statements of its 
parent company. 
If the Applicant does not have audited 
financial statements for one or more of 
the three fiscal or calendar years ending 
immediately before the date of the 
initial application, the Applicant can 
provide unaudited financial statements 
for the applicable year or years, but 
must provide audited financial 
statements for the fiscal or calendar year 
ending immediately before the date of 
the initial application. Attach to the 
unaudited financial statements a 
certification by a person duly 
authorized by the Applicant to make the 
certification that the person has 
responsibility for the financial 
statements and that to the best 
knowledge of the person making the 
certification the financial statements 
fairly present, in all material respects, 
the Applicant’s financial condition, 
results of operations, and cash flows for 
the period presented. 
An NRSRO is not required to make 
this Exhibit publicly available on its 
Web site, or through another 
comparable, readily accessible means 
pursuant to Exchange Act Rule 17g–1(i). 
An NRSRO may request that the 
Commission keep this Exhibit 
confidential by marking each page 
‘‘Confidential Treatment’’ and 
complying with Commission rules 
governing confidential treatment (See 17 
CFR 200.80 and 17 CFR 200.83). The 
Commission will keep the information 
and documents in the Exhibit 
confidential upon request to the extent 
permitted by law. 
Exhibit 12. Provide in this Exhibit the 
following information, as applicable, 
and which is not required to be audited, 
regarding the Applicant’s aggregate 
revenues for the fiscal or calendar year 
ending immediately before the date of 
the initial application: 
•Revenue from determining and 
maintaining credit ratings; 
•Revenue from subscribers; 
•Revenue from granting licenses or 
rights to publish credit ratings; and 
•Revenue from all other services and 
products offered by your credit rating 
organization (include descriptions of 
any major sources of revenue). 
An NRSRO is not required to make 
this Exhibit publicly available on its 
Web site or, through another 
comparable, readily accessible means 
pursuant to Exchange Act Rule 17g–1(i). 
An NRSRO may request that the 
Commission keep this Exhibit 
confidential by marking each page 
‘‘Confidential Treatment’’ and 
complying with Commission rules 
governing confidential treatment (See 17 
CFR 200.80 and 17 CFR 200.83). The 
Commission will keep the information 
and documents in the Exhibit 
confidential upon request to the extent 
permitted by law. 
Exhibit 13. Provide in this Exhibit the 
approximate total and median annual 
compensation of the Applicant’s credit 
analysts for the fiscal or calendar year 
ending immediately before the date of 
this initial application. In calculating 
total and median annual compensation, 
the Applicant may exclude deferred 
compensation, provided such exclusion 
is noted in the Exhibit. 
An NRSRO is not required to make 
this Exhibit publicly available on its 
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33636 Federal  Register/ Vol.  72,  No.  116 / Monday,  June  18,  2007 / Rules  and  Regulations  
Web site, or through another 
comparable, readily accessible means 
pursuant to Exchange Act Rule 17g–1(i). 
An NRSRO may request that the 
Commission keep this Exhibit 
confidential by marking each page 
‘‘Confidential Treatment’’ and 
complying with Commission rules 
governing confidential treatment (See 17 
CFR 200.80 and 17 CFR 200.83). The 
Commission will keep the information 
and documents in the Exhibit 
confidential upon request to the extent 
permitted by law. 
F. Explanation of Terms 
1. COMMISSION—The U. S. 
Securities and Exchange Commission. 
2. CREDIT RATING [Section 3(a)(60) 
of the Exchange Act]—An assessment of 
the creditworthiness of an obligor as an 
entity or with respect to specific 
securities or money market instruments. 
3. CREDIT RATING AGENCY [Section 
3(a)(61) of the Exchange Act]—Any 
person: 
•Engaged in the business of issuing 
credit ratings on the Internet or through 
another readily accessible means, for 
free or for a reasonable fee, but does not 
include a commercial credit reporting 
company; 
•Employing either a quantitative or 
qualitative model, or both to determine 
credit ratings; and 
•Receiving fees from either issuers, 
investors, other market participants, or 
a combination thereof. 
4. NATIONALLY RECOGNIZED 
STATISTICAL RATING 
ORGANIZATION [Section 3(a)(62) of 
the Exchange Act]—A credit rating 
agency that: 
•Has been in business as a credit 
rating agency for at least the 3 
consecutive years immediately 
preceding the date of its application for 
registration as an NRSRO; 
•Issues credit ratings certified by 
qualified institutional buyers in 
accordance with section 15(a)(1)(B)(ix) 
of the Exchange Act with respect to: 
ÆFinancial institutions, brokers, or 
dealers; 
ÆInsurance companies; 
ÆCorporate issuers; 
ÆIssuers of asset-backed securities; 
ÆIssuers of government securities, 
municipal securities, or securities 
issued by a foreign government; or 
ÆA combination of one or more of 
the above; and 
•Is registered as an NRSRO. 
6. PERSON—An individual, 
partnership, corporation, trust, 
company, limited liability company, or 
other organization (including a 
separately identifiable department or 
division). 
7. PERSON WITHIN AN APPLICANT/ 
NRSRO—The person furnishing Form 
NRSRO identified in Item 1, any credit 
rating affiliates identified in Item 3, and 
any partner, officer, director, branch 
manager, or employee of the person or 
the credit rating affiliates (or any person 
occupying a similar status or performing 
similar functions). 
8. SEPARATELY IDENTIFIABLE 
DEPARTMENT OR DIVISION—A unit 
of a corporation or company: 
•That is under the direct supervision 
of an officer or officers designated by 
the board of directors of the corporation 
as responsible for the day-to-day 
conduct of the corporation’s credit 
rating activities for one or more 
affiliates, including the supervision of 
all employees engaged in the 
performance of such activities; and 
•For which all of the records relating 
to its credit rating activities are 
separately created or maintained in or 
extractable from such unit’s own 
facilities or the facilities of the 
corporation, and such records are so 
maintained or otherwise accessible as to 
permit independent examination and 
enforcement by the Commission of the 
Exchange Act and rules and regulations 
promulgated thereunder. 
8. QUALIFIED INSTITUTIONAL 
BUYER [Section 3(a)(64) of the 
Exchange Act]—An entity listed in 17 
CFR 230.144A(a) that is not affiliated 
with the credit rating agency. 
Disclosure Reporting Page (NRSRO) 
This Disclosure Reporting Page (DRP) 
is to be used to provide information 
concerning affirmative responses to Item 
8 of Form NRSRO. 
Submit a separate DRP for each 
person that: (a) Has committed or 
omitted any act, or been subject to an 
order or finding, enumerated in 
subparagraphs (A), (D), (E), (G), or (H) of 
section 15(b)(4) of the Securities 
Exchange Act of 1934, has been 
convicted of any offense specified in 
section 15(b)(4)(B) of the Securities 
Exchange Act of 1934, or has been 
enjoined from any action, conduct, or 
practice specified in section 15(b)(4)(C) 
of the Securities Exchange Act of 1934; 
(b) has been convicted of any crime that 
is punishable by imprisonment for 1 or 
more years, and that is not described in 
section 15(b)(4) of the Securities 
Exchange Act of 1934, or has been 
convicted of a substantially equivalent 
crime by a foreign court of competent 
jurisdiction; or (c) is subject to any order 
of the Commission barring or 
suspending the right of the person to be 
associated with an NRSRO. 
Name of Applicant/NRSRO 
lllllllllllllllllll
Date 
lllllllllllllllllll
Check Item being responded to: 
bItem 8A 
bItem 8B 
bItem 8C 
Full name of the person for whom this 
DRP is being submitted: 
lllllllllllllllllll
If this DRP provides information 
relating to a ‘‘Yes’’ answer to Item 8A, 
describe the act(s) that was (were) 
committed or omitted; or the order(s) or 
finding(s); or the injunction(s) (provide 
the relevant statute(s) or regulation(s)) 
and provide jurisdiction(s) and date(s): 
lllllllllllllllllll
If this DRP provides information 
relating to a ‘‘Yes’’ answer to Item 8B, 
describe the crime(s) and provide 
jurisdiction(s) and date(s): 
lllllllllllllllllll
If this DRP provides information 
relating to a ‘‘Yes’’ answer to Item 8C, 
attach the relevant Commission order(s) 
and provide the date(s): 
lllllllllllllllllll
By the Commission. 
Dated: June 5, 2007. 
Florence E. Harmon, 
Deputy Secretary. 
[FR Doc. E7–11166 Filed 6–15–07; 8:45 am] 
BILLING  CODE  8010–01–P 
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pwalker on PROD1PC71 with RULES_2

Monday, 

June 18, 2007 

Part II 

Securities and 
Exchange 
Commission 
17 CFR Parts 240 and 249b 
Oversight of Credit Rating Agencies 
Registered as Nationally Recognized 
Statistical Rating Organizations; Final Rule 

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33564 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

1 See, e.g., federal statutes: 15 U.S.C. 78c(a)(41) 
(defining the term ‘‘mortgage related security’’); 15 
U.S.C. 78c(a)(53)(A) (defining the term ‘‘small 
business related security’’); 15 U.S.C. 80a- 
6(a)(5)(A)(iv)(I) (exempting certain companies from 
the provisions of the Investment Company Act of 

1940’’); Gramm-Leach-Bliley Act, Pub. L. No. 106– 
102 (1999); Transportation Equity Act for the 21st 
Century, Pub. L. No. 105–178 (1998); Reigle 
Community Development and Regulatory 
Improvement Act of 1994, Pub. L. No. 103–325 
(1994); Department of Commerce, Justice, and State, 
The Judiciary, and Related Agencies Appropriations 
Act, FY2001, Pub. L. No. 106–553 (2000); Higher 
Education Amendments of 1992, Pub. L. No. 102– 
325 (1992); Housing and Community Development 
Act of 1992, Pub. L. No. 102–550 (1992); Federal 
Deposit Insurance Corporation Improvement Act of 
1991, Pub. L. No. 102–242 (1991); and Financial 
Institutions Reform, Recovery, and Enforcement Act 
of 1989, Pub. L. No. 101–72 (1989); Commission 
rules: 17 CFR 228.10(e), 229.10(c), 230.134(a)(14), 
230.436(g), 239.13, 239.32, 239.33, 240.3a1–1(b)(3), 
240.10b-10(a)(8), 240.15c3–1(c)(2)(vi)(E), (F), and 
(H), 240.15c3–1a(b)(1)(i)(C), 240.15c3–1f(d), 
240.15c3–3a, Item 14, Note G, 242.101(c)(2), 
242.102(d), 242.300(k)(3) and (l)(3), 270.2a-7(a)(10), 
270.3a-7(a)(2), 270.5b-3(c), and 270.10f-3(a)(3); and 
state rule: Cal. Ins. Code 1192.10. 

2 See letter from Nelson S. Kibler, Assistant 
Director, Division of Market Regulation, 
Commission, to John T. Anderson, Esquire, of Lord, 
Bissell & Brook, on behalf of Duff & Phelps, Inc. 
(February 24, 1982); letter from Michael A. 
Macchiaroli, Assistant Director, Division of Market 
Regulation, Commission, to Paul McCarthy, 
President, McCarthy, Crisanti & Maffei, Inc. 
(September 13, 1983); letter from Michael A. 
Macchiaroli, Assistant Director, Division of Market 
Regulation, Commission, to Robin Monro-Davies, 
President, IBCA Limited (November 27, 1990); letter 
from Michael A. Macchiaroli, Assistant Director, 
Division of Market Regulation, Commission, to 
David L. Lloyd, Jr., Dewey Ballentine, Bushby, 
Palmer & Wood (October 1, 1990); letter from 
Michael A. Macchiaroli, Assistant Director, 
Division of Market Regulation, Commission, to 
Gregory A. Root, President, Thomson BankWatch, 
Inc. (August 6, 1991); letter from Michael A. 
Macchiaroli Assistant Director, Division of Market 
Regulation, Commission, to Lee Pickard, Pickard 
and Djinis LLP (January 25, 1999); letter from 
Annette L. Nazareth, Director, Division of Market 
Regulation, Commission, to Mari-Anne Pisarri, 
Pickard and Djinis LLP (February 24, 2003); letter 
from Mark M. Attar, Special Counsel, Division of 
Market Regulation, Commission, to Arthur Snyder, 
President, A.M. Best Company, Inc. (March 3, 
2005); letter from Erik R. Sirri, Director, Division of 
Market Regulation, Commission, to Neal E. 
Sullivan, Bingham McCutchen LLP (May 21, 2007); 
letter from Erik R. Sirri, Director, Division of Market 
Regulation, Commission, to Yoshihiro Saito, 
Perkins Coie LLP (May 23, 2007). 

3 15 U.S.C. 78c. 

4 15 U.S.C. 78o–7. 
5 15 U.S.C. 78q. 
6 See Exchange Act Release No. 55231 (February 

2, 2007), 72 FR 6378 (February 9, 2007) (‘‘Proposing 
Release’’). 

7 These comments are available on the 
Commission’s Internet Web site, located at http:// 
www.sec.gov/comments/s7–04–07/s70407.shtml, 
and in the Commission’s Public Reference Room in 
its Washington, DC headquarters. 

SECURITIES AND EXCHANGE 
COMMISSION 

17 CFR Parts 240 and 249b 

[Release No. 34–55857; File No. S7–04–07] 

RIN 3235–AJ78 

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

AGENCY: Securities and Exchange 
Commission (‘‘Commission’’). 
ACTION: Final rule. 

SUMMARY: The Commission is adopting 
rules to implement provisions of the 
Credit Rating Agency Reform Act of 
2006 (the ‘‘Rating Agency Act’’), enacted 
on September 29, 2006. The Rating 
Agency Act defines the term ‘‘nationally 
recognized statistical rating 
organization,’’ provides authority for the 
Commission to implement registration, 
recordkeeping, financial reporting, and 
oversight rules with respect to registered 
credit rating agencies, and directs the 
Commission to issue final implementing 
rules no later than 270 days after its 
enactment (or by June 26, 2007). The 
rule and form prescribing the process 
for a credit rating agency to apply for 
registration are immediately effective. 
The remaining rules are effective on 
June 26, 2007. 
EFFECTIVE DATES: June 18, 2007, except 
that §§ 240.17g-2, 240.17g-3, 240.17g-4, 
240.17g-5, and 240.17g-6 are effective 
on June 26, 2007. 
FOR FURTHER INFORMATION CONTACT: 
Michael A. Macchiaroli, Associate 
Director, at (202) 551–5525; Thomas K. 
McGowan, Assistant Director, at (202) 
551–5521; Randall W. Roy, Branch 
Chief, at (202) 551–5522; Rose Russo 
Wells, Attorney, at (202) 551–5527; 
Sheila D. Swartz, Attorney, at (202) 
551–5545, Division of Market 
Regulation, Securities and Exchange 
Commission, 100 F Street, NE., 
Washington, DC 20549–6628. 
SUPPLEMENTARY INFORMATION: 

I. Background 

The term nationally recognized 
statistical rating organization 
(‘‘NRSRO’’) is used in federal and state 
statutes and regulations to confer 
regulatory benefits or prescribe 
requirements based on credit ratings 
issued by credit rating agencies 
identified as NRSROs.1 The process of 

identifying NRSROs has historically 
been undertaken by the Commission 
staff through the issuance of no-action 
letters where the staff has determined, 
among other things, that the credit 
rating agency is recognized nationally 
by the predominant users of credit 
ratings as issuing credible and reliable 
ratings.2 The Rating Agency Act 
replaces the no-action letter process— 
which has been criticized as lacking 
transparency—with a registration 
program and Commission oversight of 
credit rating agencies that choose to be 
treated as NRSROs. 

The Rating Agency Act implements 
the program for NRSRO registration and 
oversight by adding definitions to 
Section 3 of the Securities Exchange Act 
of 1934 (‘‘Exchange Act’’),3 creating a 

new Section 15E of the Exchange Act,4 
and amending Section 17 of the 
Exchange Act.5 Under these new 
statutory provisions, a credit rating 
agency seeking to be treated as an 
NRSRO must apply for, and be granted, 
registration with the Commission, make 
public in its application certain 
information to help persons assess its 
credibility, and implement procedures 
to manage the handling of material 
nonpublic information and conflicts of 
interest. In addition, the Rating Agency 
Act provides the Commission with 
rulemaking authority to prescribe: the 
form of the application (including 
requiring the furnishing of additional 
information); the records an NRSRO 
must make and retain; the financial 
reports an NRSRO must furnish to the 
Commission on a periodic basis; the 
specific procedures an NRSRO must 
implement to manage the handling of 
material nonpublic information; the 
conflicts of interest an NRSRO must 
manage or avoid altogether; and the 
practices that an NRSRO must not 
engage in if the Commission determines 
they are unfair, coercive, or abusive. 

II. Timing of Final Rules 

On February 2, 2007, the Commission 
proposed a package of rules pursuant to 
these grants of rulemaking authority.6 
The rules published today incorporate 
many of the proposed provisions but 
also include significant revisions based 
on the comments received.7 The 
Commission, in adopting these rules 
today, intends that Rule 17g–1 (17 CFR 
240.17g–1), Form NRSRO, and 17 CFR 
249b.300 be issued in final form and be 
effective on the date of their publication 
in the Federal Register. The 
Commission further intends that Rules 
17g–2 (17 CFR 240.17g–2), 17g–3 (17 
CFR 240.17g–3), 17g–4 (17 CFR 
240.17g–4), 17g–5 (17 CFR 240.17g–5), 
and 17g–6 (17 CFR 240.17g–6) be issued 
in final form on June 26, 2007 and 
become effective on that date. 

III. Effective Date 

Section 553(d) of the Administrative 
Procedure Act generally provides that, 
unless an exception applies, a 
substantive rule may not be made 
effective less than 30 days after notice 
of the rule has been published in the 

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33565 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

8 5 U.S.C. 553(d). 
9 Id. 
10 15 U.S.C. 78o–7(p). 
11 15 U.S.C. 78o–7(l). 

12 15 U.S.C. 78o–7(n)(2). 
13 Id. 
14 See Sections 3(a)(62) and 15E(l)(2) of the 

Exchange Act (15 U.S.C. 78c(a)(62) and 15 U.S.C. 
78o–7(l)(2)). 

15 See 17 CFR 240.15c3–1(c)(2)(vi)(F). 

16 See Sections 3(a)(62) and 15E(l)(2) of the 
Exchange Act (15 U.S.C. 78c(a)(62) and 15 U.S.C. 
78o–7(l)(2)). 

17 See letter dated March 12, 2007 from Elizabeth 
Krentzman, General Counsel, Investment Company 
Institute (‘‘ICI Letter’’); letter dated March 12, 2007 
from Stephen A. Keen, Attorney, on behalf of 
Federated Investors, Inc. (‘‘FI Letter’’); letter dated 
April 4, 2007 from Charles S. Morrison, Senior Vice 
President and Money Market Group Leader, Fidelity 
Management and Research Company (‘‘FMRC 
Letter’’). 

18 17 CFR 270.2a–7. 
19 15 U.S.C. 80a–1 et seq. 
20 See ICI Letter; FI Letter; FMRC Letter. 
21 See FI Letter. 
22 See FMRC Letter. 
23 Id. 
24 See FI Letter. 

Federal Register.8 One exception to the 
30-day requirement is an agency’s 
finding of good cause for providing a 
shorter effective date.9 

The Rating Agency Act provides that 
the new program for NRSRO registration 
and oversight shall apply on the earlier 
of the date on which regulations are 
issued in final form under Section 
15E(n) of the Exchange Act, or 270 days 
after the enactment of the Rating Agency 
Act, which will be June 26, 2007.10 The 
Rating Agency Act voids existing 
Commission staff no-action letters on 
and after the effective date of the new 
program for NRSRO registration and 
oversight, but creates a transitional 
measure allowing credit rating agencies 
with existing no-action letters to 
continue to act as NRSROs ‘‘during 
Commission consideration of the 
application, if such entity has furnished 
an application for registration.’’ 11 
Consequently, as noted above, the 
Commission intends that Rule 17g–1 
and Form NRSRO be effective 
immediately upon publication. Further, 
the Commission intends that the 
remaining rules, Rule 17g–2 through 
Rule 17g–6, be effective on June 26, 
2007, the statutory deadline. 

Immediate effectiveness of Form 
NRSRO and Rule 17g–1 is necessary to 
allow credit rating agencies that are 
currently the subject of staff no-action 
letters identifying them as NRSROs to 
have a period of time to submit 
applications for registration as NRSROs 
before the provisions of the Rating 
Agency Act and the recordkeeping, 
reporting, and conduct rules issued 
under the Rating Agency Act become 
effective, and thus before the no-action 
letters become void. This will avoid a 
gap in time when no NRSROs exist, 
which would disrupt the regulatory use 
of that term in applicable statutes and 
regulations, resulting in uncertainty in 
the marketplace for all persons that rely 
upon credit ratings issued by NRSROs. 
Further, this result would be 
inconsistent with Congressional intent 
in creating the transitional measure. 
Finally, the accelerated effectiveness for 
the remaining rules, Rule 17g–2 through 
Rule 17g–6, is necessary to meet the 
statutory deadline. 

The primary purpose of the 30-day 
delayed effectiveness requirement is to 
give affected parties a reasonable period 
of time to adjust to the new rules. Here, 
the existing NRSROs would not be 
harmed by immediate effectiveness, and 
would in fact benefit from the 

opportunity to utilize the transitional 
measure Congress provided. Further, an 
entity would not be required to comply 
with Rule 17g–2 through Rule 17g–6 
until its voluntary registration has been 
approved. 

The Commission acted expeditiously 
in proposing and adopting these rules 
under a very tight, statutorily-imposed 
deadline. The Rating Agency Act was 
enacted on September 29, 2006. Just 
over four months later, on February 2, 
2007, the Commission voted to propose 
the new rules and form, which were 
designed to comply with the statutory 
mandate to establish an entirely new 
regulatory regime for NRSROs. The 
Commission voted to adopt these rules 
and Form NRSRO on May 23, 2007, over 
a month before the statutory deadline. 
In doing so, the Commission carefully 
responded to industry, user, and 
investor perspectives to ease the 
transition to a new, Congressionally- 
created registration and regulatory 
scheme. 

Failure to accelerate effectiveness of 
Rule 17g–1 through Rule 17g–6 and 
Form NRSRO could interfere with the 
goals of the Rating Agency Act. For 
these reasons, the Commission finds 
that good cause exists for Rule 17g–1 
and Form NRSRO to be immediately 
effective upon publication, and for Rule 
17g–2 through Rule 17g–6 to be effective 
on June 26, 2007. 

IV. Review of Commission Rules 
Section 15E(n)(2) of the Exchange Act 

requires the Commission to review its 
existing rules using the term ‘‘NRSRO’’ 
within 270 days of its enactment.12 The 
statute further provides that the 
Commission shall amend or revise the 
rules in accordance with Section 
15E(n)(2) of the Exchange Act.13 The 
Commission has reviewed all of its rules 
using the term ‘‘NRSRO.’’ The 
Commission does not believe these rules 
need to be amended at this time. The 
term ‘‘NRSRO’’ in each rule will refer to 
an ‘‘NRSRO’’ as that term is defined in 
the Rating Agency Act when the 
statutory provisions become effective.14 
For example, Commission Rule 15c3–1 
(the broker-dealer net capital rule) uses 
the term ‘‘nationally recognized 
statistical rating organization’’ to 
prescribe the amount a broker-dealer 
must haircut proprietary corporate debt 
securities when computing its 
regulatory capital.15 The rule does not 
otherwise define the term ‘‘nationally 

recognized statistical rating 
organization.’’ Consequently, after the 
effective date of the NRSRO regulatory 
program, the term, as used in this rule, 
will refer to a credit rating agency that 
is an NRSRO as determined by the 
provisions of the Rating Agency Act.16 

The Commission notes that several 
commenters raised potential concerns 
about how other Commission rules may 
operate after the NRSRO registration 
and oversight program takes effect.17 
These commenters suggested that 
requirements in Rule 2a–7 18 under the 
Investment Company Act of 1940,19 
which regulates the operation of money 
market funds, may need to be modified 
depending on the number of credit 
rating agencies that become registered as 
NRSROs.20 For example, one 
commenter noted that Rule 2a– 
7(c)(6)(i)(A)(2) requires a money market 
fund to re-assess the minimal credit risk 
of its portfolio whenever it becomes 
aware that any unrated or second tier 
security held by the fund has been given 
a credit rating by any NRSRO below the 
NRSRO’s second highest category.21 
Another commenter noted that Rule 2a– 
7 prescribes that money market funds 
determine whether a security is eligible 
for purchase based on whether it has 
received a credit rating in one of the two 
highest categories from any NRSRO.22 
This commenter was concerned that this 
might lead to money market funds 
filling portfolios that most NRSROs 
consider third tier.23 One of the these 
commenters also expressed concern that 
the proposal did not require that an 
NRSRO have a particular number of 
credit rating categories or that the 
categories of one NRSRO might not 
correspond to those of another 
NRSRO.24 Based on the uncertainty of 
how many credit rating agencies 
ultimately will register as NRSROs, the 
Commission intends to monitor for now 
how the NRSRO regulatory program 
impacts Rule 2a–7 and the 
Commission’s other rules using the term 
‘‘NRSRO.’’ As the program develops, the 

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33566 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

25 15 U.S.C. 78o–7. 
26 15 U.S.C. 78o–7(a)(1)(A). 

27 See 15 U.S.C. 78c(a)(62). 
28 See 15 U.S.C. 78c(3)(a)(62)(B). 
29 This provision further implements Section 

15E(a)(1) of the Exchange Act, which requires the 
Commission, by rule, to prescribe the form of an 
application for registration (15 U.S.C. 78o–7(a)(1)). 

30 15 U.S.C. 78o–7(a)(1)(B). 
31 See Section 15E(a)(1)(B)(vii) of the Exchange 

Act (15 U.S.C. 78o–7(a)(1)(B)(vii)). 
32 15 U.S.C. 78c(a)(62)(B). 
33 This provision further implements Section 

15E(a)(1) of the Exchange Act, which requires the 
Commission, by rule, to prescribe the form of an 
application for registration (15 U.S.C. 78o–7(a)(1)). 

34 15 U.S.C. 78o–7. 

35 15 U.S.C. 78o–7(a)(2)(A) and (B). 
36 This provision is being implemented under the 

Commission’s authority in Section 15E(a)(1)(A) of 
the Exchange Act to prescribe the form of the 
application (15 U.S.C. 78o–7(a)(1)(A)). 

Commission will evaluate whether 
modifications to these rules would be 
appropriate. 

V. The Final Rules 

A. Rule 17g–1—Registration 
Requirements 

The Rating Agency Act, through the 
enactment of new Section 15E of the 
Exchange Act, provides the Commission 
with rulemaking authority with respect 
to the process for applying for 
registration as an NRSRO, keeping an 
NRSRO registration current, and 
withdrawing an NRSRO registration.25 
The Commission proposed to 
implement its rulemaking authority in 
these areas through a new rule, Rule 
17g–1. The provisions of proposed Rule 
17g–1 would have prescribed: How a 
credit rating agency must apply to be 
registered as an NRSRO; the form of the 
application; how an NRSRO must make 
non-confidential information in the 
application public; how an NRSRO 
must apply to be registered in an 
additional class of credit ratings; how an 
NRSRO must update its application; 
how an NRSRO must annually certify 
that the information and documents in 
its registration continue to be accurate; 
and how an NRSRO must provide notice 
of the withdrawal of its registration. 

As discussed below, the Commission 
is adopting Rule 17g–1 with certain 
modifications that address issues raised 
by commenters, restructure the order of 
the paragraphs, and remove text that 
was unnecessary. Any textual changes 
not specifically discussed are non- 
substantive and designed to make the 
rule text more cohesive and consistent 
both within the rule and across the 
other NRSRO rules published today. 

1. Paragraph (a) of Rule 17g–1 
As adopted, paragraph (a) of Rule 

17g–1 provides that a credit rating 
agency applying to register with the 
Commission as an NRSRO must furnish 
an application on Form NRSRO. Section 
15E(a)(1)(A) of the Exchange Act 
provides that a credit rating agency 
applying for registration must furnish 
the Commission with an application in 
a form prescribed by Commission 
rule.26 Paragraph (a) of Rule 17g–1, as 
proposed, similarly provided that a 
credit rating agency applying to be 
registered with the Commission as an 
NRSRO must furnish the Commission 
with an application on Form NRSRO 
that follows all instructions for the 
Form. The Commission did not receive 
any comments on the proposed rule text 
of this paragraph and is adopting it 

substantially as proposed with one 
modification. Specifically, there is no 
longer a reference in the text to the 
‘‘credit ratings described in section 
3(a)(62)(B) of the [Exchange] Act (15 
U.S.C. 78c(a)(62)).’’ This reference to a 
component of the statutory definition of 
‘‘NRSRO’’ in the proposed rule was 
redundant and unnecessary. A credit 
rating agency, by statutory definition, 
must apply to be registered in one or 
more of the classes of credit ratings 
identified in section 3(a)(62)(B) of the 
Exchange Act.27 

2. Paragraph (b) of Rule 17g–1 

As adopted, paragraph (b) of Rule 
17g–1 provides a mechanism for an 
NRSRO registered for fewer than the 
five classes of credit ratings identified in 
the definition of NRSRO to apply to be 
registered in an additional class.28 
Specifically, the NRSRO must apply by 
furnishing an amendment on Form 
NRSRO.29 This provision was proposed 
in paragraph (e) of Rule 17g–1. 

Section 15E(a)(1)(B) of the Exchange 
Act, prescribes certain minimum 
information the credit rating agency 
must provide in its application for 
registration as an NRSRO.30 This 
includes information regarding the 
classes of credit ratings set forth in the 
definition of ‘‘NRSRO’’ in Section 
3(a)(62)(B) of the Exchange Act with 
respect to which the credit rating agency 
‘‘intends to apply for registration.’’ 31 A 
credit rating agency may apply to be 
registered for fewer than all five classes 
of credit ratings described in Section 
3(a)(62)(B) of the Exchange Act.32 
Accordingly, this provision provides a 
mechanism for an NRSRO to apply to be 
registered in an additional class.33 

The application to register for an 
additional class will be subject to the 
requirements in Section 15E of the 
Exchange Act 34 applicable to an 
application to be registered as an 
NRSRO. This means the time periods for 
the Commission to act on the 
application set forth in Sections 
15E(a)(2)(A) and (B) of the Exchange Act 
also will apply to an application to be 

registered in an additional class of 
credit ratings.35 

Finally, the provisions of paragraphs 
(c) and (h) respectively, regarding the 
requirement to notify the Commission 
and amend the application prior to final 
Commission action and when an 
application is deemed to have been 
furnished to the Commission also apply 
to these applications. 

The Commission did not receive any 
comments on these provisions. The 
Commission is adopting them 
substantially as proposed with several 
technical modifications. The rule text is 
modified to delete language instructing 
the NRSRO to indicate where 
appropriate on the form the additional 
class of credit ratings for which it is 
applying for registration. In its place, 
the rule text provides that the NRSRO 
must follow all applicable instructions 
for the Form, which include an 
instruction to indicate where 
appropriate on the Form the additional 
class of credit ratings for which 
registration is sought. The Commission 
is adopting the provision with the 
modifications discussed above. 

3. Paragraph (c) of Rule 17g–1 
As adopted, paragraph (c) of Rule 

17g–1 provides that an applicant for 
registration and an NRSRO applying to 
be registered in an additional class of 
credit ratings must promptly furnish the 
Commission with a notice if information 
in the application becomes, or is found 
to be, materially inaccurate before the 
Commission has granted or denied the 
application. Thereafter, the applicant 
will be required to update the 
application with complete and accurate 
information by submitting an amended 
application on Form NRSRO.36 

These provisions were proposed in 
paragraphs (c) and (e) of Rule 17g–1 for 
initial applicants and for NRSROs 
applying to be registered in an 
additional class of credit ratings, 
respectively. The notification provision 
is designed to alert the Commission as 
soon as possible that the application 
under consideration is materially 
inaccurate. The intent is to avoid 
situations where the Commission 
continues to review an application that 
is no longer materially accurate. The 
Commission has modified Form NRSRO 
to further clarify how a pending 
application should be updated using 
Form NRSRO. Specifically, the Form 
now has a check box for ‘‘Application 
Supplement’’ and specific instructions 

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33567 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

37 The withdrawal of a granted registration is 
discussed separately below. 

38 15 U.S.C. 78o–7(b)(1). 
39 The Commission is implementing this 

provision under Section 15E(a)(1) of the Exchange 
Act (15 U.S.C. 78o–7(a)(1)), which requires the 
Commission, by rule, to prescribe the form of an 
application for registration. 

40 15 U.S.C. 78o–7(b)(1). 
41 Id. 

42 Id. 
43 See letter dated March 12, 2007 from William 

G. Connolly, on behalf of A.M. Best Company, Inc. 
(‘‘A.M. Best Letter’’); letter dated March 12, 2007 
from Yasuhiro Harada, President, Ratings & 
Investment Information (‘‘R&I Letter’’); letter dated 
March 12, 2007 from Jeanne M. Dering, Executive 
Vice President, Moody’s Investors Services 
(‘‘Moody’s Letter’’); letter dated March 12, 2007 
from Kent Wideman, Group Managing Director, and 
Mary Keogh, Managing Director, Dominion Bond 
Rating Service (‘‘DBRS Letter’’); letter dated March 
12, 2007 from Charles D. Brown, General Counsel, 
Fitch Ratings (‘‘Fitch Letter’’). 

44 See R&I Letter; A.M. Best Letter; and Fitch 
Letter. 

45 See Moody’s Letter. 
46 See DBRS Letter. 
47 See Moody’s Letter. 

48 15 U.S.C. 78o–7(b)(1). 
49 15 U.S.C. 78o–7(b)(2). 
50 The Commission is implementing this 

provision under Section 15E(b)(2) of the Exchange 
Act (15 U.S.C. 78o–7(b)(2)), which requires the 
Commission, by rule, to prescribe the form of the 
annual certification. 

51 15 U.S.C. 78o–7(b)(2). 
52 Id. 
53 See Fitch Letter. 
54 15 U.S.C. 78o–7(e)(1). 

about how to complete the Form in this 
instance. The Commission did not 
receive any comments on these 
provisions and is adopting them with 
the modifications discussed above. 

4. Paragraph (d) of Rule 17g–1 

As adopted, paragraph (d) of Rule 
17g–1 provides a mechanism for an 
entity that has applied to be registered 
as an NRSRO, or an NRSRO that has 
applied to be registered in an additional 
class of credit ratings, to withdraw the 
registration application before the 
Commission takes final action on the 
application.37 Specifically, it requires 
the applicant to furnish the Commission 
with a written notice of withdrawal 
executed by a duly authorized person. 

The application provisions were 
proposed in paragraphs (b)(2) and (e) of 
Rule 17g–1 for initial applicants and for 
applications to be registered in an 
additional class of credit ratings, 
respectively. The requirement for 
execution by a duly authorized person 
is designed to ensure that the 
withdrawal notice reflects the intent of 
the credit rating agency. The 
Commission did not receive any 
comments on these provisions and is 
adopting them substantially as 
proposed. 

5. Paragraph (e) of Rule 17g–1 

As adopted, paragraph (e) of Rule 
17g–1 provides that an NRSRO updating 
its application for registration pursuant 
to Section 15E(b)(1) of the Exchange 
Act 38 must promptly furnish the 
amendment to the Commission on Form 
NRSRO.39 Section 15E(b)(1) of the 
Exchange Act requires an NRSRO to 
promptly update its application for 
registration if, after registration, any 
information or document provided as 
part of the application becomes 
materially inaccurate.40 The statute 
further provides that the information on 
credit ratings performance statistics 
(discussed below) must only be updated 
on an annual basis and that the 
certifications from qualified 
institutional buyers (QIBs), discussed 
below, are not required to be updated.41 
This provision was proposed in 
paragraph (f) of Rule 17g–1. 

The Commission has added in the 
instructions to Form NRSRO a 

description of this statutory requirement 
as a means to alert NRSROs that they 
must promptly update information or a 
document submitted on or with their 
Form NRSRO that has become 
materially inaccurate. 

The Commission is not defining the 
term ‘‘promptly’’ as used in Section 
15E(b)(1) of the Exchange Act.42 The 
Commission, however, did express its 
view in the proposing release that 
meeting the statutory requirement to 
update a registration when information 
becomes materially inaccurate should 
not take more than two days. In 
response, five commenters stated that it 
would be unreasonable to expect an 
NRSRO to submit an amendment in two 
days.43 Three commenters proposed 
that the Commission define the term 
‘‘promptly’’ to mean 10 days.44 One 
commenter suggested 20 days.45 
Another commenter suggested the 
Commission use a facts and 
circumstances standard for determining 
whether an amendment was ‘‘promptly’’ 
furnished.46 The Commission agrees 
that the analysis of whether an 
amendment is furnished promptly will 
depend on the facts and circumstances. 
For example, if an NRSRO changes its 
principal business address, it should not 
take more than a few days to complete 
Form NRSRO (inputting the new 
information), have the Form executed, 
and furnish the Form to the 
Commission. On the other hand, it may 
take a few days longer to complete the 
Form if the information or documents in 
an Exhibit become materially 
inaccurate. 

One commenter also stated that the 
rule should require an update of the 
registration application only when the 
information in the current registration 
application becomes ‘‘materially 
inaccurate.’’ 47 In response, the 
Commission notes that the requirement 
to update an application arises from 
Section 15E(b)(1) of the Exchange Act, 
which provides, in pertinent part, that 
an NRSRO shall promptly update its 

application for registration ‘‘if any 
information or document provided 
therein becomes materially 
inaccurate.’’ 48 As noted above, the 
instructions to Form NRSRO have been 
modified to include a description of this 
statutory provision. 

In all other respects, the Commission 
is adopting the provision substantially 
as proposed. 

6. Paragraph (f) of Rule 17g–1 

As adopted, paragraph (f) of Rule 17g– 
1 provides that an NRSRO updating its 
application for registration pursuant to 
Section 15E(b)(2) of the Exchange Act 49 
(the annual certification) must furnish 
the amendment to the Commission on 
Form NRSRO.50 Section 15E(b)(2) of the 
Exchange Act requires an NRSRO to 
furnish the Commission with an 
amendment to its registration not later 
than 90 days after the end of each 
calendar year.51 This section further 
provides that the amendment must (1) 
certify that the information and 
documents provided in the application 
for registration (except the QIB 
certifications) continue to be accurate 
and (2) list any material change to the 
information and documents during the 
previous calendar year.52 

This provision was proposed in 
paragraph (g) of Rule 17g–1. A 
commenter suggested that the proposed 
provision should be revised to permit 
the filing of the annual certification 
within 90 days after the end of an 
NRSRO’s fiscal year (if different than 
the end of the calendar year).53 
However, as noted, the calendar year 
requirement is statutory. The 
instructions to Form NRSRO have been 
modified from those proposed to 
include a description of this statutory 
provision. In all other respects, the 
Commission is adopting the provision 
substantially as proposed. 

7. Paragraph (g) of Rule 17g–1 

As adopted, paragraph (g) of Rule 
17g–1 provides that an NRSRO 
withdrawing its registration pursuant to 
Section 15E(e)(1) of the Exchange Act 54 
must furnish the Commission with a 
notice of withdrawal on Form NRSRO. 
The rule further provides that the 
withdrawal becomes effective 45 

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55 Id. 
56 Id. 
57 See Moody’s Letter. 
58 15 U.S.C. 78o–7(a)(3). 
59 See 17 CFR 240.15b6–1. 

60 15 U.S.C. 78c(a)(4) and (5). 
61 See Section 15 of the Exchange Act (15 U.S.C. 

78o). 
62 15 U.S.C. 78c(a)(61). 
63 This provision is adopted under the 

Commission’s authority in Section 15E(a)(1)(A) of 
the Exchange Act to prescribe the form of the 
application (15 U.S.C. 78o–7(a)(1)(A)). 

64 See, e.g., 17 CFR 240.15b1–1 and 17 CFR 
240.15b3–1 (broker-dealers); 17 CFR 240.15Ba2–1 
(municipal securities dealers); 17 CFR 240.17Ab2– 
1 (clearing agencies); and 17 CFR 240.17Ac2–1 
(transfer agents). 

65 15 U.S.C. 78o–7(a)(2)(A). 
66 15 U.S.C. 78o–7(a)(2)(B). 
67 Under Section 15E(a)(2)(B)(iii) of the Exchange 

Act, the Commission can extend this period for an 
additional 90 days for good cause or for such other 
period as the applicant consents (15 U.S.C. 78o– 
7(a)(2)(B)(iii)). An applicant will be required to 
consent to extend both the period for the 
Commission to make the initial determination and 
the 120-day period to conclude proceedings; since 
the 120-day period begins when the application is 
furnished to the Commission, not when the 
Commission determines to commence proceedings. 

calendar days after the furnishing of the 
form. Section 15E(e)(1) of the Exchange 
Act 55 provides that an NRSRO may 
withdraw from registration, subject to 
such terms and conditions the 
Commission may establish as necessary 
in the public interest or for the 
protection of investors, by furnishing 
the Commission with a written notice of 
withdrawal.56 The rule text references 
this statutory standard. 

This provision was proposed in 
paragraph (h) of Rule 17g–1 without 
specifying the form of the notice or the 
conditions for withdrawal. A 
commenter suggested that the 
withdrawal provision be modified to 
provide that the withdrawal of the 
registration becomes effective within 90 
days of the notice and that the notice be 
provided through an amendment to 
registration furnished on Form 
NRSRO.57 The Commission did note in 
the proposing release that the 
conditions for withdrawal potentially 
could include a requirement that the 
NRSRO provide public notice that its 
credit ratings will cease to be eligible for 
regulatory use. 

The Commission agrees with the 
commenter that the notice should be 
furnished on Form NRSRO. This 
provides for public notice of the 
withdrawal, since the current Form 
NRSRO must be made publicly available 
pursuant to Section 15E(a)(3) of the 
Exchange Act 58 and Rule 17g–1(i) 
discussed below. The Commission also 
agrees with the commenter that in the 
normal course an NRSRO’s withdrawal 
of registration should become effective 
within a prescribed time period. This 
will provide a degree of certainty to the 
NRSRO as to when it will no longer be 
subject to the Commission’s regulatory 
program. It also will be consistent with 
withdrawal requests by certain other 
regulated entities. For example, a 
broker-dealer’s request for withdrawal 
of its registration becomes effective 
within 60 days of the filing of the 
appropriate form.59 The Commission 
also believes users of credit ratings 
should have adequate prior notice of an 
NRSRO’s intent to withdraw its 
application. This will give them notice 
that they will no longer be able to rely 
on the entity’s credit ratings to meet 
statutory or regulatory requirements 
using the term ‘‘NRSRO.’’ It also will 
provide them with notice that the entity 
will no longer be subject to the 
Commission’s oversight, including 

requirements to disclose information 
about its performance, methodologies, 
procedures, and organization. 

The Commission believes the 45 
calendar day time period for the 
withdrawal to become effective is 
necessary in the public interest or for 
the protection of investors for several 
reasons. First, as discussed below, 
pursuant to paragraph (i) of Rule 17g– 
1, an NRSRO must make its current 
Form NRSRO publicly available within 
10 business days of being furnished to 
the Commission. Consequently, notice 
of an NRSRO’s withdrawal will be made 
publicly available at least 30 calendar 
days before becoming effective. This 
notice will provide users of credit 
ratings with time to prepare for the 
NRSRO’s withdrawal. Second, subject to 
certain limited exceptions, an entity 
acting as a ‘‘broker’’ or ‘‘dealer’’ as 
defined in Sections 3(a)(4) and (5) of the 
Exchange Act 60 respectively must 
register with the Commission.61 
Conversely, an entity may act as a 
‘‘credit rating agency’’ as defined in 
Section 3(a)(61) of the Exchange Act 62 
without being required to register with 
the Commission. In this sense, 
registration as an NRSRO is more 
voluntary than registration as a broker- 
dealer. Therefore, a shorter time period 
to withdraw an NRSRO registration is 
appropriate. 

Form NRSRO has been modified to 
include a checkbox to indicate when the 
Form is being furnished to withdraw a 
registration and the instructions for the 
Form have been modified from those 
proposed to include an explanation of 
how to complete the Form in this case. 
Specifically, an NRSRO would complete 
each Item on the Form, except Item 6, 
and have the Form executed. 

For these reasons, the Commission is 
adopting the provision in Rule 17g–1 
concerning a withdrawal of registration 
with the modifications described above. 

8. Paragraph (h) of Rule 17g–1 
As adopted, paragraph (h) of Rule 

17g–1 provides that a Form NRSRO 
submitted to the Commission pursuant 
to any provision in Rule 17g–1 will be 
deemed furnished to the Commission on 
the date that the Commission receives a 
complete and properly executed Form 
NRSRO that follows all applicable 
instructions for the form.63 The 
requirement for completeness comports 

with the requirements imposed on other 
types of registrants under the Exchange 
Act.64 In addition, Section15E(a)(2)(A) 
of the Exchange Act requires the 
Commission to grant an application for 
registration as an NRSRO or commence 
proceedings on whether to deny the 
application within 90 days from the 
date the application is furnished to the 
Commission or a longer period if the 
applicant consents.65 Further, if 
proceedings are commenced, Section 
15E(a)(2)(B) of the Exchange Act 66 
requires the Commission to conclude 
them within 120 days of the date the 
application is furnished to the 
Commission.67 These statutory 
requirements make it necessary for the 
Commission to receive a complete 
initial application before the 90-day and 
120-day periods begin to run. 

Rule 17g–1, as proposed, explicitly 
applied the standard described above 
for when a Form NRSRO would be 
deemed ‘‘furnished’’ for submissions of 
the Form to apply for registration and to 
add a class of credit ratings to an 
existing registration. The Commission 
did not receive any comments on these 
provisions as proposed. 

Rule 17g–1, as adopted, clarifies that 
the ‘‘when furnished’’ standard also 
applies to furnishings of Form NRSRO 
to update a registration, make the 
annual certification, and withdraw a 
registration. As discussed above, 
amendments to update materially 
inaccurate information must be 
furnished promptly, annual 
certifications must be furnished within 
90 days of the end of the calendar year, 
and withdrawals of registration become 
effective in 45 calendar days. Therefore, 
a Form NRSRO submitted for these 
purposes will be deemed ‘‘furnished’’ 
upon the submission of a complete and 
properly executed form. 

Rule 17g–1(h), as adopted, contains a 
provision stating that the Commission 
will, to the extent permitted by law, 
keep confidential information that is 
furnished on a confidential basis and 
requested to be kept confidential. As in 

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68 See, e.g., Section 24 of the Exchange Act (15 
U.S.C. 78x), 17 CFR 240.24b–2, 17 CFR 200.80 and 
17 CFR 200.83. 

69 See, e.g., Section 15E(a)(1)(B)(viii) of the 
Exchange Act. 

70 See Sections 15E(a)(1)(B)(viii) and (ix) of the 
Exchange Act (15 U.S.C. 78o–7(a)(1)(B)(viii) and 
(ix)). 

71 See 17 CFR 200.80 and 17 CFR 200.83. 
72 15 U.S.C. 78o–7(a)(3). 

73 See DBRS Letter; Fitch Letter. 
74 See Fitch Letter and DBRS Letter, respectively. 
75 See ICI Letter. 
76 15 U.S.C. 78o–7(a)(3). 
77 See 17 CFR 200.80(b)(4) and 17 CFR 200.80a. 

17 CFR 200.80a contains a compilation of records 
generally available at the public reference room in 
the principal office of the Commission, including, 
for example, applications for registration as a 
broker-dealer or investment adviser. 

78 See DBRS Letter; A.M. Best Letter. 
79 See 17 CFR 200.80 and 17 CFR 200.83. 
80 15 U.S.C. 78o–7(a)(1)(B). 
81 15 U.S.C. 78o–7(a)(1)(B)(x). 

any situation where a person wishes to 
obtain confidential treatment for 
information provided to the 
Commission, an applicant and NRSRO 
must comply with the requirements of 
the Exchange Act governing confidential 
treatment.68 This provision has been 
added to highlight for credit rating 
agencies and NRSROs the fact that 
information required by Form NRSRO 
includes information that will be 
furnished ‘‘on a confidential basis.’’ 69 
Some of the information to be furnished 
to the Commission ‘‘on a confidential 
basis’’ in the Form is required by 
Section 15E(a)(1)(B) of the Exchange 
Act,70 and the Commission will 
consider requests for confidential 
treatment for that information. In 
addition, certain other information also 
is required in the Form and it may be 
appropriate for the Commission to 
provide confidential treatment to some 
of this information. The Commission 
will evaluate all requests for 
confidential treatment under the 
existing rules governing confidential 
treatment for information furnished to 
the Commission.71 

For these reasons, the Commission is 
adopting the provision in Rule 17g–1 
concerning when a Form NRSRO will be 
deemed to have been furnished with the 
modifications described above. 

9. Paragraph (i) of Rule 17g–1 
As modified, paragraph (i) of Rule 

17g–1 requires that an NRSRO make its 
current Form NRSRO and information 
and documents submitted in Exhibits 1 
though 9 publicly available within 10 
business days of being granted an initial 
registration or registration in an 
additional class of credit ratings and 
within 10 business days of furnishing an 
update to amend information on the 
form, to provide the annual 
certification, and to withdraw a 
registration. Section 15E(a)(3) of the 
Exchange Act provides that the 
Commission, by rule, shall require an 
NRSRO, after registration, to make the 
information submitted in its application 
and any amendments publicly available 
on its Web site or through another 
comparable, readily accessible means.72 
The 10 business day period is intended 
to provide the NRSRO with sufficient 
time to make the information public and 

designed to ensure that users of credit 
ratings have access to the information 
within a reasonably short timeframe. 

This provision was proposed in 
paragraph (d) of Rule 17g–1, except that 
the time period to make the information 
publicly available was proposed to be 
five business days. The Commission 
received three comments on the five 
business day time period. Two 
commenters stated that five business 
days was not enough time to make their 
application information publicly 
available, given the volume of 
information.73 They commented that the 
time period should be 15 and 20 
business days, respectively.74 The third 
commenter stated that the five business 
day time period should not be 
lengthened as the information is an 
important way for users of credit ratings 
to become familiar with a new 
NRSRO.75 

The Commission agrees with the third 
commenter that making the information 
publicly available as soon as possible 
will be an important means for users of 
credit ratings to understand the 
methodologies, procedures, and 
business models of new NRSROs. At the 
same time, the Commission agrees with 
the two other commenters that larger 
more complex NRSROs could have 
substantial amounts of information in 
their applications, which may make it 
difficult to provide all this information 
in a publicly available format in five 
business days. Therefore, the 
Commission is lengthening the time 
period to ten business days. This is 
shorter than the 15 and 20 day periods 
advocated by the two commenters. 
However, as discussed below, Form 
NRSRO has been modified in ways that 
reduce the volume of information that 
must be made publicly available. 
Consequently, the Commission believes 
10 business days will be a sufficient 
amount of time. 

Finally, while Section 15E(a)(3) of the 
Exchange Act 76 does not address 
whether an application to register as an 
NRSRO shall be made publicly available 
prior to registration, this type of 
information typically would be made 
available by the Commission to 
members of the public before the 
application is acted on by the 
Commission.77 Two commenters, both 

current NRSROs, stated that the 
Commission should not make 
information in the application available 
to the public until after registration was 
granted.78 The Commission notes that 
an applicant can seek confidential 
treatment for information in the 
application under existing laws and 
rules governing confidential 
treatment.79 The Commission will 
accord this information confidential 
treatment to the extent permitted by 
law. This is consistent with how the 
Commission treats applications of other 
entities. 

B. Form NRSRO 
The Commission proposed Form 

NRSRO to serve four functions: For a 
credit rating agency to apply for 
registration as an NRSRO; for an NRSRO 
to apply to be registered in an additional 
class of credit ratings; for an NRSRO to 
update public information required to 
be disclosed and kept accurate on the 
Form; and for an NRSRO to make an 
annual certification. Proposed 
instructions for the Form described how 
an applicant, and after registration, an 
NRSRO, should complete the Form in 
each of these circumstances. 

The Commission believes that having 
just one form (and one set of 
instructions) will reduce the burden on 
applicants, NRSROs, and Commission 
staff. For example, it will reduce the 
complexity of having different forms for 
the application, amendments, and 
annual certification. Using one form 
also will allow NRSROs to more quickly 
become familiar with the Form and its 
instructions, which will reduce the 
potential for making mistakes in 
completing the Form. It also will assist 
users of credit ratings in understanding 
the Form and public Exhibits and where 
to look on the Form for specific 
information. 

As discussed below, the Commission 
is adopting Form NRSRO with 
substantial modifications that address 
issues commenters raised and allow the 
Form to be used to furnish a notice of 
withdrawal of registration. Much of the 
information elicited in the Form is 
required to be submitted to the 
Commission pursuant to Section 
15E(a)(1)(B) of the Exchange Act.80 The 
Commission, under authority in Section 
15E(a)(1)(B)(x), is requiring certain 
additional information.81 The 
Commission believes this additional 
information elicited in the Form is 
necessary or appropriate in the public 

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82 15 U.S.C. 78o–7(a)(2)(C). 
83 15 U.S.C. 78o–7(d). 
84 15 U.S.C. 78o–7. 

85 See DBRS Letter. 
86 See Form BD—Uniform Application for Broker- 

Dealer Registration. 
87 See, e.g., letter dated March 12, 2007 from 

Vickie A. Tillman, Executive Vice President, 
Standard & Poors (‘‘S&P Letter’’); DBRS Letter; Fitch 
Letter; Moody’s Letter. 

88 See 15 U.S.C. 80b–2 for a similar definition of 
separately identifiable departments or divisions of 
banks. 

89 15 U.S.C. 78o–7. 

interest or for the protection of investors 
because, as discussed below, it will: (1) 
Assist the Commission in making the 
findings required in Section 15E(a)(2)(C) 
of the Exchange Act with respect to 
whether an applicant should be granted 
registration as an NRSRO; 82 (2) assist 
the Commission in making the findings 
required in Section 15E(d) of the 
Exchange with respect to whether the 
Commission should censure, place 
limitations on the activities, functions 
or operations of, suspend for a period 
not exceeding 12 months, or revoke the 
registration of an NRSRO; 83 (3) assist 
the Commission in reviewing whether 
an NRSRO is complying with Section 
15E of the Exchange Act 84 and the 
Commission’s rules thereunder; and (4) 
provide users of credit ratings with 
information that will assist them in 
comparing NRSROs and understanding 
how a given NRSRO conducts its 
activities. 

1. Checkboxes Indicating Nature of 
Submission 

The first entry an applicant or NRSRO 
must make on Form NRSRO is to 
indicate, by checking the appropriate 
box, the reason the form is being 
furnished: To apply for registration as 
an NRSRO; to apply to be registered in 
an additional class of credit ratings; to 
supplement either type of application 
while the application is pending; to 
update public information on the Form 
that has become materially inaccurate; 
to make the annual certification; and to 
provide notice of a withdrawal of 
registration. If the Form is furnished to 
supplement an application or update a 
registration, the NRSRO also must 
identify by number the specific items or 
Exhibits on the form that are being 
supplemented or amended. For 
example, if the NRSRO is furnishing an 
update to its registration because its 
address and organizational structure 
have changed, the NRSRO is required to 
enter ‘‘Item 1C’’ and ‘‘Exhibit 4’’ in the 
appropriate field on the Form. The 
Form, as proposed, required a brief 
description of the nature of the 
amendment. This requirement has been 
eliminated to simplify the process of 
completing the Form. 

The Commission also has added two 
checkboxes that were not on the 
proposed version of the Form. The first 
new checkbox—‘‘Application 
Supplement’’—is for when a credit 
rating agency applying for registration 
as an NRSRO or an NRSRO applying to 
be registered in an additional class of 

credit ratings must furnish an 
amendment to its application because 
information submitted in the 
application is or has become materially 
inaccurate. As proposed, an NRSRO 
would have checked the more generic 
‘‘Amendment’’ checkbox. The 
Commission added a separate checkbox 
to distinguish amendments relating to a 
pending application from other 
amendments, which will make the 
reason for the furnishing of the Form 
more transparent. 

Second, the Commission added a 
checkbox to indicate when the Form is 
being furnished to withdraw a 
registration in light of the change to 
Rule 17g–1 requiring the notice of 
withdrawal to be furnished on Form 
NRSRO. 

2. Item 1 (Identifying Information) 
As adopted, Item 1 requires an 

applicant and NRSRO to enter on to 
Form NRSRO identifying information 
about itself and its contact person. The 
instructions for Form NRSRO provide 
that the individual listed as the contact 
person must be authorized to receive all 
communications and papers from the 
Commission and will be responsible for 
their dissemination within the NRSRO. 
One commenter suggested that Item 1 
require the telephone number, fax, and 
email address of the contact person.85 
The Commission elicits the telephone 
number for broker-dealer contact 
persons.86 The number of NRSROs will 
be substantially smaller than the 
number of registered broker-dealers. The 
Commission believes at this time it will 
be able to easily obtain the contact 
information for the contact person 
without the necessity of having the 
information disclosed on the Form. 

The instructions to Item 1 of Form 
NRSRO indicate that the name entered 
on Line A of Item 1 must be the 
‘‘person’’ that is applying for 
registration or registered as the NRSRO. 
The instructions further clarify through 
the definition of ‘‘person’’ that a 
separately identifiable department or 
division of a corporation or company 
may be registered as an NRSRO. This 
clarification had been made because 
certain credit rating agencies provide 
their credit rating services through 
operating divisions that may be a part of 
a larger legal entity or encompass 
several different legal entities located 
throughout the world.87 In an effort to 

more narrowly tailor the requirements 
for registration, the Commission 
believes it is appropriate in these 
circumstances to permit the operating 
division to register as the NRSRO as 
opposed to the larger legal entity that 
may engage in activities not intended to 
be regulated under the Rating Agency 
Act. Similarly, the Commission believes 
it is appropriate that the registered 
operating division include each separate 
legal entity that provides credit rating 
services, provided the operating 
division treats the credit ratings of the 
separate legal entities as its own and has 
global procedures, methodologies, 
policies, and controls that apply to the 
separate legal entities. 

The instructions to Form NRSRO now 
include a definition of ‘‘separately 
identifiable department or division’’ 
that is designed with these goals in 
mind.88 The first component of the 
definition is that the operating division 
must be a unit of a corporation or 
company that is under the direct 
supervision of an officer or officers 
designated by the board of directors of 
the corporation as responsible for the 
day-to-day conduct of the corporation’s 
credit rating activities for one or more 
affiliates, including the supervision of 
all employees engaged in the 
performance of such activities. The 
second component of the definition is 
that all of the records relating to the 
operating division’s credit rating 
activities must be separately created or 
maintained in or extractable from its 
own facilities or the facilities of the 
corporation, and such records must be 
maintained or otherwise accessible to 
permit independent examination for, 
and enforcement by, the Commission of 
Section 15E of the Exchange Act 89 and 
rules and regulations promulgated 
thereunder. 

In all other respects, Item 1 to Form 
NRSRO is being adopted substantially 
as proposed. 

3. Certification 

The applicant or NRSRO must have a 
duly authorized individual execute a 
certification that the information and 
statements furnished in the Form 
NRSRO are accurate in all significant 
respects. The Commission added the ‘‘in 
all significant respects’’ language to the 
certification in response to comments 
that the certification, as proposed, could 
have been construed to hold the 
certifying individual to an unrealistic 
standard of having to ensure the Form 

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33571 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

90 See Letter dated March 26, 2007 from Vickie A. 
Tillman, Executive Vice President, Standard & 
Poors (‘‘S&P 2nd Letter’’); Moody’s Letter. 

91 See DBRS Letter; Fitch Letter. 
92 15 U.S.C. 78o–7. 

93 15 U.S.C. 78o–7(j). 
94 15 U.S.C. 78o–7(a)(3). 
95 Id. 

96 See, e.g., A.M. Best Letter. 
97 See letter dated March 8, 2007 from Majorie E. 

Gross (‘‘Gross Letter’’). 

did not include even trivial 
inaccuracies.90 The additional language 
is intended to allay these concerns. In 
light of this new language, the 
instructions for the Form now clarify 
that the Chief Executive Officer or the 
President of the applicant or NRSRO, or 
an individual with similar 
responsibilities, must execute the 
certification. This is designed to ensure 
that the person executing the 
certification has responsibilities that 
will make the person aware of the basis 
for the information being provided in 
the form. 

In all other respects, the language of 
the certification is being adopted 
substantially as proposed. 

4. Item 2 (Legal Status, Place of 
Formation, Fiscal Year End) 

As adopted, Item 2 requires an 
applicant and NRSRO to enter on to 
Form NRSRO information about its legal 
status (for example, corporation or 
partnership), the place and date of its 
formation, and its fiscal year end. The 
information with respect to the fiscal 
year end of the applicant or NRSRO is 
relevant because Form NRSRO requires 
applicants to submit audited financial 
statements with the application and 
Rule 17g–3 requires NRSROs to 
annually furnish the Commission with 
audited financial statements covering 
the previous fiscal year. The 
Commission did not receive any 
comments on this provision and is 
adopting it substantially as proposed. 

5. Item 3 (Credit Rating Affiliates) 
As discussed above, commenters with 

global operations stated that a credit 
rating agency with separate legal entities 
in different countries should be able to 
include them in a single NRSRO 
registration.91 The Commission agrees 
that permitting a single registration is 
appropriate in that it will lessen the 
burden of having a parent company 
register multiple legal entities that make 
up the parent company’s credit rating 
division. Consequently, an applicant 
with affiliates that would be, or an 
NRSRO with affiliates that are, a part of 
its registered separately identifiable 
department or division must identify 
and provide the address of each such 
affiliate. The instructions to Form 
NRSRO clarify that any credit rating 
issued by a credit rating affiliate will be 
considered a credit rating issued by the 
NRSRO for purposes of Section 15E of 
the Exchange Act 92 and the regulations 

thereunder. For example, the provisions 
in Rule 17g–5 with respect to issuing or 
maintaining credit ratings while having 
certain conflicts of interest will apply. 

The instructions also provide that an 
applicant and NRSRO in completing 
Form NRSRO must incorporate 
information about the credit ratings, 
methodologies, procedures, policies, 
financial condition, results of 
operations, and organizational structure 
of each credit rating affiliate identified 
in Item 3 in the other items and 
Exhibits. For example, the description 
of the procedures and methodologies for 
determining credit ratings in Exhibit 2 
must include the procedures and 
methodologies used by the credit rating 
affiliates. 

For these reasons, the Commission is 
adopting Item 3 to Form NRSRO as 
described above. 

6. Item 4 (Compliance Officer) 
As adopted, Item 4 requires an 

applicant and NRSRO to provide the 
name and address of its designated 
compliance officer required under 
Section 15E(j) of the Exchange Act.93 
This person is responsible for 
administering the policies and 
procedures of the credit rating agency to 
prevent the misuse of nonpublic 
information, to manage conflicts of 
interest, and to ensure compliance with 
the securities laws and the rules and 
regulations under those laws. The 
Commission did not receive any 
comments on this provision and is 
adopting it substantially as proposed. 

7. Item 5 (Method of Making Form and 
Exhibits Publicly Available) 

As adopted, Item 5 requires an 
applicant and NRSRO to describe how 
it will make, or makes, its current Form 
NRSRO and Exhibits 1 through 9 
publicly available pursuant to Section 
15E(a)(3) of the Exchange Act 94 and 
Rule 17g–1(i) thereunder. As discussed 
above, paragraph (i) of Rule 17g–1 is 
being adopted under Section 15E(a)(3) 
of the Exchange Act, which provides 
that the Commission shall, by rule, 
require an NRSRO, upon the granting of 
its registration, to make the information 
submitted to the Commission in the 
initial application, amendments, or 
annual certifications publicly available 
on the NRSRO’s Web site or through 
another comparable, readily accessible 
means.95 As discussed above, paragraph 
(i) of Rule 17g–1 requires an NRSRO to 
make its current Form NRSRO and 
Exhibits 1 through 9 publicly available 

within 10 business days after the date of 
the Commission order granting an initial 
application and an application to be 
registered in an additional class of 
credit ratings and within 10 business 
days after furnishing the Commission 
with an amendment on Form NRSRO 
(including an annual certification and 
withdrawal of registration). This 
information elicited in Item 5 will assist 
the Commission in reviewing whether 
the NRSRO is complying with this 
requirement and assist the public in 
locating the information. 

The Commission did not receive any 
comments on this provision and is 
adopting it substantially as proposed. 

8. Item 6 (Classes of Credit Ratings for 
Which Registration Is Sought and QIB 
Certifications) 

An applicant for registration as an 
NRSRO or an NRSRO applying to add 
another class of credit ratings to its 
registration must complete Item 6 of 
Form NRSRO. This item elicits 
information about the classes of credit 
ratings for which the applicant is 
applying to be registered. It also requires 
the applicant to attach the requisite 
number of QIB certifications (two for 
each class of credit rating for which 
registration is sought and at least 10 
with an initial application). 

Item 6 elicits the approximate number 
of credit ratings issued in each class as 
of the application date. Commenters 
objected to the requirement to provide 
the number of credit ratings in a 
particular class because it could make it 
more difficult for new entrants to obtain 
business.96 The Commission believes 
that users of credit ratings will find this 
information useful in understanding an 
NRSRO. For example, it will provide 
information as to how broad an 
NRSRO’s coverage is with respect to 
issuers and obligors within a particular 
class of credit ratings. 

Item 6 also elicits the date the 
applicant first began issuing credit 
ratings in that class on a continuous 
basis without interruption. The Form, as 
proposed, required the applicant to 
provide the number of years it has been 
issuing credit ratings on a continuous 
basis. One commenter suggested that an 
NRSRO be required to provide the date 
of first issuance, instead of the number 
of years, to avoid the necessity of having 
to frequently update the information.97 
The Commission agrees with the 
commenter that this will make the 
information submitted on the Form less 
subject to change and reduce the 

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33572 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

98 Because Item 7, discussed below, will not be 
filled out when the NRSRO applies for registration, 
it will remain blank for a period of time between 
the granting of an initial registration and the time 
when the NRSRO furnishes a new Form NRSRO 
either as an amendment or annual certification. 
Item 6, however, will have been filled out as part 
of the application for registration. This item 
requires the same information as Item 7. Therefore, 
users of credit ratings will have the access to the 
information through Item 6 until the NRSRO 
furnishes an annual certification. Thereafter, the 
information will be located in Item 7 and updated 
annually with each new annual certification. 

99 Section 3(a)(61)(A) of the Exchange Act (15 
U.S.C. 78c(a)(61)(A)). 

100 See letter dated March 12, 2007 from Cate 
Long, Multiple Markets (‘‘MM Letter’’); letter dated 
March 12, 2007 from Lawrence J. White, Professor 
of Economics, Stern School of Business (‘‘White 
Letter’’); Letter dated March 12, 2007 from Alex J. 
Pollack, Resident Fellow, American Enterprise 
Institute (‘‘AEI Letter’’); Gross Letter. 

101 See Gross Letter. 
102 15 U.S.C. 78o–7(a)(1)(B)(ix). 
103 15 U.S.C. 78o–7(a)(3). 
104 An applicant can request that this information 

be kept confidential to the extent permitted by law. 
See 17 CFR 200.80 and 17 CFR 200.83. 

105 See 15 U.S.C. 78o–7(a)(1)(C)(i), (ii) and (iii), 
respectively. 

106 15 U.S.C. 78c(a)(64). 

107 15 U.S.C. 78o–7(a)(1)(C)(iv). 
108 See Report of the Senate Committee on 

Banking, Housing, and Urban Affairs to Accompany 
S. 3850, Credit Rating Agency Reform Act of 2006, 
S. Report No. 109–326, 109th Cong., 2d Sess. (Sept. 
6, 2006) (‘‘Senate Report’’). The Senate Report 
further explained that a QIB whose employees 
subscribe to or regularly receive the ratings but do 
not read them or, if they read them, rarely or never 
consider them in making their investment decisions 
would not be deemed to have ‘used’ the ratings.’’ 

109 Id (emphasis added). 

requirement to, and burden of, updating 
the Form. Consequently, the 
Commission has modified Items 6 and 
7 accordingly. The information on how 
long an NRSRO has issued credit ratings 
in a particular class will assist users of 
credit ratings in assessing the NRSRO’s 
level of experience.98 Section 
15E(a)(1)(C) of the Exchange Act also 
requires that the QIB certifications 
include a representation that the QIB 
has used the credit ratings of the 
applicant in the class of credit ratings 
for at least the three years immediately 
preceding the date of the application. 
The instructions provide that an 
applicant cannot tack on periods when 
a credit rating affiliate issued credit 
ratings in the particular class if the 
entity was not an affiliate during that 
time period. This provision is designed 
to avoid the submission of misleading 
information by providing that only 
credit ratings issued by, or on behalf of, 
the NRSRO are used in determining the 
start date. 

Item 6 also elicits a brief description 
of how the credit rating agency issues its 
credit ratings on the Internet or through 
another readily accessible means, for 
free or for a reasonable fee. The 
Commission will use this information to 
review whether the applicant is in the 
business of issuing credit ratings on the 
Internet or through another readily 
accessible means, for free or for a 
reasonable fee.99 The Rating Agency Act 
does not define ‘‘readily accessible.’’ 
The information about how an applicant 
issues credit ratings on the Internet or 
through another readily accessible 
means, for free or for a reasonable fee 
also will inform the public about where 
and, if applicable, the cost to access an 
NRSRO’s credit ratings. 

Further, the Rating Agency Act does 
not define ‘‘reasonable fee.’’ In the 
proposing release, the Commission 
sought comment on whether it should 
define ‘‘reasonable fee.’’ In response, 
four commenters stated that the 
Commission should not in any way 
regulate the fees an NRSRO charges for 

its credit ratings.100 The Commission 
has determined not to define 
‘‘reasonable fee’’ at this time in order to 
gain experience on the issue. Item 6 is 
designed to assist the Commission in 
gaining this experience. 

One commenter stated that Item 6, as 
proposed, does not elicit information 
that would be helpful in understanding 
the fees charged for obtaining or 
accessing credit ratings.101 The 
Commission notes that, to the extent 
that several NRSROs indicate that they 
make their credit ratings available for 
free, the Commission will have 
assurance that regulatory users have 
ready access to NRSRO credit ratings. 
However, the Commission believes the 
form should elicit more information 
about fees so that the information will 
be disclosed to users of credit ratings. 
This will improve price transparency, 
which may lead to greater competition. 
Accordingly, the instructions for Item 6 
and Item 7 now provide that an 
applicant that charges a fee for accessing 
its credit ratings must describe the fee 
or include a fee schedule in the form. 

Finally, Item 6 requires the applicant 
to provide the QIB certifications 
mandated pursuant to Section 
15E(a)(1)(B)(ix) of the Exchange Act.102 
Under this provision, an applicant must 
submit a minimum of ten QIB 
certifications. An NRSRO will not be 
required to make the QIB certifications 
publicly available pursuant to Section 
15E(a)(3) of the Exchange Act 103 and 
Rule 17g–1(i) thereunder or update 
them after registration.104 Sections 
15E(a)(1)(C)(i), (ii), and (iii) further 
provide, respectively, that: (1) The 
certifying QIB must not be affiliated 
with the applicant; (2) the certification 
may address more than one of the 
categories of obligors identified in the 
definition of NRSRO; and (3) at least 
two of the certifications must address 
each category of obligor.105 Section 
15E(a)(1)(C)(iv) provides that the QIB 
must state in the certification that it 
meets the definition of a ‘‘QIB’’ in 
Section 3(a)(64) of the Exchange Act 106 
and that the QIB has used the credit 

ratings of the applicant for at least three 
years immediately preceding the date of 
the application in the subject category 
or categories of obligors.107 The Senate 
report (‘‘Senate Report’’) accompanying 
the Rating Agency Act explained that 
the term ‘‘used’’ was intended to mean 
the QIB ‘‘seriously considered the 
ratings in some of [its] investment 
decisions.’’ 108 The Senate Report 
further explained that ‘‘a QIB whose 
analysts regularly read and consider [a 
credit rating agency’s] ratings in the 
course of making investment decisions 
would have ‘‘used’’ them under the 
meaning of the bill.’’ 109 The required 
representation for the QIB certification 
is that the QIB ‘‘has seriously 
considered the credit ratings of [the 
credit rating agency] in the course of 
making some of its investment decisions 
for at least the three years immediately 
preceding the date of this certification, 
in the following classes of credit 
ratings.’’ In addition, as a measure 
designed to ensure the impartiality of 
the QIB’s representation, the QIB must 
certify that it has not received 
compensation for providing the 
certification. 

The certification must be executed by 
a person duly authorized by the QIB to 
make the certification on behalf of the 
QIB. This is designed to ensure that the 
certification is that of the QIB and not 
an employee of the QIB who may have 
an interest (distinct from that of the 
QIB) in providing the certification to the 
applicant. The form of the certification 
now requires that the printed name and 
title of the person be provided under the 
signature. This will clarify the identity 
and level of responsibility of the person 
executing the certification. 

The Commission did not receive any 
comments on the form of the QIB 
certification and is adopting it 
substantially as proposed with the two 
modifications described above. 

Item 6 of proposed Form NRSRO also 
requires the applicant to indicate 
whether it is submitting the QIB 
certifications and, if so, how many 
certifications are being submitted or that 
the applicant is exempt from the 
requirement to provide the 
certifications. Under Section 
15E(a)(1)(D) of the Exchange Act, a 

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33573 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

110 15 U.S.C. 78o–7(a)(1)(D). 
111 15 U.S.C. 78o–7(a)(2)(C)(ii)(II). 

112 15 U.S.C. 78o–7(d). 
113 Id. 
114 15 U.S.C. 78o(b)(4)(A), (D), (E), (G) and (H). 
115 15 U.S.C. 78o(b)(4). 
116 15 U.S.C. 78o(b)(4)(C). 
117 15 U.S.C. 78o(b)(4)(B). 
118 15 U.S.C. 78o–7(d). 
119 Id. 
120 15 U.S.C. 78o–7(a)(3). 
121 An applicant can request that this information 

be kept confidential to the extent permitted by law. 
See 17 CFR 200.80 and 17 CFR 200.83. 

122 15 U.S.C. 78o–7(d). 
123 See S&P Letter; Moody’s Letter. 
124 15 U.S.C. 78o–7(a)(2)(C)(ii)(II). 
125 15 U.S.C. 78o–7(d). 
126 See R&I Letter. 
127 15 U.S.C. 78o–7(d). 
128 See A.M. Best Letter. 

credit rating agency is not required to 
submit the QIB certifications if it was 
identified as an NRSRO in a 
Commission staff no-action letter issued 
before August 2, 2006.110 

For these reasons, the Commission is 
adopting Item 6 with the modifications 
discussed above. 

9. Item 7 (Classes of Credit Ratings 
Covered by Current Registration) 

As adopted, Item 7 requires an 
NRSRO to provide information about 
the classes of credit ratings for which 
the NRSRO is currently registered, the 
approximate number of credit ratings 
issued in each class as of the previous 
calendar year end, and the date the 
NRSRO first issued credit ratings in that 
class on a continuous basis. The NRSRO 
also must provide information about 
how the NRSRO makes its credit ratings 
readily accessible. Item 7 has been 
modified from the proposed form to 
make the information provided in the 
item less subject to change, which will 
reduce the frequency of having to 
furnish updated information. 
Specifically, as discussed above, the 
number of years the NRSRO has issued 
credit ratings in a particular class is now 
indicated by having the NRSRO provide 
the date it first issued credit ratings in 
that class. As proposed, the NRSRO 
would have had to provide the number 
of years it had issued credit ratings in 
that class, which would constantly 
change with the advance of time. Also, 
the number of credit ratings issued in a 
particular class is now as of the end of 
the previous calendar year. Therefore, 
this information will change once a year 
and only be required to be updated on 
an annual basis. The instructions to the 
Form provide that this update can be 
made with the annual certification and 
within the 90-day time period for 
providing the annual certification. 

10. Item 8 (Potential Statutory 
Disqualifications) 

An applicant and NRSRO will be 
required to disclose, if applicable, if it 
or any person within its credit rating 
organization have been, or are, subject 
to certain legal judgments or orders, or 
regulatory findings. As explained in the 
proposing release, Section 
15E(a)(2)(C)(ii)(II) of the Exchange 
Act 111 directs the Commission to deny 
a credit rating agency’s application for 
registration as an NRSRO if the 
Commission finds that the applicant, if 
granted registration, would be subject to 
suspension or revocation of its 
registration under Section 15E(d) of the 

Exchange Act.112 Section 15E(d) of the 
Exchange Act 113 provides that the 
Commission, by order, shall censure, 
place limitations on the activities, 
functions, or operations of, suspend for 
a period not exceeding 12 months, or 
revoke the registration of an NRSRO, if 
the Commission finds that the NRSRO 
or a person associated with the NRSRO 
has committed or omitted any act, or is 
subject to an order or finding 
enumerated in Sections 15(b)(4)(A), (D), 
(E), (G), or (H) of the Exchange Act,114 
has been convicted of any offense 
specified in Section 15(b)(4)(B) of the 
Exchange Act,115 or is enjoined from 
any action, conduct, or practice 
specified in Section 15(b)(4)(C) of the 
Exchange Act.116 The Commission also 
can take these actions if the NRSRO or 
a person associated with the NRSRO has 
been convicted of any crime punishable 
by imprisonment for 1 or more years 
that is not described in Section 
15(b)(4)(B) of the Exchange Act 117 or a 
substantially equivalent crime in a 
foreign court of competent jurisdiction, 
or if a person associated with the 
NRSRO is subject to any order of the 
Commission barring or suspending the 
right of the person to be associated with 
an NRSRO.118 Item 8 of Form NRSRO 
requires an applicant or NRSRO to 
answer whether the applicant or the 
NRSRO or any person within their 
credit rating organizations, is subject to 
these acts, convictions, or orders 
described in Section 15E(d) of the 
Exchange Act.119 

If an applicant answers ‘‘yes’’ to a 
question, the credit rating agency is 
required to provide additional 
information on a Disclosure Reporting 
Page (DRP) NRSRO as set forth in the 
instructions for Form NRSRO. An 
NRSRO will not be required to make the 
disclosure reporting pages publicly 
available pursuant to Section 15E(a)(3) 
of the Exchange Act 120 and Rule 17g– 
1(i) thereunder.121 If an applicant 
answers ‘‘yes’’ to a question in Item 8, 
the Commission will use the disclosure 
reporting pages to evaluate whether the 
applicant’s registration could be granted 
in light of the disclosure. After 
registration, if an NRSRO answers ‘‘yes’’ 
to one of the questions, the Commission 

will use the disclosure reporting pages 
to evaluate pursuant to the process 
under Section 15E(d) of the Exchange 
Act whether it would be appropriate to 
issue an order censuring, placing 
limitations on the activities, functions, 
or operations of, suspending for a period 
not exceeding 12 months, or revoking 
the registration of the NRSRO.122 

Two commenters stated that Item 8, as 
proposed, was overly broad because, in 
asking about any person ‘‘associated’’ 
with the applicant and NRSRO, it 
reached employees in areas of a large 
conglomerate that performed functions 
wholly unrelated to credit rating 
services.123 The Commission notes that 
its authority under Sections 
15E(a)(2)(C)(ii)(II) 124 and 15E(d) 125 of 
the Exchange Act can be triggered by 
legal judgments and orders, and 
regulatory findings involving persons 
‘‘associated’’ with the applicant and 
NRSRO. In considering these comments, 
the Commission evaluated when a 
disclosure would be more likely to 
trigger Commission action. The 
Commission concluded that it would 
involve disclosures relating to the credit 
rating agency and the persons directly 
involved in providing or supporting 
credit rating services. Therefore, to 
lessen the burden on applicants and 
NRSROs, the Commission believes it is 
appropriate to narrow the scope of the 
disclosure requirement to ‘‘persons 
within the credit rating agency,’’ which 
the instructions define as the credit 
rating agency, any credit rating affiliates 
of the credit rating agency identified in 
Item 3, and any partner, officer, director, 
branch manager, or employee of the 
credit rating agency or credit rating 
affiliates (or any person occupying a 
similar status or performing similar 
functions). 

One commenter requested that the 
Commission clarify that the disclosures 
in Item 8 do not include disclosures 
relating to accusations or arrests.126 The 
Commission notes that the disclosures 
are triggered by the provisions of 
Section 15E(d) of the Exchange Act,127 
which refers to convictions (not arrests 
or accusations). A second commenter 
suggested that the disclosure item not 
include the name of the individual.128 
The Commission believes it has reduced 
this concern, in part, by narrowing the 
disclosure item to persons within the 
credit rating agency and by providing 

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33574 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

129 15 U.S.C. 78o–7(a)(3). 
130 An applicant can request that this information 

be kept confidential to the extent permitted by law. 
See 17 CFR 200.80 and 17 CFR 200.83. 

131 15 U.S.C. 78o–7(a)(1)(B)(i). 
132 The credit rating categories of a credit rating 

agency generally are represented by symbols, 
numbers or other designations that are used to 
distinguish the creditworthiness of the obligors, 
securities and money market instruments the credit 
rating agency rates. For example, some credit rating 
agencies use symbols such as AAA, AA, A, BBB, 
BB, B, CCC, and CC to distinguish the 
creditworthiness of corporate debt securities. AAA 
would be the highest rating and CC would be the 
lowest rating above the default or regulatory 
supervision of the issuer. 

133 See DBRS Letter. 
134 Section 15E(a)(1)(B)(x) of the Exchange Act 

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

135 17 CFR 240.15c3–1(c)(2)(vi)(F). 
136 Id. 
137 See letter dated March 12, 2007 from Richard 

M. Whiting, Executive Director and General 
Counsel, Financial Services Roundtable (‘‘FSR 
Letter’’); letter dated March 12, 2007 from Herwig 
M. Langohr, Professor, INSEAD Business School, 
Patricia T. Langohr, Professor, ESSEC Business 
School (‘‘Langohr Letter’’); letter dated March 22, 
2007 from George P. Miller, Executive Director, 
American Securitization Forum (‘‘ASF Letter’’); 
letter dated March 16, 2007 from Makoto Utsumi, 
President & CEO, Ratings & Investment Information 
(‘‘JCR 2nd Letter’’); ICI Letter; Gross Letter; R&I 
Letter; MM Letter; White Letter; DBRS Letter; A.M. 
Best Letter; S&P Letter; AEI Letter; Moody’s Letter. 

138 See Gross Letter; ICI Letter; JCR 2nd Letter. 

139 See, e.g., R&I Letter; A.M Best Letter; S&P 
Letter; Moody’s Letter; ASF Letter. 

140 15 U.S.C. 78o–7(a)(1)(B)(ii). 

that the disclosure reporting pages are 
not required to be made publicly 
available pursuant to Section 15E(a)(3) 
of the Exchange Act 129 and Rule 17g– 
1(i).130 The Commission believes the 
disclosure of the name of a person 
providing or supporting credit ratings 
services will be important as these 
persons may seek to associate with 
another NRSRO if they are terminated 
from or leave the reporting NRSRO. The 
Commission also notes that the events 
triggering an Item 8 disclosure generally 
are matters of public record (e.g., 
convictions, regulatory orders) and, 
consequently, there may be a reduced 
expectation of confidentiality. 

Otherwise, Item 8 is being adopted 
substantially as proposed. 

11. Exhibit 1 (Credit Ratings 
Performance Statistics) 

Section 15E(a)(1)(B)(i) of the 
Exchange Act requires that an 
application for registration as an NRSRO 
contain credit ratings performance 
measurement statistics over short-term, 
mid-term, and long-term periods (as 
applicable).131 An applicant and 
NRSRO will provide this information in 
Exhibit 1 to Form NRSRO. The 
Exchange Act does not otherwise define 
or identify the particular credit rating 
performance statistics to be provided 
with the application. Credit rating 
agencies typically generate statistical 
reports showing historical default and 
downgrade rates within each credit 
rating notch or grade.132 These types of 
statistics are important indicators of the 
performance of a credit rating agency in 
terms of its ability to assess the 
creditworthiness of issuers and obligors 
and, consequently, will be useful to 
users of credit ratings in evaluating an 
NRSRO. 

The instructions to Form NRSRO 
provide that an applicant and NRSRO 
must include in the Exhibit definitions 
of the credit ratings (i.e., an explanation 
of each category and notch) and 
explanations of the performance 
measurement statistics, including the 
metrics used to derive the statistics. One 

commenter requested that the 
Commission clarify the instruction with 
respect to explaining ‘‘the metrics used 
to derive the statistics.’’ 133 The intent is 
that the NRSRO explain in general terms 
how it calculates the default and 
downgrade rates. The Commission 
believes that requiring this information 
is necessary or appropriate in the public 
interest or for the protection of investors 
because it will assist users of credit 
ratings in understanding how the 
measurements were derived and in 
making comparisons with the 
measurement statistics of other 
NRSROs.134 

The definitions of the categories and 
notches will assist the Commission in 
assessing whether the NRSRO’s credit 
ratings, as a practical matter, can be 
used for certain Commission rules. For 
example, paragraph(c)(2)(vi)(F) of 
Exchange Act Rule 15c3–1 specifies 
lower haircuts for debt securities that 
are rated in one of the ‘‘four highest 
rating categories’’ of at least two 
NRSROs.135 This provision was 
designed based on the practice of many 
credit rating agencies to have at least 
eight categories for their debt securities 
with the top four commonly referred to 
as ‘‘investment grade.’’ If an NRSRO 
uses less than eight categories, the 
Commission will be required to evaluate 
whether, based on the NRSRO’s 
definitions, securities included in the 
top four categories would be suitable for 
the lower haircuts specified in 
paragraph(c)(2)(vi)(F) of Rule 15c3–1.136 

The Commission requested comment 
on whether the performance 
measurement statistics should use 
standardized inputs, time horizons, and 
metrics to allow for greater 
comparability. This request elicited 
numerous comments.137 Three 
commenters supported the use of 
standardized measures because it would 
make it easier to compare NRSROs.138 A 

number of commenters opposed the use 
of standardized measures for several 
reasons, including that such measures 
would be impractical because credit 
rating agencies use different 
methodologies to determine credit 
ratings and different definitions of 
default and that the use of such 
measures could interfere with the 
methodologies for determining credit 
ratings.139 In light of the varying 
approaches cited in the comments, the 
Commission is not prepared to prescribe 
standard metrics at this time. The 
Commission intends to continue to 
consider this issue to determine the 
feasibility, as well as the potential 
benefits and limitations, of devising 
measurements that would allow reliable 
comparisons of performance between 
NRSROs. As adopted, the Exhibit 
requires NRSROs to describe how they 
derive their statistics in sufficient detail 
to allow users of credit ratings to 
understand the measures. This will 
provide users with some basis to 
compare different NRSROs even if the 
statistics are not derived from similar 
measures. 

The Commission requested comment 
on whether other performance 
measurement statistics would be 
appropriate as an alternative, or in 
addition, to historical default and 
downgrade rates. For example, the 
Commission requested comment on 
whether Exhibit 1 should require 
measurement of the performance of a 
given credit rating by comparing or 
mapping it to the market value of the 
rated security or to extreme declines in 
the market value of the security after the 
rating. Although the Commission is not 
taking action in this regard at this time, 
the Commission intends to study these 
issues and consider possible future 
action. 

For these reasons, Exhibit 1 to Form 
NRSRO and the instructions for the 
Exhibit are being adopted substantially 
as proposed. 

12. Exhibit 2 (Procedures and 
Methodologies for Determining Credit 
Ratings) 

Section 15E(a)(1)(B)(ii) of the 
Exchange Act requires that an 
application for registration as an NRSRO 
contain information regarding the 
procedures and methodologies used by 
the credit rating agency to determine 
credit ratings.140 An applicant and 
NRSRO will provide this information in 
Exhibit 1 to Form NRSRO. The 
Exchange Act does not otherwise define 

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33575 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

141 See 15 U.S.C. 78a et seq. 
142 See particularly, Section 3(a)(61)(B) of the 

Exchange Act (15 U.S.C. 78c(a)(61)(B)). 
143 See Section 3(a)(61) of the Exchange Act 

defining the term ‘‘credit rating agency’’ (15 U.S.C. 
78c(a)(61)). 

144 See White Letter; DBRS Letter; A.M. Best 
Letter; Fitch Letter; Moody’s Letter. 

145 See, e.g., DBRS Letter; A.M. Best Letter; Fitch 
Letter; Moody’s Letter. 

146 Id. 
147 Id. 

148 See letter dated March 12, 2007 from James A. 
Kaitz, President & CEO, Association for Financial 
Professionals (‘‘AFP Letter’’) stating the importance 
of monitoring whether an NRSRO adheres to its 
stated procedures and methodologies for 
determining credit ratings. 

149 See A.M. Best Letter; Moody’s Letter. 

or identify the procedures and 
methodologies that must be provided 
under this section.141 However, the 
definition of ‘‘credit rating agency’’ in 
Section 3(a)(61) of the Exchange Act 
provides that a ‘‘credit rating agency’’ is 
an entity that, among other things, 
‘‘employ[s] either a quantitative or 
qualitative model, or both, to determine 
credit ratings.’’ 142 

Credit rating agencies may establish 
procedures and methodologies for 
determining credit ratings in the 
following areas: The determination of 
whether to initiate a credit rating; the 
use of public and non-public sources of 
information to perform credit rating 
analysis, including information and 
analysis provided by third-party 
vendors; the use of quantitative and 
qualitative models and metrics to 
determine credit ratings; the interaction 
with the management of a rated obligor 
or issuer of rated securities; the 
establishment of the structure and 
voting process of committees that 
review or approve credit ratings; the 
notification of rated obligors or issuers 
of rated securities about credit rating 
decisions and for appeals of final or 
pending credit rating decisions; the 
monitoring, reviewing, and updating of 
credit ratings; and the withdrawal, or 
suspension of the maintenance, of a 
credit rating. 

The list identifies areas where a credit 
rating agency may establish procedures 
and methodologies for determining 
credit ratings. The applicability of 
certain areas to a particular credit rating 
agency will depend on whether it uses 
subjective qualitative analysis, purely 
quantitative models, or a combination of 
both.143 Consequently, a credit rating 
agency might not establish a procedure 
or methodology in a given area if doing 
so would not be relevant to how the 
credit rating agency determines credit 
ratings. 

In addition, credit rating agencies that 
issue ‘‘unsolicited’’ credit ratings may 
establish procedures and methodologies 
in the areas described above that are 
unique for such ratings. Credit rating 
agencies that use a subscription fee 
based business model may only issue 
unsolicited ratings because that 
business model does not rely on fees 
charged issuers, obligors, and 
underwriters to determine specific 
credit ratings (issuers, obligors, and 
underwriters, however, may subscribe 
to receive the credit ratings of such 

credit rating agencies). The procedures 
and methodologies these credit rating 
agencies employ, in some respects, may 
be unique to this business model. 

Credit rating agencies that are paid by 
issuers, obligors, and underwriters to 
determine specific credit ratings 
sometimes also issue unsolicited credit 
ratings. This practice has led to 
concerns that unsolicited ratings may be 
used to coerce issuers and obligors into 
ultimately paying the credit rating 
agency to determine and maintain the 
credit rating. Consequently, credit rating 
agencies that rely on fees from issuers, 
obligors, and underwriters to determine 
specific credit ratings, but also issue 
unsolicited ratings, often establish 
procedures and methodologies for 
determining unsolicited credit ratings 
that are designed to address this 
concern and the fact that the issuer or 
obligor may not have participated in the 
determination of the credit rating (as is 
most often the case with a solicited 
credit rating). 

The Commission believes that the 
information about any procedures and 
methodologies established in the areas 
described above, including any with 
respect to unsolicited credit ratings, will 
be useful to users of credit ratings. The 
information will provide them with an 
understanding of the nature of the credit 
rating agency (i.e., a user of quantitative 
models, qualitative analysis, or a 
combination of both) and how the credit 
rating agency produces credit ratings. 
This will provide a basis for comparing 
NRSROs. 

Several commenters stated that the 
Exhibit should require that an applicant 
and NRSRO describe its procedures and 
methodologies rather than submit and 
disclose each actual procedure and 
methodology.144 These commenters 
pointed out that large credit rating 
agencies that issue multiple types of 
credit ratings generally have volumes of 
detailed procedures that credit analysts 
must follow in the course of 
determining a credit rating.145 They 
noted that disclosing all this 
information would be burdensome and 
could be difficult for users of credit 
ratings to parse.146 They also noted that 
some of the procedures and 
methodologies may involve the use of 
proprietary models.147 

The Commission agrees with these 
commenters that disclosing all the 
procedures could be burdensome and 

could result in an overload of 
information that would be less helpful 
to users of credit ratings. Therefore, the 
Commission has modified the 
instructions to require that the Exhibit 
contain a description of the procedures 
and methodologies (not the submission 
and disclosure of each actual procedure 
and methodology). The instructions 
provide that the description must be 
sufficiently detailed to provide users of 
credit ratings with an understanding of 
the processes the applicant or NRSRO 
employs to determine credit ratings. 

As discussed below, rather than have 
a credit rating agency submit its 
procedures and methodologies in 
Exhibit 2, the Commission is adopting a 
requirement in Rule 17g–2 that an 
NRSRO must document them internally. 
Moving this requirement from Exhibit 2 
to the recordkeeping rule is designed to 
reduce the burden on NRSROs, while 
making these procedures and 
methodologies available to Commission 
examination staff. These records are 
important to the Commission’s 
oversight. For example, Rule 17g–6 
prohibits, among other things, an 
NRSRO from issuing or modifying or 
threatening to issue or modify a credit 
rating contrary to the NRSRO’s 
established procedures and 
methodologies. The Commission’s 
ability to enforce this prohibition will 
depend on the Commission staff being 
able to access an NRSRO’s documented 
procedures and methodologies.148 

Two commenters also suggested 
changes to the Commission’s 
description of an ‘‘unsolicited credit 
rating’’ in the proposed instructions to 
Form NRSRO as being a credit rating 
that is not requested by the issuer or 
underwriter of the rated securities or the 
rated obligor.149 The commenters noted 
that issuers and obligors may consent to 
the issuance and participate in the 
determination of a credit rating even if 
they did not specifically request that the 
credit rating be issued. As discussed 
below, the Commission has eliminated 
the prohibition in Rule 17g–6 relating to 
unsolicited credit ratings, in part, 
because of difficulties with defining the 
term. Therefore, the Commission has 
removed the definition from the 
instructions to Exhibit 2. The 
Commission wants to gain a better 
understanding through its examination 
function of how credit rating agencies 
define ‘‘unsolicited credit ratings’’ and 

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33576 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

150 15 U.S.C. 78o–7(g)(1). 
151 15 U.S.C. 78a et seq. 
152 15 U.S.C. 78o–7(g)(2). 
153 15 U.S.C. 78o–7(g)(1). 
154 15 U.S.C. 78o–7(a)(1)(B)(iii). 
155 15 U.S.C. 78a et seq. 
156 15 U.S.C. 78o–7(g). 
157 See letter dated March 12, 2007 from Ayal 

Rosenthal (‘‘Rosenthal Letter’’); R&I Letter. 
158 See R&I Letter. 

159 See Rosenthal Letter. 
160 15 U.S.C. 78o–7(a)(3). 
161 15 U.S.C. 78o–7(a)(1)(B)(iv). 
162 Id. See also, 15 U.S.C. 78a et seq. 
163 See MM Letter. 

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

165 See R&I Letter. 
166 15 U.S.C. 78o–7(j). 
167 See Sections 15E(a)(2)(C) and 15E(d) of the 

Exchange Act (15 U.S.C. 78o–7(a)(2)(C) and (d)). 
168 See Section 15E(a)(1)(B)(x) of the Exchange 

Act (15 U.S.C. 78o–7(a)(1)(B)(x)). 
169 15 U.S.C. 78o–7(g) and (h). 
170 Section 15E(j) of the Exchange Act (15 U.S.C. 

78o–7(j)). 

the practices they employ with respect 
to these ratings. 

For these reasons, the Commission is 
adopting Exhibit 2 and the instructions 
for the Exhibit with the modifications 
described above. 

13. Exhibit 3 (Procedures To Prevent the 
Misuse of Material Non-Public 
Information) 

Section 15E(g)(1) of the Exchange 
Act 150 requires an NRSRO to establish, 
maintain, and enforce written policies 
and procedures to prevent the misuse of 
material, nonpublic information in 
violation of the Exchange Act.151 
Section 15E(g)(2) of the Exchange Act 
provides that the Commission shall 
adopt rules requiring an NRSRO to 
establish specific policies and 
procedures to prevent the misuse of 
material, nonpublic information.152 As 
discussed below, Rule 17g–4 requires an 
NRSRO’s policies and procedures 
established pursuant to Section 
15E(g)(1) of the Exchange Act 153 to 
include certain specific types of 
procedures. 

Section 15E(a)(1)(B)(iii) of the 
Exchange Act 154 requires that an 
application for registration as an NRSRO 
contain information regarding policies 
or procedures adopted and 
implemented by the credit rating agency 
to prevent the misuse of material, 
nonpublic information in violation of 
Exchange Act 155 provisions and rules. 
An applicant and NRSRO will provide 
this information in Exhibit 3 to Form 
NRSRO. Specifically, Exhibit 3 requires 
a copy of the policies and procedures to 
prevent the misuse of material, 
nonpublic information established 
pursuant to Section 15E(g) of the 
Exchange Act 156 and Rule 17g–4. 

The Commission received two 
comments on this Exhibit, as 
proposed.157 One commenter stated that 
the policies and procedures should not 
have to be made publicly available 
because they may contain proprietary 
information and disclosing them could 
hinder their effectiveness.158 The 
Commission agrees that disclosing 
certain components of these policies 
and procedures could make it easier for 
persons to circumvent them. Therefore, 
the Commission has modified the 
instructions to provide that the 

applicant or NRSRO is not required to 
submit in the Exhibit any specific 
information in the policies and 
procedures that is proprietary or would 
diminish the effectiveness of the 
policies and procedures if such 
information is disclosed. The other 
commenter stated that the procedures 
should be disclosed on the NRSRO’s 
Web site without further elaboration.159 
The Commission notes that Section 
15E(a)(3) of the Exchange Act 160 and 
Rule 17g–1 thereunder require an 
NRSRO to make its Form NRSRO and 
Exhibits 1 through 9 publicly available 
by posting them on its Web site, or 
through another comparable, readily 
accessible means. 

For these reasons, the Commission is 
adopting Exhibit 3 and the instructions 
for the Exhibit with the modifications 
described above. 

14. Exhibit 4 (Organizational 
Information) 

Section 15E(a)(1)(B)(iv) of the 
Exchange Act requires that an 
application for registration as an NRSRO 
contain information regarding the 
organizational structure of the 
applicant.161 An applicant and NRSRO 
will provide this information in Exhibit 
4 to Form NRSRO. The Exchange Act 
does not otherwise define or identify the 
specific type of organizational 
information that must be provided 
under Section 15E(a)(1)(B)(iv) of the 
Exchange Act.162 Companies typically 
create, as applicable, an organizational 
chart showing ultimate and sub-holding 
companies, subsidiaries, and material 
affiliates; an organizational chart 
showing divisions, departments, and 
business units within the entity; and an 
organizational chart showing the 
management structure and senior 
management reporting lines within the 
entity. Users of credit ratings will 
benefit from this information and, 
consequently, the Commission proposed 
that it be provided in this Exhibit. One 
commenter disagreed that users of credit 
ratings would find the information 
helpful in assessing or understanding 
the NRSRO.163 For the reasons 
discussed below, the Commission 
continues to believe these three charts 
will be valuable to users of credit ratings 
and the Commission. 

The first required organizational chart 
will show the credit rating agency’s 
ultimate and sub-holding companies, 
subsidiaries, and material affiliates, if 

applicable. This chart will reveal where 
potential conflicts of interest relating to 
the business activities of related 
companies might arise. Also, the fact 
that a credit rating agency has a holding 
company that potentially could provide 
financial support will be relevant to the 
Commission’s evaluation of whether an 
applicant or NRSRO has adequate 
financial resources as required under 
the Exchange Act.164 One commenter 
requested that the Commission define 
the term ‘‘material affiliate.’’165 At 
present, the Commission believes it is 
more appropriate to rely on the 
judgment of the credit rating agency to 
define its material affiliates, given that 
the size and complexity of NRSROs 
could vary widely. 

The second organizational chart will 
show the credit rating agency’s 
divisions, departments, and business 
units, if applicable. This information 
will assist users of credit ratings and the 
Commission in understanding where 
potential conflicts of interest relating to 
ancillary business activities might arise. 

The third organizational chart will 
show the credit rating agency’s 
management structure and senior 
management reporting lines and include 
in the chart its designated compliance 
officer under Section 15E(j) of the 
Exchange Act.166 The Commission will 
benefit from this chart as it will assist 
in evaluating whether an applicant and 
NRSRO has adequate managerial 
resources as required under the 
Exchange Act.167 Users of credit ratings 
will be able to use this information to 
compare the managerial resources of 
different NRSROs. 

Including the compliance officer in 
the chart will assist the Commission and 
users of credit ratings in understanding 
the degree of the compliance officer’s 
independence from the business 
managers.168 The compliance officer’s 
reporting lines are relevant in assessing 
the integrity of the credit rating process 
of a particular NRSRO, since the officer 
is responsible for administering the 
credit rating agency’s policies and 
procedures required by Sections 15E(g) 
and (h) of the Exchange Act 169 and for 
ensuring the NRSRO’s compliance with 
the securities laws and rules and 
regulations thereunder.170 In carrying 

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33577 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

171 15 U.S.C. 78o–7(a)(1)(B)(v). 
172 Id. 
173 See letter dated March 12, 2007 from John 

Grout, Policy and Technical Director, The 
Association of Corporate Treasurers (‘‘AST Letter’’); 
Gross Letter; DBRS Letter; S&P Letter; Moody’s 
Letter; Langohr Letter; JCR 2nd Letter. 

174 A number of these commenters endorsed a 
requirement that the credit rating agency disclose 
whether it has adopted a code of conduct consistent 
with the principles contained in the report: 
Statement of Principles Regarding the Activities of 
Credit Rating Agencies, Technical Committee, 
International Organization of Securities 
Commissions (‘‘IOSCO’’) (September 25, 2003). See 
also Code of Conduct Fundamentals for Credit 
Rating Agencies, Technical Committee of IOSCO 
(December 2004). 

175 See Moody’s Letter. 
176 15 U.S.C. 78o–7(a)(1)(B)(v). 
177 Id. 
178 15 U.S.C. 78o–7(a)(1)(B)(vi). 
179 Id, see also 15 U.S.C. 78a et seq. 

180 15 U.S.C. 78o–7(h). 
181 See Section 15E(a)(2)(C) Exchange Act (15 

U.S.C. 78o–7(a)(2)(C)). 
182 See, e.g., DBRS Letter; S&P Letter. 

out these responsibilities, a compliance 
officer will be required to review 
activities overseen by senior business 
managers. The ability of the compliance 
officer to objectively review an area can 
be impacted by whether the officer 
reported to the senior manager 
responsible for the area. Thus, the 
relative independence of the 
compliance officer will be relevant in 
assessing the NRSRO’s ability to ensure 
compliance with its policies and 
procedures. 

For these reasons, the Commission is 
adopting Exhibit 4 and the instructions 
for the Exhibit substantially as 
proposed. 

15. Exhibit 5 (Code of Ethics) 
Section 15E(a)(1)(B)(v) of the 

Exchange Act requires that an 
application for registration as an NRSRO 
disclose whether the applicant has a 
code of ethics in effect or an explanation 
of why the applicant has not established 
a code of ethics.171 Exhibit 5 of Form 
NRSRO elicits this information by 
requiring an applicant and NRSRO to 
attach a copy of any established code of 
ethics or an explanation of why it does 
not have a code of ethics. The 
Commission believes the requirement to 
include a copy of any established code 
of ethics in the Exhibit is necessary or 
appropriate in the public interest or for 
the protection of investors. A statement 
that an NRSRO has a code of ethics but 
no further disclosure would not be 
particularly useful to users of credit 
ratings. They would not be able to 
review the code of ethics and use it as 
a means of comparing different 
NRSROs. 

The Exchange Act does not otherwise 
define or identify the ‘‘code of ethics’’ 
that should be provided under Section 
15E(a)(1)(B)(v).172 The Commission 
believes each credit rating agency must 
have the flexibility to establish a code 
of ethics appropriate for its business 
model and organizational structure and, 
consequently, the Exhibit does not 
prescribe any specific elements that 
must be in the code of ethics, if any, 
furnished in this Exhibit. 

The Commission received several 
comments on this Exhibit.173 Most 
addressed whether the Exhibit also 
should require the credit rating agency 
to disclose whether it complies with 
international principles and codes of 
conduct related to credit rating 

agencies.174 One commenter suggested 
that the Exhibit not refer to a code of 
‘‘ethics’’ but rather to a code of 
‘‘conduct.’’175 Another commenter 
requested that the Exhibit not require 
the credit rating agency to ‘‘certify’’ that 
it is complying with international 
principles and codes of conduct because 
some principles permit an entity to 
comply or explain. 

The Commission reiterates that 
Exhibit 5 does not prescribe any 
requirements that must be in an 
NRSRO’s code of ethics and that Section 
15E(a)(1)(B)(v) of the Exchange Act does 
not require an NRSRO to have a code of 
ethics.176 An applicant or NRSRO can 
submit a statement of why it does not 
have a code of ethics.177 The 
Commission believes that the Exhibit 
should not require the inclusion of any 
particular type of code of conduct. It 
could be the case that the code of ethics 
provided by an applicant or NRSRO is 
part of a broader code of conduct. For 
the foregoing reasons, the Commission 
is adopting Exhibit 5 substantially as 
proposed. 

16. Exhibit 6 (Conflicts of Interest) 

Section 15E(a)(1)(B)(vi) of the 
Exchange Act requires that an 
application for registration as an NRSRO 
contain information regarding any 
conflict of interest relating to the 
issuance of credit ratings by the 
applicant and NRSRO.178 The Exchange 
Act does not otherwise define or 
identify the types of conflicts of interest 
that should be disclosed under Section 
15E(a)(1)(B)(vi) of the Exchange Act.179 
Exhibit 6, as proposed, would have 
required an applicant and NRSRO to 
describe in general terms each type of 
conflict that arises, or may arise, from 
its business model and credit rating 
activities. Thus, if an NRSRO receives 
payment from issuers to rate their 
securities, the NRSRO would have been 
required to disclose that fact. It would 
not have had to make a disclosure each 
time it received payment from an issuer. 
The purpose of the proposed disclosure 
was to alert users of credit ratings to the 

NRSRO’s business model (subscriber 
fee-based, issuer fee-based, or a 
combination of both), and to potential 
conflicts that arise from the business 
model. 

The Commission continues to believe 
that disclosing the types of conflicts that 
arise from an NRSRO’s business model 
will assist the Commission in evaluating 
whether an applicant has sufficient 
financial and managerial resources to 
comply with the procedures for 
managing conflicts of interest required 
under Section 15E(h) of the Exchange 
Act,180 given the types of conflicts of 
interest identified by the applicant.181 
The information also will be useful to 
users of credit ratings in assessing an 
NRSRO by, for example, comparing the 
types of conflicts disclosed by the entity 
in Exhibit 6 with the procedures for 
managing conflicts of interest disclosed 
by the entity in Exhibit 7. 

Exhibit 6 of Form NRSRO, as adopted, 
requires an applicant and NRSRO to 
provide a list describing in general 
terms the types of conflicts of interest 
that arise from its business activities. 
The instructions to the Exhibit have 
been modified to include a list of 10 
different generic conflicts of interest 
that may apply to a credit rating agency 
based on its business model and 
activities. These conflicts were included 
in the proposed instructions as 
examples of conflicts. These are the 
types of conflicts that generally arise 
from the business of issuing credit 
ratings depending on the business 
model of the credit rating agency. The 
instructions further provide that the 
credit rating agency can use the 
descriptions provided in the 
instructions to identify an applicable 
conflict of interest and is not required 
to provide any further information. 
Thus, the credit rating agency can 
review each item on the list and 
determine whether it describes an 
applicable conflict. This modification is 
intended to make it simpler for the 
credit rating agency to create the Exhibit 
since it may rely on the language in the 
instructions to identify a conflict. A 
credit rating agency can choose to 
provide its own description of the 
conflict or further explanation to one of 
the descriptions in the instructions. 

Several commenters raised concerns 
with the Commission’s identification as 
a potential conflict the fact that a 
subscriber may use the entity’s credit 
ratings for regulatory purposes.182 They 

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183 Id. 
184 See DBRS Letter. 
185 15 U.S.C. 78o–7(h)(2)(D). 186 15 U.S.C. 77b(a)(11). 

187 15 U.S.C. 78o–7(h). 
188 See Section 15E(a)(1)(B)(x) of the Exchange 

Act (15 U.S.C. 78o–7(a)(1)(B)(x)). 
189 15 U.S.C. 78o–7(h). 
190 Id. 
191 See R&I Letter. 

argued that it would be impractical to 
determine how subscribers might be 
using their credit ratings.183 The 
Commission did not intend to require 
NRSROs to actively monitor how their 
subscribers were using their credit 
ratings. Rather, the intent is to require 
NRSROs to disclose that subscribers, 
while they do not pay to have a credit 
rating issued, may have an interest in a 
specific credit rating. Therefore, the fact 
that they compensate the NRSRO could 
give rise to a conflict of interest. The 
instructions now describe the conflict as 
the fact that subscribers may use the 
credit ratings for regulatory purposes. 
This means that any credit rating agency 
that charges subscribers to access its 
credit ratings will be required to 
identify this conflict. The credit rating 
agency is not required to determine 
whether, or how, the subscribers are 
using the credit ratings to comply with 
statutes and regulations. The purpose of 
the disclosure is to alert users of credit 
ratings to the fact that the NRSRO’s 
business model includes charging 
subscribers to access its credit ratings 
and that a subscriber may have an 
interest in a particular credit rating. For 
similar reasons, the Commission 
eliminated a provision in the 
instructions requiring the identification 
of associated persons that use credit 
ratings for regulatory purposes as this 
would have required an applicant and 
NRSRO to monitor how another legal 
entity was using its credit ratings. 

A commenter noted that subscribers 
who manage investment portfolios also 
may have an interest in a particular 
credit rating.184 For example, such a 
subscriber may be limited to investing 
in debt securities that have investment 
grade credit ratings and, consequently, 
would be required to sell, perhaps at a 
loss, a debt security that is downgraded 
below investment grade. The 
Commission believes that, similar to 
regulatory users, this type of subscriber 
could raise a potential conflict of 
interest. Therefore, this type of conflict 
is specifically identified in the 
instructions to the Exhibit. 

The instructions to the Exhibit, as 
proposed, also required an NRSRO to 
identify a person associated with the 
NRSRO that underwrites securities or 
money market instruments that are 
subject to a credit rating of the NRSRO. 
This type of conflict is identified in 
Section 15E(h)(2)(D) of the Exchange 
Act.185 The concerns raised by 
commenters with respect to monitoring 
how subscribers use their credit ratings 

also apply in this context. For example, 
the provision, as proposed, could be 
interpreted to require an NRSRO to 
monitor whether any person associated 
with the NRSRO is an ‘‘underwriter’’ as 
that term is defined in Section 2(a)(11) 
of the Securities Act of 1933.186 The 
Commission believes this could impose 
a very difficult compliance standard in 
that it would involve continuous 
monitoring of the securities trading 
activities of associated persons and legal 
judgments as to whether they were 
acting as ‘‘underwriters’’ at any given 
moment. 

At the same time, the Commission 
believes that where there is a potential 
affiliation between an NRSRO and a 
securities underwriter that it is 
necessary or appropriate in the public 
interest or for the protection of investors 
to require it to be disclosed in this 
Exhibit. Specifically, an affiliation 
between an NRSRO and a broker or 
dealer that is in the business of 
underwriting securities would raise 
concerns that the NRSRO might be 
influenced by the affiliation to issue 
favorable credit ratings for these 
securities. The Commission further 
believes that disclosing this type of 
affiliation does not present the concerns 
discussed above since most persons 
associated with an NRSRO likely are not 
broker-dealers in the business of 
underwriting securities. Therefore, the 
NRSRO should be able to identify those 
associated persons. Further, the 
requirement to identify these persons is 
based on being affiliated with such an 
underwriter that may underwrite 
securities rated by the NRSRO. Thus, 
the NRSRO will not need to actively 
monitor whether it currently has rated 
such securities and update the Exhibit 
each time this changes. Consequently, 
the requirement to identify persons 
associated with the NRSRO that 
underwrite securities rated by the 
NRSRO has been narrowed to a 
requirement to identify any person 
associated with the NRSRO that is a 
broker or dealer in the business of 
underwriting securities or money 
market instruments. 

Finally, the Commission notes that 
the Exhibit contains a catchall provision 
requiring the disclosure of any other 
material conflict of interest. 
Consequently, the additional conflict 
added to the instructions is expected to 
reduce the potential conflicts that must 
be disclosed under the catchall. With 
respect to the catchall, the instructions 
note that a ‘‘material’’ type of conflict 
will include one that the NRSRO has 

established specific policies and 
procedures to address. 

For these reasons, the Commission is 
adopting Exhibit 6 and the instructions 
for the Exhibit with the modifications 
described above. 

17. Exhibit 7 (Procedures To Manage 
Conflicts) 

An applicant or NRSRO will be 
required to furnish in Exhibit 7 a copy 
of the written policies and procedures it 
establishes, maintains, and enforces to 
address and manage conflicts of interest 
pursuant to Section 15E(h) of the 
Exchange Act.187 Requiring inclusion of 
these policies and procedures in the 
Form is necessary or appropriate in the 
public interest or for the protection of 
investors.188 First, their disclosure will 
assist the Commission in monitoring 
whether an NRSRO is complying with 
Section 15E(h) of the Exchange Act.189 
Second, their disclosure will assist the 
Commission in evaluating whether an 
applicant or NRSRO has adequate 
financial and managerial resources to 
materially comply with Section 15E(h) 
of the Exchange Act.190 Third, their 
disclosure will allow users of credit 
ratings to compare an NRSRO’s policies 
and procedures for managing conflicts 
of interest with the types of conflicts 
disclosed in Exhibit 7. 

One commenter stated that these 
policies and procedures should not have 
to be made publicly available because 
they may contain proprietary 
information and disclosing them could 
hinder their effectiveness.191 As with 
the Exhibit 3 policies and procedures, 
the Commission has modified the 
instructions for this Exhibit to provide 
that the applicant or NRSRO is not 
required to submit in the Exhibit any 
specific information in the policies and 
procedures that is proprietary or would 
diminish the effectiveness of the 
policies and procedures if such 
information were disclosed. 

For these reasons, the Commission is 
adopting Exhibit 7 and the instructions 
for the Exhibit with the modification 
described above. 

18. Exhibit 8 (Credit Analyst 
Information) 

Exhibit 8, as proposed, would have 
required an applicant and NRSRO to 
provide certain background information 
(e.g., employment history and 
education) with respect to each credit 
analyst and credit analyst supervisor. 

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

193 See letter dated May 3, 2007 from Barron H. 
Putnam, Ph.D, Owner and Advisor, LACE Financial 
Corporation (‘‘LACE Letter’’); JCR Letter; R&I Letter; 
DBRS Letter; A.M. Best Letter; Fitch Letter; S&P 
Letter; AEI Letter; Moody’s Letter. 

194 See, e.g., DBRS Letter; A.M. Best Letter; Fitch 
Letter; S&P Letter; Moody’s Letter. 

195 15 U.S.C. 78o–7(j). 
196 See Sections 15E(a)(2)(C) and (d) of the 

Exchange Act (15 U.S.C. 78o–7(a)(2)(C) and (d)). 

197 See, e.g., R&I Letter; DBRS Letter; A.M. Best 
Letter; Fitch Letter; S&P Letter; Moody’s Letter. 

198 An applicant can request that the Commission 
keep this information confidential to the extent 
permitted by law. See 17 CFR 200.80 and 17 CFR 
200.83. 

199 15 U.S.C. 78o–7(a)(1)(B)(viii). 
200 15 U.S.C. 78o–7(a)(3). 
201 An applicant can request that this information 

be kept confidential to the extent permitted by law. 
See 17 CFR 200.80 and 17 CFR 200.83. 

Consistent with its reasons for 
proposing this request, the Commission 
believes that the ability of a credit rating 
agency to assess the creditworthiness of 
an issuer and obligor depends on the 
competence of the personnel 
responsible for determining the entity’s 
credit ratings. Further, the Commission 
believes that information about the 
responsibilities, experience, and 
employment history of the credit 
analysts and supervisors is necessary or 
appropriate in the public interest or for 
the protection of investors. The 
information will assist users of credit 
ratings in assessing the competence of 
an NRSRO’s credit analysts and, 
thereby, provide a means for users to 
compare NRSROs. This information also 
will assist the Commission in evaluating 
whether the applicant has adequate 
managerial resources to consistently 
produce credit ratings with integrity and 
to materially comply with its 
procedures and methodologies.192 

The Commission received numerous 
comments on Exhibit 8 stating that the 
requirement to provide information on 
each credit analyst and credit analyst 
supervisor was unduly burdensome and 
unnecessary.193 Several commenters 
suggested, as an alternative, that the 
Exhibit require general information 
about the education, qualifications, and 
number of the credit analysts and their 
supervisors.194 After considering the 
comments and the potential burden 
associated with the proposed 
requirement, the Commission has 
modified the Exhibit to only require 
aggregate information about these 
employees. Consequently, the Exhibit, 
as adopted, requires the following 
information: 

• The total number of credit analysts. 
• The total number of credit analyst 

supervisors. 
• A general description of the 

minimum required qualifications of the 
credit analysts, including education 
level and work experience (if 
applicable, distinguish between junior, 
mid, and senior level credit analysts). 

• A general description of the 
minimum required qualifications of the 
credit analyst supervisors, including 
education level and work experience. 

The information about the total 
number of credit analysts and their 
supervisors will provide the 

Commission and users of credit ratings 
with an understanding of the human 
resources the credit rating agency 
devotes to determining credit ratings. 
This will assist the Commission in 
assessing the managerial resources of an 
applicant and NRSRO. The information 
about the qualifications of the credit 
analysts and their supervisors will be 
useful to users of credit ratings in 
assessing the competency of an NRSRO. 
The Commission believes this 
modification strikes an appropriate 
balance between reducing burden and 
requiring necessary information. 
Nonetheless, the Commission intends to 
monitor whether this aggregate 
approach to the credit analyst 
information is sufficient to apprise users 
of credit ratings of the qualifications of 
a given NRSRO’s credit analysts. 

For these reasons, the Commission is 
adopting Exhibit 8 and the instructions 
for the Exhibit with the modifications 
described above. 

19. Exhibit 9 (Designated Compliance 
Officer) 

As adopted, Exhibit 9 requires an 
applicant and NRSRO to provide certain 
background information on the entity’s 
designated compliance officer. Section 
15E(j) of the Exchange Act requires 
every NRSRO to designate an individual 
responsible for administering the 
policies and procedures of the credit 
rating agency to prevent the misuse of 
nonpublic information, to manage 
conflicts of interest, and to ensure 
compliance with the securities laws and 
the rules and regulations under those 
laws.195 The ability of the compliance 
officer to carry out these statutorily 
mandated responsibilities will depend, 
in part, on the officer’s experience and 
qualifications. 

The Commission continues to believe 
that requiring information about the 
experience and employment history of 
the designated compliance officer is 
necessary or appropriate in the public 
interest or for the protection of 
investors. It will assist the Commission 
in evaluating whether the applicant has 
adequate managerial resources to 
consistently produce credit ratings with 
integrity and to materially comply with 
its procedures and methodologies.196 It 
also will be useful to users of credit 
ratings because it would provide 
information regarding the resources an 
NRSRO devotes to ensuring, among 
other things, that credit ratings are 
determined in accordance with the 

procedures and methodologies the 
NRSRO makes public in Exhibit 2. 

The Exhibit, as proposed, also 
required information about the 
compliance personnel responsible for 
assisting the compliance officer. Several 
commenters objected to this aspect of 
the Exhibit as being unduly 
burdensome, unnecessary, and 
intrusive.197 After considering the 
comments and the potential burden 
associated with the proposed 
requirement, the Commission has 
modified the Exhibit to eliminate the 
requirement to provide information 
about the persons that assist the 
compliance officer. As with the 
modifications to Exhibit 8, the 
Commission believes this modification 
to Exhibit 9 strikes an appropriate 
balance between reducing burden and 
requiring necessary information. 
Nonetheless, the Commission intends to 
monitor whether information about the 
designated compliance officer alone is 
sufficient to apprise users of credit 
ratings of how this statutorily required 
compliance function is being addressed 
by a given NRSRO. 

For these reasons, the Commission is 
adopting Exhibit 9 and the instructions 
for the Exhibit with the modifications 
described above. 

20. Exhibit 10 (List of Large Users of 
Credit Rating Services) 

Section 15E(a)(1)(B)(viii) of the 
Exchange Act requires that an 
application for registration as an NRSRO 
include, on a confidential basis,198 a list 
of the 20 largest issuers and subscribers 
that use the credit rating services 
provided by the credit rating agency by 
amount of net revenue received by the 
credit rating agency in the fiscal year 
immediately preceding the date of 
submission of the application.199 This 
information will be elicited in Exhibit 
10 to Form NRSRO. An NRSRO will not 
be required to make this information 
publicly available pursuant to Section 
15E(a)(3) of the Exchange Act 200 and 
Rule 17g–1(i) thereunder or update the 
Exhibit after registration.201 An NRSRO 
will be required to update this 
information in an unaudited financial 
report that must be furnished to the 
Commission pursuant to Rule 17g–3. 

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202 Id. 
203 See R&I Letter. 
204 See 15 U.S.C. 78o–7(a)(1)(B)(viii). 
205 Id. 
206 15 U.S.C. 78a et seq. 

207 See DBRS Letter. 
208 15 U.S.C. 78o–7(a)(1)(B)(viii). 
209 15 U.S.C. 78a et seq. 
210 15 U.S.C. 78o–7(a)(1)(B)(viii). 

211 See Gross Letter; Fitch Letter; S&P Letter; 
Moody’s Letter. 

212 See, e.g., Fitch Letter; S&P Letter; Moody’s 
Letter. 

213 See, e.g., Gross Letter; Moody’s Letter. 
214 See FSR Letter. 

Exhibit 10 also requires that an 
applicant disclose in the list large 
obligors (i.e., persons who are rated as 
an entity as opposed to having their 
securities rated) and underwriters if 
they are determined to have provided at 
least as much net revenue as the 20th 
largest issuer or subscriber. 
Consequently, a credit rating agency 
will be required to identify the 20 
largest issuers and subscribers as 
required by Section 15E(a)(1)(B)(viii) of 
the Exchange Act 202 and include in the 
list any obligor and underwriter that 
meets the above criteria. 

The Commission believes that 
including large obligors and 
underwriters in the list of the 20 largest 
issuers and subscribers is necessary or 
appropriate in the public interest or for 
the protection of investors. The 
information will help identify persons 
that could potentially have undue 
influence on an NRSRO given the 
amount of revenue the person provides 
the NRSRO. Obligors and securities 
underwriters may have as much of an 
interest in potentially influencing a 
credit rating as issuers and subscribers. 
One commenter suggested that the list 
of 20 large clients be determined from 
the pool of issuers, subscribers, obligors, 
and underwriters, rather than from only 
issuers and subscribers, with obligors or 
underwriters being added only to the 
extent they meet the above criteria.203 In 
this case, the list would never exceed 20 
persons. The Commission notes, 
however, that the statute clearly refers 
to the 20 largest ‘‘issuers and 
subscribers’’ and not to obligors or 
underwriters.204 Therefore, this 
provision of the Exhibit is being 
adopted as proposed. 

Section 15E(a)(1)(B)(viii) of the 
Exchange Act limits the persons 
required to be included in the list to 
users of the ‘‘credit rating services’’ of 
the applicant and NRSRO.205 The 
Exchange Act 206 does not define the 
term ‘‘credit rating services.’’ The 
Commission proposed to interpret this 
term to mean any of the following: 
Rating an obligor (regardless of whether 
the obligor or any other person paid for 
the credit rating); rating an issuer’s 
securities or money market instruments 
(regardless of whether the issuer, 
underwriter, or any other person paid 
for the credit rating); and providing 
credit ratings to a subscriber. The intent 
of this proposed interpretation is to 
include—along with persons that pay 

for credit ratings and subscriptions— 
persons that are rated, or whose 
securities or money market instruments 
are rated, but that did not pay for the 
credit rating. Even though these persons 
may not have paid for the credit rating, 
they potentially could have undue 
influence on the credit rating agency if 
they provide substantial net revenue for 
other services or products. 

One commenter suggested expanding 
the definition to include providing 
credit ratings data and analysis to 
subscribers.207 The Commission agrees 
that the meaning of ‘‘subscribers’’ 
should include persons who pay for 
credit ratings data and the analysis 
behind credit ratings because it may be 
difficult to separate these subscribers 
from other subscribers. Additionally, 
the Commission notes that credit rating 
agencies that make their credit ratings 
publicly available for free may offer 
subscriptions to receive feeds of the 
credit ratings or to receive more reports 
detailing the analysis behind the credit 
ratings. Consequently, the Commission 
is interpreting the term ‘‘credit rating 
services’’ to mean any of the following: 
Rating an obligor (regardless of whether 
the obligor or any other person paid for 
the credit rating); rating an issuer’s 
securities or money market instruments 
(regardless of whether the issuer, 
underwriter, or any other person paid 
for the credit rating); and providing 
credit ratings, credit ratings data, or 
credit ratings analysis to a subscriber. 

Section 15E(a)(1)(B)(viii) of the 
Exchange Act provides that the 
determination of the 20 largest issuers 
and subscribers is to be based on ‘‘net 
revenue’’ received from the issuer or 
subscriber.208 The Exchange Act 209 
does not define the term ‘‘net revenue.’’ 
The Commission proposed to interpret 
the term ‘‘net revenue’’ for the purposes 
of Section 15E(a)(1)(B)(viii) of the 
Exchange Act 210 to mean all fees, sales 
proceeds, commissions, and other 
revenue received by the applicant and 
its affiliates for any type of service or 
product, regardless of whether related to 
credit ratings, and net of any fees, sales 
proceeds, rebates, commissions, and 
other monies paid to the customer by 
the credit rating agency and its affiliates. 

The Commission received several 
comments suggesting that this 
interpretation be narrowed in certain 
ways to make it more practical to 
employ in determining the large users of 

a credit rating agency’s services.211 
Commenters stated that tracking 
revenues received by affiliates of the 
credit rating agency would be 
difficult.212 Several commenters also 
stated that payables used to determine 
the ‘‘net revenue’’ should not include, 
for example, monies paid to vendors for 
ordinary course goods and services such 
as utility bills.213 A commenter also 
sought clarification on how to realize 
revenues (e.g., cash receipts, accrued 
receivables) for purposes of this Exhibit. 

The Commission agrees with these 
commenters that the proposed 
definition of ‘‘net revenues’’ created 
some practical difficulties in 
determining the list required in Exhibit 
10. Therefore, the Commission is 
refining the interpretation to make the 
calculation of ‘‘net revenues’’ easier to 
compute but also more focused. 
Specifically, the Commission interprets 
‘‘net revenues’’ to mean revenue earned 
by the applicant or NRSRO for any type 
of service or product, regardless of 
whether related to credit rating services, 
and net of any rebates and allowances 
paid or owed to the person by the 
applicant or NRSRO. This definition 
excludes revenues received by affiliates 
that are not part of the credit rating 
organization. Also the intent in 
describing the netting payables as 
‘‘rebates or allowances’’ is to limit them 
to items that directly reduce a payable 
on the revenue side and to exclude 
unrelated payables (e.g., payables for 
utility bills). Finally, by using the term 
‘‘revenue earned’’ the Commission 
intends that the applicant and NRSRO 
apply its standard accounting 
convention for recognizing revenue. The 
Commission is incorporating these 
interpretations into the instructions for 
Exhibit 10 and, as discussed below, 
Rule 17g–3. 

The Commission notes that one 
commenter stated that the Exhibit 
requires public disclosure and that such 
disclosure is unnecessary because credit 
rating agencies establish barriers 
between credit analysts and the 
business units.214 In response, the 
Commission notes that, as discussed 
above, an NRSRO is not required to 
make this information publicly available 
under Rule 17g–1(i). The information is 
intended to be used by the Commission 
to identify persons that could 
potentially exert undue influence on an 
NRSRO. The Commission further notes 

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215 15 U.S.C. 78o–7(a)(1)(B)(viii). 
216 15 U.S.C. 78o–7(a)(3). 
217 An applicant can request that this information 

be kept confidential to the extent permitted by law. 
See 17 CFR 200.80 and 17 CFR 200.83. 

218 See 15 U.S.C. 78o–7(a)(2)(C). 
219 See 15 U.S.C. 78o–7(a)(2)(C)(ii)(I). 
220 An applicant must have been in the business 

of issuing credit ratings for the three years 
preceding the application to be eligible for 
registration with the Commission as an NRSRO. See 

Section 3(a)(62)(A) of the Exchange Act (15 U.S.C. 
78c(a)(62)(A)). 

221 See DBRS Letter; Fitch Letter; Moody’s Letter. 

222 See Letter dated March 12, 2007 from Sean 
Egan, President, Egan-Jones Ratings Company (‘‘EJR 
Letter’’); LACE Letter. 

223 15 U.S.C. 78o–7(a)(3). 
224 An applicant can request that this information 

be kept confidential to the extent permitted by law. 
See 17 CFR 200.80 and 17 CFR 200.83. 

225 See S&P Letter; AEI Letter. 
226 See 15 U.S.C. 78o–7(a)(2)(C). 

that Congress specifically prescribed 
that an applicant and NRSRO provide 
the information with respect to the 20 
largest issuers and subscribers in terms 
of net revenues.215 

For these reasons, the Commission is 
adopting Exhibit 10 and the instructions 
for the Exhibit with the modifications 
described above. 

21. Exhibit 11 (Audited Financial 
Statements) 

As adopted, Exhibit 11 requires an 
applicant to furnish audited financial 
statements for the past three fiscal or 
calendar years immediately preceding 
the date of the application. An NRSRO 
will not be required to make this 
information publicly available pursuant 
to Section 15E(a)(3) of the Exchange 
Act 216 and Rule 17g–1(i) thereunder or 
update the Exhibit after registration.217 
An NRSRO will be required to provide 
audited financial statements to the 
Commission annually under Rule 17g– 
3. 

The Commission continues to believe 
this financial information is necessary 
or appropriate in the public interest or 
for the protection of investors because it 
will assist the Commission in making 
the finding required by Section 
15E(a)(2)(C) of the Exchange Act.218 
This section directs the Commission to 
grant a credit rating agency’s application 
for registration as an NRSRO unless, 
among other things, the Commission 
finds that the applicant does not have 
adequate financial and managerial 
resources to consistently issue ratings 
with integrity and to materially comply 
with its procedures and methodologies 
disclosed pursuant to Section 15E(1)(B) 
of the Exchange Act and established 
pursuant to the Sections 15E(g), (h), (i) 
and (j) of the Exchange Act.219 The 
financial statements will provide the 
Commission with information as to the 
applicant’s net worth and income, 
which will assist the Commission in 
determining whether the applicant has 
sufficient financial resources. Financial 
statements for three years will assist the 
Commission in reviewing whether the 
applicant has been in the business of 
issuing credit ratings for the three years 
immediately preceding the date of its 
application for registration.220 The 

information also will alert the 
Commission to a significant downward 
trend in the applicant’s financial 
condition, which could be relevant to 
whether it has adequate financial 
resources. 

The requirement that the financial 
statements be audited will provide the 
Commission with independent 
verification of the information in the 
statements. However, the Commission 
anticipates that some applicants may 
not have been audited in the past. 
Consequently, the instructions to the 
Exhibit provide that in this case the 
applicant may provide an audited 
financial statement for the fiscal year 
immediately preceding the date of the 
application. The prior years can be 
covered by unaudited financial 
statements. The instructions also 
provide that the applicant must attach a 
statement by a duly authorized person 
that the unaudited financial statements 
present fairly, in all material respects, 
the financial condition, results of 
operations, and the cash flows of the 
applicant. This will provide a level of 
assurance that the information in the 
financial statements has been reviewed 
and verified by the applicant. 

Finally, the Commission anticipates 
that some applicants will be 
subsidiaries of holding companies. In 
this case, the applicant may provide 
audited consolidated financial 
statements of the parent company. 
Consolidated financial statements will 
provide information on the financial 
strength of the credit rating agency’s 
parent. The parent is in a position to 
support the credit rating agency and, 
consequently, its financial condition 
may be indicative of the financial 
resources of the credit rating agency. 
Further, the information on revenues 
elicited in Exhibit 12 will augment the 
financial statements by providing 
information specific to the credit rating 
agency. 

Several commenters sought 
clarification on whether the financial 
statements provided in Exhibit 11 must 
be prepared in accordance with 
Regulation S–X.221 The Commission’s 
intent with respect to Exhibit 11 is that 
applicants, to the extent possible, will 
be able to provide financial statements 
that have already been prepared for 
other reasons. 

Two commenters also requested that 
the proposed rule be modified to permit 
an NRSRO to furnish a tax return 
prepared by an accountant in lieu of 

audited financial statements.222 The 
Commission believes a tax return will 
not provide sufficient detail about an 
applicant’s financial condition. For 
example, it would not provide the 
information that can be derived from a 
balance sheet, an income statement and 
statement of cash flows, and a statement 
of changes in ownership equity. 
Moreover, as indicated above, the 
Commission believes it is important to 
have an auditor provide independent 
verification that all this information is 
presented fairly, in all material respects. 

For these reasons, the Commission is 
adopting Exhibit 11 and the instructions 
for the Exhibit with the modifications 
described above. 

22. Exhibit 12 (Revenues) 
As adopted, Exhibit 12 requires an 

applicant to provide information as to 
the amount of revenue generated from 
various credit rating services and a 
separate computation of total revenue 
from all other services. The instructions 
provide that this information be for the 
most recently completed fiscal or 
calendar year and is not required to be 
audited. An NRSRO will not be required 
to make this information publicly 
available pursuant to Section 15E(a)(3) 
of the Exchange Act 223 and Rule 17g– 
1(i) thereunder or update the Exhibit 
after registration.224 An NRSRO will be 
required to update this information in 
an unaudited financial report furnished 
to the Commission under Rule 17g–3. 

Two commenters stated that the 
Exhibit should be eliminated because it 
was unnecessary given the submission 
of financial statements in Exhibit 11.225 
The Commission continues to believe 
that this information is necessary or 
appropriate in the public interest or for 
the protection of investors. It will assist 
the Commission in making the finding 
with respect to adequate financial 
resources required by Section 
15E(a)(2)(C) of the Exchange Act 226 by 
providing detail as to the revenues 
generated by different types of credit 
rating services. Financial statements 
alone may not separate out or itemize 
revenues earned from credit rating 
services as opposed to other services. 
For example, an applicant that has 
earned less revenue from credit rating 
services than its total credit analyst 
compensation may not be able to 

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227 See Moody’s Letter. 
228 See Fitch Letter. 
229 See Gross Letter; R&I Letter. 
230 See Gross Letter. 
231 See R&I Letter. 

232 15 U.S.C. 78o–7(a)(3). 
233 An applicant can request that this information 

be kept confidential to the extent permitted by law. 
See 17 CFR 200.80 and 17 CFR 200.83. 

234 See AEI Letter. 
235 See 15 U.S.C. 78o–7(a)(2)(C). 
236 See Section 5 of the Rating Agency Act and 

15 U.S.C 78q(a)(1). 

237 See 15 U.S.C 78q(b)(1). 
238 See, e.g., FSR Letter; AEI Letter. 
239 Section 15E(c)(2) of the Exchange Act (15 

U.S.C. 78o–7(c)(2)) requires that the Commission’s 
rules under the Rating Agency Act be narrowly 
tailored. 

240 See, e.g., 17 CFR 240.17a–3 and 17a–4 (broker- 
dealers); 17 CFR 275.204–2 (investment advisers); 
17 CFR 240.17Ad–6 and 17Ad–7 (transfer agents). 

241 See Electronic Storage of Broker-Dealer 
Records, Exchange Act Release No. 47806 (May 7, 
2003), 68 FR 25281 (May 12, 2003); see also 
Commission order in Matter of Deutsche Bank 
Securities, Inc. et al., Exchange Act Release No. 
46937 (December 3, 2002) (‘‘The recordkeeping 
rules are ‘a keystone of the surveillance of broker- 
dealers’ ’’) (citations omitted); Commission order in 
Matter of J.P. Morgan Securities Inc., Exchange Act 
Release No. 51200 (February 14, 2005); Electronic 
Recordkeeping by Investment Companies and 
Investment Advisers, Investment Company Act 
Release No. 24991 (May 24, 2001) (‘‘The 
recordkeeping requirements are a key part of the 
Commission’s regulatory program for funds and 
advisers, as they allow [the Commission] to monitor 
fund and adviser operations, and to evaluate their 
compliance with federal securities laws.’’). 

242 15 U.S.C. 78o–7. 

continue to support this business line at 
levels consistent with the statutory 
mandate. 

One commenter stated that the 
determination of the revenue amounts 
should be made using a ‘‘net revenue’’ 
definition that permits flexibility in 
terms of how revenue is recognized.227 
As with Exhibit 10 and Rule 17g–3, the 
Commission intends that the credit 
rating agency apply its standard 
accounting convention for recognizing 
revenue as this will make revenue 
calculations consistent across the 
various financial reports required in 
Form NRSRO and Rule 17g–3. 

Another commenter, with respect to 
Rule 17g–3, requested the elimination of 
a requirement to separately report 
revenues from determining private 
credit ratings (i.e., credit ratings that are 
not made readily accessible to the 
public).228 The commenter stated that it 
would be difficult to separate private 
ratings revenue from public ratings 
revenue. In an effort to reduce burden, 
the Commission has eliminated the 
requirement to separately itemize 
revenue from private ratings. The 
private ratings revenue must be 
included in the revenue item for 
determining or maintaining credit 
ratings. 

Two commenters disagreed on the 
information that should be included in 
the revenue item relating to 
subscribers.229 One commenter stated 
that the item should include revenue 
from subscribers to an applicant’s credit 
analysis in addition to credit ratings 
subscribers.230 The other commenter 
stated that the item should only apply 
to credit ratings subscribers.231 The 
Commission intends the Exhibit to 
include both types of subscribers. The 
Commission believes separating out 
revenues from these two types of 
subscribers could be difficult in that 
some credit rating agencies may offer 
subscriptions that include access to 
credit ratings and credit analysis. 
Furthermore, some credit rating 
agencies make their credit ratings 
available for free but charge subscribers 
for credit ratings data and credit 
analysis. The Commission believes there 
is no reason to distinguish between a 
subscriber to credit ratings and a 
subscriber to credit ratings data and 
analysis in this context. 

For these reasons, the Commission is 
adopting Exhibit 12 and the instructions 

for the Exhibit with the modifications 
described above. 

23. Exhibit 13 (Analyst Compensation) 
As adopted, Exhibit 13 will require an 

applicant to disclose to the Commission 
the amount of total aggregate annual 
compensation paid to its credit analysts 
and the median compensation. The 
instructions provide that the 
information must be for the most 
recently completed fiscal or calendar 
year and will not have to be audited. An 
NRSRO will not be required to make 
this information publicly available 
pursuant to Section 15E(a)(3) of the 
Exchange Act 232 and Rule 17g–1(i) 
thereunder or update the Exhibit after 
registration.233 An NRSRO will be 
required to update this information in a 
financial report furnished to the 
Commission under Rule 17g–3. 

One commenter stated that the 
information may not be necessary given 
the different sizes and business models 
of credit rating agencies.234 The 
Commission continues to believe this 
compensation information is necessary 
or appropriate in the public interest or 
for the protection of investors. It will 
assist the Commission in making the 
finding with respect to adequate 
financial resources required by Section 
15E(a)(2)(C) of the Exchange Act.235 
Similar to the revenue information, this 
information will augment the financial 
statements that are required under 
Exhibit 11 because it provides detail on 
the expenses necessary to retain the 
credit rating agency’s credit analysts. 
The Commission will compare this 
information with the revenues earned 
by the applicant for credit ratings 
services to evaluate an applicant’s 
financial condition. 

For these reasons, the Commission is 
adopting Exhibit 13 and the instructions 
for the Exhibit with the modifications 
described above. 

C. Rule 17g–2—Recordkeeping 
The Rating Agency Act amended 

Section 17(a)(1) of the Exchange Act to 
add NRSROs to the list of entities 
required to make and keep such records, 
and make and disseminate such reports, 
as the Commission prescribes by rule as 
necessary or appropriate in the public 
interest, for the protection of investors, 
or otherwise in furtherance of the 
Exchange Act.236 The inclusion of 

NRSROs on the list also provides the 
Commission with authority under 
Section 17(b)(1) of the Exchange Act to 
examine all the records of an NRSRO.237 

The Commission is implementing this 
rulemaking authority through Rule 17g– 
2. This rule requires an NRSRO to make 
and retain certain records relating to its 
business and to retain certain other 
business records made in the normal 
course of business operations. The rule 
also prescribes the time periods and 
manner in which all these records will 
be required to be retained. 

Several commenters stated that Rule 
17g–2 as proposed was unduly 
burdensome or onerous.238 The 
Commission believes the rule is 
necessary or appropriate in the public 
interest or for the protection of investors 
and narrowly tailored to achieve its 
purpose.239 The Commission designed 
the rule based on its experience with 
recordkeeping rules for other regulated 
entities.240 These other books and 
records rules have proven integral to the 
Commission’s investor protection 
function because the preserved records 
are the primary means of monitoring 
compliance with applicable securities 
laws.241 Rule 17g–2 is designed to 
ensure that an NRSRO makes and 
retains records that will assist the 
Commission in monitoring, through its 
examination authority, whether an 
NRSRO is complying with the 
provisions of Section 15E of the 
Exchange Act 242 and the rules 
thereunder. For example, examiners 
will use the records to review whether 
an NRSRO is following its disclosed 
procedures and methodologies for 
determining credit ratings, its disclosed 
policies and procedures for preventing 
the misuse of material nonpublic 

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243 See DBRS Letter; Langohr Letter. 
244 See DBRS Letter. 
245 15 U.S.C. 78o–7(c)(2). 
246 15 U.S.C. 78o–7. 
247 15 U.S.C. 78o–7(a)(1)(B)(ii) and 15 U.S.C. 78o– 

7(a)(3). 

248 See Langohr Letter. 
249 15 U.S.C. 78o–7(c)(2). 
250 15 U.S.C. 78o–7(f). 
251 See Moody’s Letter. 
252 15 U.S.C. 78o–7. 

253 See, e.g., In the Matter of SG Cowens 
Securities Corporation, Exchange Act Release No. 
48335 (August 14, 2003) (‘‘Implicit in the 
Commission’s recordkeeping rules is the 
requirement that information in a required book or 
record be accurate.’’). 

254 See 15 U.S.C. 78q(a)(1). 

information, and managing conflicts of 
interest, and whether it is complying 
with Rules 17g–4, 17g–5, and 17g–6 
discussed below. 

Nonetheless, the Commission is 
adopting Rule 17g–2 with modifications 
to address issues commenters raised, to 
reduce burden, and to enhance 
recordkeeping requirements with 
respect to the issuance of credit ratings 
on certain asset-backed and mortgage- 
backed securities transactions. As a 
preliminary matter, the Commission 
notes that several commenters raised 
concerns with how examiners would 
use the books and records required 
under Rule 17g–2.243 One commenter 
requested that the Commission clarify 
that examiners would not use their 
inspection of records to second-guess 
credit rating opinions.244 The 
Commission does not intend that Rule 
17g–2 be used as a means to substitute 
the Commission’s judgment for that of 
an NRSRO with respect to the NRSRO’s 
credit rating opinion. 

Further, Section 15E(c)(2) of the 
Exchange Act provides that the 
Commission may not ‘‘regulate the 
substance of credit ratings or the 
procedures and methodologies by which 
an NRSRO determines credit 
ratings.’’ 245 The purpose of the 
recordkeeping requirements in Rule 
17g–2 is to allow examiners to review 
whether an NRSRO is following its 
stated procedures and methodologies 
and otherwise complying with Section 
15E of the Exchange Act 246 and the 
rules thereunder. It is important that 
users of credit ratings be given the 
opportunity to understand how a 
specific NRSRO determines its credit 
ratings. Consequently, Sections 
15E(a)(1)(B)(ii) and 15E(a)(3) of the 
Exchange Act require an NRSRO to 
make this information publicly 
available.247 The Commission’s role is 
to examine whether an NRSRO has 
accurately disclosed this information so 
that users of credit ratings can assess its 
credit rating procedures and 
methodologies. The Commission’s role 
also is to examine whether an NRSRO 
adheres to its credit rating procedures 
and methodologies. 

A second commenter raised the 
concern that using records to examine 
whether an NRSRO has accurately 
disclosed information about how it 
determines credit ratings would result 
in the Commission’s tacit endorsement 

of the credit ratings.248 The Commission 
reiterates that the purpose of examining 
these records is to review whether an 
NRSRO has accurately disclosed 
information about, and adheres to, the 
procedures and methodologies it uses to 
determine credit ratings. As noted 
above, the Commission cannot ‘‘regulate 
the substance of credit ratings or the 
procedures and methodologies by which 
an NRSRO determines credit 
ratings.’’ 249 Users of credit ratings 
should not view the fact that the 
Commission has examined whether an 
NRSRO has accurately disclosed 
information about, and adheres to, its 
credit rating procedures and 
methodologies as an endorsement of the 
credit ratings or the procedures and 
methodologies used to determine the 
credit ratings. Users of credit ratings 
must evaluate a given NRSRO’s 
procedures and methodologies for 
themselves and reach their own 
conclusions as to the quality of the 
procedures and methodologies. The 
Commission’s role is limited to 
reviewing whether the information 
disclosed by an NRSRO is consistent 
with how the NRSRO conducts its credit 
rating activities. The Commission also 
notes that Section 15E(f) of the 
Exchange Act bars an NRSRO from 
representing that it has been 
‘‘designated, sponsored, recommended, 
or approved, or that [its] abilities or 
qualifications. * * * have in any 
respect been passed upon, by the United 
States, or any agency, officer, or 
employee thereof.’’ 250 

Finally, another commenter stated 
that the recordkeeping rule should be 
principles based and permit an NRSRO 
to implement a recordkeeping system 
appropriate for its organizational 
structure and business model.251 The 
Commission does not intend that Rule 
17g–2 require a specific form of record 
or recordkeeping system. An NRSRO 
will have the flexibility to implement a 
recordkeeping system that captures the 
records required in Rule 17g–2 in a 
manner that conforms to the NRSRO’s 
internal processes. At the same time, as 
noted above, Rule 17g–2 is designed to 
ensure that an NRSRO makes and 
retains records that will assist the 
Commission in monitoring, through its 
examination authority, whether an 
NRSRO is complying with the 
provisions of Section 15E of the 
Exchange Act 252 and the rules 
thereunder. The Commission believes 

that a principles based recordkeeping 
rule would be difficult to administer. It 
could lead to inconsistent 
recordkeeping by NRSROs and also 
create uncertainty for NRSROs and 
Commission examiners as to the records 
that must be retained. The Commission 
believes the better approach is to 
prescribe certain records that must be 
made and retained at a minimum to 
provide for consistent recordkeeping 
requirements across all NRSROs. 

1. Paragraph (a) of Rule 17g–2 
As adopted, paragraph (a) of Rule 

17g–2 requires an NRSRO to make and 
retain certain books and records. The 
records required under paragraph (a) 
must be complete and current and not 
contain inaccurate information.253 With 
respect to the specific records required 
under paragraph (a), the Commission 
has made several modifications in light 
of comments that will ease the 
recordkeeping burden. The Commission 
believes the records required in this 
paragraph are necessary or appropriate 
in the public interest, for the protection 
of investors, or otherwise in furtherance 
of the Exchange Act. As described 
below, they will assist the Commission 
in monitoring whether an NRSRO is 
complying with Section 15E of the 
Exchange Act and the rules 
thereunder.254 

a. Paragraph (a)(1) of Rule 17g–2 
As adopted, paragraph (a)(1) of Rule 

17g–2 requires an NRSRO to make 
records of original entry into an 
NRSRO’s accounting system, and 
records reflecting entries to and 
balances in all general ledger accounts 
of the NRSRO for each fiscal year. Rule 
17g–2, as proposed, contained a similar 
provision. The Commission believes 
these fundamental business records are 
necessary for the preparation of the 
financial reports required to be prepared 
under Rule 17g–3. In addition, they will 
assist Commission examiners in 
reviewing the financial resources of an 
NRSRO and its revenue sources. The 
latter information will be important in 
identifying customers that provide an 
NRSRO with significant revenues and, 
consequently, could be in a position to 
exercise undue influence over a credit 
rating decision. 

One commenter stated that, while it 
already maintains these types of 
records, the requirement to make them 

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33584 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

255 See Fitch Letter. 
256 Several commenters requested that the 

Commission eliminate the requirement to make a 
record identifying the procedures and 
methodologies used to determine the credit rating. 
See DBRS Letter; Fitch Letter; Moody’s Letter; 
Langohr Letter. These commenters argued, among 
other things, that the requirement interfered with 

the process of determining credit ratings, was not 
consistent with normal practice, and was 
burdensome. Id. 257 See Fitch Letter. 

should be eliminated because the 
information in the Rule 17g–3 financial 
reports will be sufficient.255 The 
Commission believes it is important that 
an NRSRO make and retain these 
records. They will provide Commission 
examiners with the source information 
that feeds into the Rule 17g–3 financial 
reports. Further, those financial reports 
are a snap shot of the NRSRO’s financial 
condition as of its fiscal year end. These 
records will provide examiners with 
current financial information as of the 
time of their exam. For these reasons, 
the Commission is adopting paragraph 
(a)(1) of Rule 17g–2 substantially as 
proposed. 

b. Paragraph (a)(2) of Rule 17g–2 
As adopted, paragraph (a)(2) of Rule 

17g–2 requires an NRSRO to make the 
following records with respect to each 
of the NRSRO’s current credit ratings, as 
applicable: The identity of any credit 
analyst(s) that participated in the 
determination of the credit rating; the 
identity of the person(s) who approved 
the credit rating before it was issued; 
whether the credit rating was solicited 
or unsolicited; and the date the credit 
rating action was taken. This 
information will assist the Commission 
in monitoring whether the NRSRO is 
following its procedures and 
methodologies for determining credit 
ratings and whether the NRSRO is 
complying with procedures designed to 
prevent the misuse of material 
nonpublic information. For example, if 
questions arise about a particular credit 
rating, the record will provide the 
Commission staff with the names of the 
credit analysts that participated in 
determining the credit rating and the 
persons that approved the credit rating. 
This will identify for the Commission 
staff the persons with the best 
information as to how the credit rating 
was determined. 

Rule 17g–2, as proposed, also would 
have required a record identifying the 
procedures and methodologies used to 
determine the credit rating and the 
method by which the credit rating was 
made publicly available. The 
Commission has eliminated these 
requirements to reduce recordkeeping 
burden and because Commission 
examiners can ascertain the information 
through a less burdensome 
requirement.256 Under paragraph (a)(6) 

of Rule 17g–2, an NRSRO is required to 
separately document the procedures and 
methodologies it uses to determine 
credit ratings. The Commission 
examination staff will be able to refer to 
these records to understand how 
specific types of credit ratings are 
determined by the NRSRO. Therefore, 
examiners will not need an individual 
record identifying the methodology 
used to determine each credit rating. For 
similar reasons, the Commission has 
eliminated the proposed requirement to 
make a record of the method by which 
each credit rating was made readily 
accessible. An NRSRO must disclose in 
Form NRSRO how it makes its credit 
ratings readily accessible. Commission 
examiners can review this disclosure to 
understand how a specific credit rating 
was made readily accessible. 

The Commission notes, however, that 
if an NRSRO materially diverges from 
its stated methodology for determining 
a specific type of credit rating or for 
making credit ratings readily accessible, 
it may violate the requirements to 
disclose in Form NRSRO information 
about credit ratings methodologies and 
how credit ratings are made readily 
accessible and, in the former case, the 
requirement in paragraph (a)(6) to 
document the procedures and 
methodologies for determining credit 
ratings. Consequently, an NRSRO must 
include in its documented procedures 
any alternative methodologies for 
determining a specific type of credit 
rating and when such alternatives may 
be used by a credit analyst. 

Finally, consistent with changes to 
Form NRSRO discussed above, the final 
rule changes the requirement proposed 
in Rule 17g–2(a)(2) to identify the credit 
analysts ‘‘who determined’’ the credit 
rating to credit analysts ‘‘who 
participated in determining’’ the credit 
rating. In all other respects, the 
Commission is adopting paragraph (a)(2) 
of Rule 17g–2 substantially as proposed. 

c. Paragraph (a)(3) of Rule 17g–2 
As adopted, paragraph (a)(3) of Rule 

17g–2 requires an NRSRO to make an 
account record for each person (for 
example, an obligor, issuer, underwriter, 
or other user) that has paid for the 
issuance or maintenance of a credit 
rating indicating the identity and 
address of the person and the credit 
ratings determined or maintained for the 
person. This information will assist the 
Commission in monitoring whether the 
NRSRO is complying with procedures 
for addressing and managing conflicts of 

interest as well as complying with the 
requirements in Rule 17g–5 prohibiting 
certain conflicts of interest. For 
example, examiners can use this record 
to identify persons that have paid the 
NRSRO for a significant number of 
credit ratings (e.g., a regular sponsor of 
structured products). These persons, 
given the large volume of business they 
provide the NRSRO, may be in a 
position to exert inappropriate influence 
on the NRSRO to issue favorable credit 
ratings. 

One commenter pointed out that by 
using the term ‘‘solicits’’ the rule could 
be construed to require a record of each 
person that asks the NRSRO to issue a 
credit rating, regardless of whether the 
person ultimately pays for the credit 
rating or the NRSRO ultimately issues 
the credit rating.257 The Commission 
agrees that the rule text, as proposed, 
contained a degree of ambiguity. 
Further, the Commission believes it 
could be difficult and unduly 
burdensome to create a record of each 
person who approaches the NRSRO 
about having a credit rating issued. For 
example, some contacts between the 
NRSRO and a person may never 
progress beyond initial inquiries. For 
these reasons, the Commission modified 
the rule to clarify that the requirement 
is limited to persons who pay for credit 
ratings that are issued publicly. 

The Commission also modified 
paragraph (a)(3) of Rule 17g–2 by 
eliminating the requirement to provide 
the customer’s ‘‘principal’’ address. The 
term ‘‘principal address’’ has a legal 
meaning in some contexts and, 
accordingly, could unduly complicate 
the process of creating the record. The 
rule now requires the customer’s 
‘‘address’’ without regard to whether it 
is the principal address. In all other 
respects, the Commission is adopting 
paragraph (a)(3) of Rule 17g–2 
substantially as proposed. 

d. Paragraph (a)(4) of Rule 17g–2 
As adopted, paragraph (a)(4) of Rule 

17g–2 requires an NRSRO to make an 
account record for each subscriber to the 
credit ratings and/or credit analysis 
reports of the NRSRO indicating the 
identity and address of the subscriber. 
This information will assist the 
Commission in monitoring whether the 
NRSRO was complying with its 
procedures for addressing and managing 
conflicts of interest and the handling of 
material, nonpublic information as well 
as complying with the requirements in 
Rule 17g–5 prohibiting certain conflicts 
of interest. The Commission did not 
receive any comments on this provision. 

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33585 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

258 See Fitch Letter. 259 See AFP Letter. 

260 As discussed below, several commenters 
sought clarification as to whether the record 
retention requirements in paragraph (b) of Rule 
17g–2, as proposed, would apply to drafts of 
documents. The Commission did not intend these 
requirements to apply to drafts and has added 
language the introductory text of paragraph (b) of 
Rule 17g-2 excluding drafts of documents. 

For the reasons discussed above with 
respect to paragraph (a)(3) of Rule 17g– 
2, the Commission has modified the 
provision to eliminate the reference to a 
customer’s ‘‘principal’’ address. In all 
other respects, the Commission is 
adopting paragraph (a)(4) of Rule 17g– 
2 substantially as proposed. 

e. Paragraph (a)(5) of Rule 17g–2 
As adopted, paragraph (a)(5) of Rule 

17g–2 requires an NRSRO to make a 
record listing the general types of 
services and products offered by the 
NRSRO. This record will provide the 
Commission with details of the ancillary 
business activities of the NRSRO and, 
therefore, will be useful in identifying 
potential conflicts of interest that arise 
from such activities. Commission 
examiners then will be able to review 
whether the NRSRO has implemented 
procedures to manage these potential 
conflicts. 

One commenter pointed out that the 
rule text as proposed could be construed 
to require a record each time the NRSRO 
made an offer to provide a service to a 
customer.258 This was not the intent of 
the proposed requirement. Rather, it 
was to require a record listing the 
general types of services the NRSRO 
offers. The record is designed to provide 
Commission examiners with a way to 
quickly understand the NRSRO’s 
business model based on the types of 
services and products it provides to 
persons. The record does not require an 
entry for each offer to a person or 
transaction with a person. The final rule 
has been modified to clarify that the 
provision only requires a list of the 
types of services offered by the NRSRO. 
In all other respects, the Commission is 
adopting paragraph (a)(5) of Rule 17g– 
2 substantially as proposed. 

f. Paragraph (a)(6) of Rule 17g–2 
As adopted, paragraph (a)(6) of Rule 

17g–2 requires an NRSRO to make a 
record documenting the established 
procedures and methodologies used by 
the NRSRO to determine credit ratings. 
This provision is being added to Rule 
17g–2 in response to comments 
regarding Exhibit 2 to Form NRSRO, 
which, as proposed, required an NRSRO 
to attach the procedures and 
methodologies to the Form and make 
them publicly available after 
registration. As discussed above, Exhibit 
2 has been modified so that it now 
requires a description of the procedures 
and methodologies as opposed to each 
procedure and methodology. The intent 
is to require sufficient information in 
Exhibit 2 to allow users of credit ratings 

to develop an understanding of how the 
NRSRO determines credit ratings 
without imposing the burden of making 
a voluminous submission to the 
Commission and public disclosure. It 
also is designed to avoid the public 
disclosure of proprietary information. 

Accordingly, rather than require these 
procedures and methodologies to be 
attached to Form NRSRO and disclosed 
publicly, the Commission is requiring 
that they be documented internally. 
This will permit Commission examiners 
to review the procedures and 
methodologies in order to review 
whether the NRSRO has disclosed 
sufficient information about them in 
Form NRSRO to permit users of credit 
ratings to understand how the NRSRO 
determines credit ratings. It also will 
permit Commission examiners to review 
whether the NRSRO is adhering to its 
procedures and methodologies and 
complying with other rules.259 For 
example, Rule 17g–6 prohibits, among 
other things, an NRSRO from issuing or 
modifying, or threatening to issue or 
modify, a credit rating contrary to the 
NRSRO’s established procedures and 
methodologies. The Commission’s 
ability to enforce this prohibition will 
depend in part on the NRSRO having 
fully documented its procedures and 
methodologies. As discussed below, 
these records also will be an important 
means for the Commission to gain a 
better understanding of the procedures 
and methodologies used by credit rating 
agencies to treat the credit ratings of 
other credit rating agencies when 
determining the overall credit rating for 
securities or money market instruments 
issued by asset pools or as part of any 
asset-backed or mortgage-backed 
securities transactions (‘‘structured 
products’’). 

As noted above, to the extent a credit 
rating agency permits credit analysts to 
diverge from the procedures or 
methodologies it has established, the 
NRSRO must document the 
circumstances under which such a 
divergence will be permitted and the 
alternative procedure or methodology 
that must be used. In effect, 
documenting the divergence in this 
manner will make it part of the 
NRSRO’s established procedures and 
methodologies and, therefore, the 
NRSRO will be adhering to the 
requirements of paragraph (a)(6) of Rule 
17g–2. Failing to document when the 
divergence will be permitted or required 
will expose the NRSRO to potential 
violations of Rules 17g–1, 17g–2, and 
17g–6. 

For the foregoing reasons and the 
reasons discussed with respect to 
Exhibit 2 of Form NRSRO, the 
Commission is eliminating the 
requirement that an NRSRO attach to 
Form NRSRO and make publicly 
available its procedures and 
methodologies for determining credit 
ratings. Instead, the Commission is 
adopting paragraph (a)(6) of Rule 17g– 
2 to require that the procedures and 
methodologies be documented 
internally. 

g. Paragraph (a)(7) of Rule 17g–2 
As adopted, paragraph (a)(7) of Rule 

17g–2 requires an NRSRO to make a 
record that lists each security and its 
corresponding credit rating issued by an 
asset pool or as part of any asset-backed 
or mortgage-backed securities 
transaction where the NRSRO in 
determining the credit rating for the 
security treats assets within such pool 
or as a part of such transaction that are 
not subject to a credit rating of the 
NRSRO by one or more of four ways 
specified in the rule to determine a 
credit rating for the security. This 
provision was not proposed but is being 
added because of modifications to 
paragraph (a)(4) of Rule 17g–6, which 
prohibits anti-competitive practices 
relating to determining credit ratings for 
structured products. As discussed below 
with respect to paragraph (a)(4) of Rule 
17g–6, the Commission believes this 
provision is necessary or appropriate in 
the public interest or for the protection 
of investors because it will assist the 
Commission in monitoring practices in 
the structured product area that many 
commenters believe are anti- 
competitive. 

2. Paragraph (b) of Rule 17g–2 

As adopted, paragraph (b) of Rule 
17g–2 requires an NRSRO to retain 
certain records (excluding drafts of 
documents) that relate to its business as 
a credit rating agency.260 The records 
required to be retained in paragraph (b) 
of Rule 17g–2 are those an NRSRO 
makes or receives as a matter of 
business practice but are not records an 
NRSRO is required to make. The 
Commission believes the records 
required to be retained under paragraph 
(b) are necessary or appropriate in the 
public interest, for the protection of 
investors, or otherwise in furtherance of 

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33586 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

261 15 U.S.C. 78o–7. 
262 See 15 U.S.C. 78o–7(b)(1). 
263 See Fitch Letter. 

264 See S&P Letter; DBRS Letter; Fitch Letter; 
Moody’s Letter. 

265 Id. 

266 See Letter dated March 8, 2007 from John B. 
Rutherfurd, Jr. (‘‘Rutherfurd Letter’’); DBRS Letter; 
Fitch Letter; Moody’s Letter; S&P Letter. 

267Id. 

the Exchange Act because, as described 
below, they will assist the Commission 
in monitoring whether an NRSRO is 
complying with Section 15E of the 
Exchange Act 261 and the rules 
thereunder. 

Since these records are not required to 
be made, an NRSRO will not have to 
update them. Rather, the NRSRO is 
required to retain the original record in 
an unaltered form or a true copy of the 
original record for the prescribed 
retention period. The Commission 
notes, however, that, under Section 
15E(b)(1) of the Exchange Act,262 an 
NRSRO must update, as provided in 
that section, certain information in the 
Forms and Exhibits that are required to 
be retained under paragraph (b)(9) of 
Rule 17g–2 (discussed below). 

a. Paragraph (b)(1) of Rule 17g–2 

As adopted, paragraph (b)(1) of Rule 
17g–2 requires an NRSRO to retain all 
significant records underlying the 
information included in the NRSRO’s 
annual financial reports required 
pursuant to Rule 17g–3. This includes 
bank statements, bills payable and 
receivable, trial balances, and records 
relating to the determination of the 
largest customers. These records will 
assist Commission examiners in 
understanding and reviewing the basis 
of information provided in the financial 
reports the NRSRO will be required to 
annually furnish to the Commission. For 
example, examiners can use the records 
relating to the list of the largest 
customers to review whether the 
NRSRO has identified such customers 
in accordance with Rule 17g–3. 

The Commission received one 
comment on this provision.263 The 
commenter stated that, while it retains 
these records, the requirement should 
be eliminated because the financial 
reports required in Rule 17g–3 provide 
sufficient information in these areas. 
Similar to the records required in 
paragraph (a)(1) of Rule 17g–2, the 
Commission believes it is important that 
an NRSRO retain these records. They 
will provide Commission examiners 
with the source information that feeds 
into the Rule 17g–3 financial reports. 
Further, as noted above, those financial 
reports are a snap shot of the NRSRO’s 
financial condition as of its fiscal year 
end. These records will provide 
examiners with current information as 
of the time of their exam. For these 
reasons, the Commission is adopting 

paragraph (b)(1) of Rule 17g–2 
substantially as proposed. 

b. Paragraph (b)(2) of Rule 17g–2 
As adopted paragraph (b)(2) of Rule 

17g–2 requires an NRSRO to retain 
internal records, including nonpublic 
information and work papers, used to 
form the basis of a credit rating. These 
records will include, for example, notes 
of conversations with the management 
of an issuer or obligor that was the 
subject of the credit rating and the 
inputs and raw results of a quantitative 
model used to determine the credit 
rating. The retention of this information, 
and other internal records used to 
determine a credit rating, will assist the 
Commission in reviewing whether an 
NRSRO is adhering to its established 
procedures and methodologies for 
determining credit ratings and for 
preventing the misuse of material 
nonpublic information. It also will assist 
the Commission in gaining a better 
understanding of the practices used by 
credit rating agencies to incorporate the 
credit ratings of other credit rating 
agencies into the overall credit rating of 
a structured product. 

The Commission received several 
comments on the rule text in this 
paragraph as proposed.264 The 
comments generally were similar in that 
they sought clarification that the 
provision does not require the retention 
of every record that somehow relates to 
the credit rating.265 In response, the 
Commission notes that it did not intend 
the rule to be interpreted that broadly. 
The provision only applies to internal 
records and documents that are used to 
form the basis of the credit rating. The 
provision explicitly excludes publicly 
available information and the 
introductory text to paragraph (b) of 
Rule 17g–2 excludes drafts of 
documents from its provisions. The rule 
does not require an NRSRO to retain 
internal documents that a credit analyst 
reviews but that do not factor into the 
determination of the credit rating. For 
the foregoing reasons, the Commission 
is adopting paragraph (b)(2) of Rule 
17g–2 substantially as proposed. 

c. Paragraph (b)(3) of Rule 17g–2 
As adopted, paragraph (b)(3) of Rule 

17g–2 requires an NRSRO to retain 
credit analysis reports, credit 
assessment reports, and private credit 
rating reports and internal records, 
including nonpublic information and 
work papers, used to form the basis for 
the opinions expressed in these reports. 

These reports—which credit rating 
agencies commonly create and sell as an 
ancillary service to the issuance of 
credit ratings—generally provide a 
detailed analysis of the information and 
assumptions underlying a credit rating. 
In developing these reports, the credit 
analyst may receive material nonpublic 
information about an issuer or obligor. 
For example, an issuer may request a 
private credit rating report to 
understand how a contemplated 
transaction would impact the current 
publicly available credit rating of its 
debt securities. Consequently, the 
retention of these reports and internal 
records used to form the basis of the 
reports will assist the Commission in 
monitoring whether the NRSRO is 
complying with its policies and 
procedures for preventing the misuse of 
material nonpublic information. 

The Commission received several 
comments on the rule text of this 
paragraph as proposed.266 Similar to the 
comments regarding paragraph (b)(2) of 
Rule 17g–2, the comments sought 
clarification that the provision does not 
require the retention of every potentially 
relevant record such as records that do 
not contain information that the credit 
analysis used to form the basis of 
conclusions in the report.267 In response 
to these comments, the Commission 
notes that it does not intend the rule to 
be interpreted to apply to internal 
documents that a credit analyst reviews 
but that do not factor into the 
conclusions in the final report. Further, 
the provision explicitly excludes 
publicly available information and the 
introductory text to paragraph (b) of 
Rule 17g–2 excludes drafts of 
documents from its provisions. 
Consequently, the Commission is 
adopting paragraph (b)(3) of Rule 17g– 
2 substantially as proposed. 

d. Paragraph (b)(4) of Rule 17g–2 

As adopted, paragraph (b)(4) of Rule 
17g–2 requires an NRSRO to retain 
compliance reports and compliance 
exception reports. The retention of these 
reports will identify activities of the 
NRSRO that its designated compliance 
officer had determined raised, or did not 
raise, compliance and control issues. 
Commission examiners will then be able 
to review how the NRSRO addressed the 
compliance issues. This can lead to 
more focused examinations, which also 
will decrease the burden on the NRSRO. 
The reports also will provide 
information as to whether the NRSRO is 

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33587 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

268 See DBRS Letter; Moody’s Letter. 
269See DBRS Letter. 
270Id. 
271See Moody’s Letter. 

272See DBRS Letter; Moody’s Letter. 
273 See DBRS Letter. 
274 See Moody’s Letter. 
275 Id. 

276 Id. 
277 15 U.S.C. 78o–7(f). 
278 See R&I Letter; DBRS Letter. 
279 See R&I Letter. 
280 See DBRS Letter. 

complying with its established 
methodologies, procedures, and 
policies. 

The Commission received two 
comments on this provision.268 One 
commenter stated that it should be 
narrowed to exclude compliance reports 
that do not find any deficiencies.269 The 
commenter stated that Commission 
examiners might use reports that do not 
contain deficiencies to second-guess the 
designated compliance officer.270 As 
noted above, compliance reports that do 
not contain deficiencies will be useful 
to examiners in terms of focusing 
exams. This commenter also stated that 
the provision should not apply to 
whistleblower reports. The Commission 
understands the concern that including 
whistleblower reports with the 
provision’s scope could have a chilling 
effect on an employee’s willingness to 
report violations, particularly in smaller 
organizations. For the purposes of this 
rule, the Commission does not view a 
whistleblower report as a final 
compliance report or a compliance 
exception report. It is an allegation 
made by someone within the 
organization about inappropriate or 
unlawful conduct. However, any final 
report of the NRSRO’s compliance 
officer resulting from the allegations or 
disclosures contained in the report of a 
whistleblower will be a compliance 
report subject to this provision. The 
compliance officer’s final compliance 
report on the matter can be drafted in a 
manner to protect the whistleblower by 
not identifying the person. 

The other commenter stated that the 
Commission should clarify that the rule 
does not require the retention of draft 
reports.271 In response, the Commission 
notes, as discussed above, that it did not 
intend the rule to be interpreted to 
require the retention of draft reports and 
other interim work product. The 
Commission has clarified this by adding 
introductory text to paragraph (b) of 
Rule 17g–2 that excludes drafts of 
documents from its provisions. For the 
foregoing reasons, the Commission is 
adopting paragraph (b)(4) of Rule 17g– 
2 substantially as proposed. 

e. Paragraph (b)(5) of Rule 17g–2 
As adopted, paragraph (b)(5) of Rule 

17g–2 requires an NRSRO to retain 
internal audit plans, internal audit 
reports, documents relating to internal 
audit follow-up measures, and all 
records identified by its internal 
auditors as necessary to perform the 

audit of an activity that relates to its 
business as a credit rating agency. The 
retention of these records will identify 
activities of the NRSRO that its internal 
auditors had determined raised, or did 
not raise, compliance or control issues. 
They also will assist the Commission in 
reviewing whether the NRSRO is 
complying with its established methods, 
procedures, and policies. 

The Commission received two 
comments on this provision.272 The first 
commenter requested that the provision 
be deleted because it would chill 
NRSROs from establishing robust 
internal audit departments.273 The 
Commission continues to believe these 
are important records that will assist the 
Commission examination staff in 
understanding a given NRSRO’s internal 
operations and activities. As noted 
above, one of the Commission’s 
oversight roles is to review whether an 
NRSRO is accurately disclosing 
information about, and adhering to, its 
procedures and methodologies for 
determining credit ratings. Reports of an 
NRSRO’s internal auditors can provide 
highly useful information to assist the 
Commission in performing this 
regulatory function. The Commission 
notes that the provision requires an 
NRSRO to maintain internal audit 
records for three years. This retention 
period is designed to provide 
Commission examiners with the 
opportunity to review them. Finally, the 
Commission staff’s experience with 
reviewing supervised entities such as 
broker-dealers and broker-dealer 
holding companies has not indicated 
that having access to internal audit 
reports chills the robust functioning of 
their internal audit departments. 

The second commenter requested that 
the Commission clarify that the 
provision only requires the retention of 
final internal audit reports and not 
interim work product.274 In response, 
the Commission notes that it does not 
intend the provisions to apply to drafts 
of internal audit records and, as noted 
above, has added introductory text to 
paragraph (b) of Rule 17g–2 that 
excludes drafts of documents from its 
provisions. The commenter also 
requested that the provision permit an 
NRSRO to tailor its internal audit 
records to its business plan.275 In 
response, the Commission notes that the 
provision only requires an NRSRO to 
retain internal audit records. It does not 
specify the types of audit records that 
must be made. An NRSRO is free to 

establish an internal audit process that 
is tailored to its business model. Finally, 
this commenter requested that the 
Commission clarify that the provision 
does not require an NRSRO that is a 
public company to retain financial 
reporting internal auditing reports 
beyond those required under the 
Exchange Act.276 The Commission notes 
that Rule 17g–2 requires an NRSRO to 
retain internal audit reports that relate 
to its business as a credit rating agency. 
The NRSRO must determine whether an 
internal audit report created under a 
statutory or regulatory requirement is 
one that relates to its credit rating 
business and, therefore, must be 
retained under this provision. 

For the foregoing reasons, the 
Commission is adopting paragraph 
(b)(5) of Rule 17g–2 substantially as 
proposed. 

f. Paragraph (b)(6) of Rule 17g–2 
As adopted, paragraph (b)(6) of Rule 

17g–2 requires an NRSRO to retain 
copies of marketing materials that are 
published or otherwise made available 
to persons that are not associated with 
the NRSRO. Section 15E(f) of the 
Exchange Act prohibits an NRSRO from 
representing that it has been designated, 
recommended, or approved, or that its 
abilities or qualifications have been 
passed upon by any federal agency or 
officer.277 The retention of marketing 
materials will assist the Commission in 
reviewing whether the NRSRO is 
complying with this statutory provision. 

The Commission received two 
comments on the provision.278 One 
commenter sought clarification that it 
does not apply to internal documents of 
the marketing department.279 The 
second commenter requested that the 
Commission provide guidance on the 
meaning of ‘‘marketing materials.’’ 280 
The Commission intended that the 
provision only apply to materials that 
are actually used to market the NRSRO’s 
credit rating services. The Commission 
has modified the rule text to clarify that 
the requirement only applies to 
marketing materials that are published 
or otherwise made available to persons 
who are not associated with the NRSRO. 
The Commission does not intend that 
the provision be interpreted to apply to 
records that are used by the marketing 
department for internal purposes. This 
modification is designed to provide 
greater clarity on the marketing 
materials that must be retained. In 

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33588 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

281 See ASF Letter; Rutherfurd Letter; DBRS 
Letter; Fitch Letter; S&P Letter. 

282 Id. 
283 See DBRS Letter. 
284 See Rutherfurd Letter; S&P Letter. 
285 See Fitch Letter. 
286 See, e.g., Commission complaint in 

Commission v. Citigroup Global Markets Inc., 03 CV 
2945 (WHP) (S.D.N.Y.) (April 28, 2003); 
Commission complaint in Commission v. Merrill, 
Lynch, Pierce, Fenner & Smith, 03 CV 2941 (WHP) 
(S.D.N.Y.) (April 28, 2003); Commission Order in 
Matter of Columbia Management Advisers, Inc. and 
Columbia Funds Distributor, Inc., Securities Act 
Release No. 8534 (February 9, 2005). 

287 As proposed, paragraph (b)(8) required an 
NRSRO to retain a record required to be made 
under paragraph (b) of proposed Rule 17g–6. The 
record required under paragraph (b) of proposed 
Rule 17g–6 would have documented when an 
NRSRO refused to issue or withdrew a credit rating 
for a security or money market instrument issued 
by an asset pool or as part of any asset-backed or 
mortgage backed securities transaction. This 
proposed provision in Rule 17g–6 has been 
eliminated and, therefore, the requirement to retain 
this record in Rule 17g–2 also has been eliminated. 

response to the second commenter, the 
Commission notes that marketing 
materials, generally, will include any 
written documents that an NRSRO 
publishes or provides to persons that 
explain or describe its credit rating 
services and are designed to induce 
persons to purchase the services. 

In all other respects, the Commission 
is adopting paragraph (b)(6) of Rule 
17g–2 substantially as proposed. 

g. Paragraph (b)(7) of Rule 17g–2 
As adopted, paragraph (b)(7) of Rule 

17g–2 requires an NRSRO to retain 
external and internal communications, 
including electronic communications, 
received and sent by the nationally 
recognized statistical rating organization 
and its employees that relate to 
initiating, determining, maintaining, 
changing, or withdrawing a credit 
rating. The Commission received several 
comments on the proposed rule text of 
the paragraph.281 The commenters all 
stated generally that the requirement 
was overbroad and should be 
narrowed.282 One suggested that it only 
require external communications.283 
Two suggested it only require 
communications used by a credit 
analyst to form the basis of a credit 
rating.284 Another commenter suggested 
the provision should have a materiality 
threshold.285 

In response to these comments, the 
Commission notes that the retention of 
written communications has played an 
important role in assisting the 
Commission in identifying legal 
violations and compliance issues with 
respect to other regulated entities.286 
The Commission believes that internal 
communications will play an important 
role in assisting the Commission in 
identifying legal violations and 
compliance issues in its oversight of 
NRSROs. For example, paragraph (a)(4) 
of Rule 17g–6 prohibits certain practices 
if they are undertaken with anti- 
competitive intent. The ability of the 
Commission to prove intent will be 
difficult absent communications that 
demonstrate why an NRSRO engaged in 
a particular act. Further, the 

Commission believes that narrowing the 
provision to communications used by a 
credit analyst to form the basis of a 
credit rating would carve out highly 
relevant communications, including 
communications that could be relevant 
to compliance with Rule 17g–4 
(nonpublic information), Rule 17g–5 
(conflicts of interest), and, as noted 
above, Rule 17g–6 (prohibited 
practices). Finally, the Commission 
believes that a materiality threshold 
would be very difficult to comply with 
and enforce. The degree of materiality of 
a communication viewed in isolation 
may not be apparent. In some cases, a 
seemingly innocuous communication 
may in fact be highly material when 
placed in the context of related events 
and other communications. 

For the foregoing reasons, the 
Commission is adopting paragraph 
(b)(7) of Rule 17g–2 substantially as 
proposed. 

h. Paragraph (b)(8) of Rule 17g–2 
As adopted, paragraph (b)(8) of Rule 

17g–2 requires an NRSRO to retain 
internal documents that contain 
information, analysis, or statistics that 
were used to develop a procedure or 
methodology to treat the credit ratings 
of another NRSRO for the purpose of 
determining a credit rating of a security 
or money market instrument issued by 
an asset pool or as part of any asset- 
backed or mortgage-backed securities 
transaction.287 This provision was not 
proposed but is being added because of 
modifications to paragraph (a)(4) of Rule 
17g–6, which prohibits anti-competitive 
practices relating to determining credit 
ratings for structured products. As 
discussed below with respect to 
paragraph (a)(4) of Rule 17g–6, the 
Commission believes this provision is 
necessary or appropriate in the public 
interest or for the protection of investors 
because it will assist the Commission in 
monitoring practices in the structured 
product area that many commenters 
believe are anti-competitive. 

i. Paragraph (b)(9) of Rule 17g–2 
As adopted, paragraph (b)(9) of Rule 

17g–2 requires an NRSRO to retain for 
each security identified in the record 
required under paragraph (a)(7) of Rule 

17g–2, any document that contains a 
description of how any assets within 
such pool or as a part of such 
transaction not rated by the NRSRO but 
rated by another NRSRO were treated 
for the purpose of determining the 
credit rating of the security. This 
provision was not proposed but is being 
added because of modifications to 
paragraph (a)(4) of Rule 17g–6, which 
prohibits anti-competitive practices 
relating to determining credit ratings for 
structured products. As discussed below 
with respect to paragraph (a)(4) of Rule 
17g–6, the Commission believes this 
provision is necessary or appropriate in 
the public interest or for the protection 
of investors because it will assist the 
Commission in monitoring practices in 
the structured product area that many 
commenters believe are anti- 
competitive. 

j. Paragraph (b)(10) of Rule 17g–2 

As adopted, paragraph (b)(10) of Rule 
17g–2 requires an NRSRO to retain 
Form NRSROs (including Exhibits and 
accompanying information and 
documents) submitted to the 
Commission. This provision will make 
the Forms and Exhibits subject to the 
retention and production requirements 
in Rule 17g–2. For example, NRSROs 
will be required to retain them in a 
manner that makes them easily 
accessible to the NRSRO’s principal 
office. This will assist Commission 
examiners, particularly examiners in 
regional offices, in accessing the records 
on site during an examination. 

The Commission did not receive any 
comments on the proposed rule text in 
this paragraph (proposed as paragraph 
(b)(9)) and is adopting it substantially as 
proposed. 

3. Paragraph (c) of Rule 17g–2 

As adopted, paragraph (c) of Rule 
17g–2 requires an NRSRO to retain the 
records identified in paragraphs (a) and 
(b) for three years after the date the 
record is made or received. The 
Commission believes the three-year 
retention period is necessary or 
appropriate in the public interest or for 
the protection of investors because it is 
designed to ensure that the records are 
preserved for at least one internal audit 
or Commission exam cycle. 

The proposed rule, however, 
articulated different retention periods 
for the records identified in paragraphs 
(a)(2) and (a)(3); namely, for three years 
after the NRSRO’s business relationship 
with the person ended. The Commission 
received a number of comments on this 
proposed retention period all of which 
stated that it was either too long or 

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288 See Gross Letter; Rutherfurd Letter; R&I Letter; 
DBRS Letter; Fitch Letter; S&P Letter; Moody’s 
Letter; LACE Letter. 

289 See R&I Letter; Fitch Letter; LACE Letter. 
290 See R&I Letter. 
291 15 U.S.C. 78q(b)(1). 
292 See Fitch Letter. 
293 See LACE Letter. 

294 See 15 U.S.C 78q(b). 
295 See Moody’s Letter. 

unclear.288 The Commission believes 
there has been some confusion 
regarding the retention requirement for 
these records. The proposed rule was 
designed so that an NRSRO would 
retain the last version of an account 
record for three years after the account 
was closed. The Commission believes 
the simpler and clarified text in the 
adopted version of the rule is designed 
to ensure this record is retained for this 
period. 

In other respects, paragraph (c) of 
Rule 17g–2 is being adopted 
substantially as proposed. 

4. Paragraph (d) of Rule 17g–2 

As adopted, paragraph (d) of Rule 
17g–2 requires an NRSRO to maintain 
an original, or a true and complete copy 
of the original, of each record required 
to be retained pursuant to paragraphs (a) 
and (b) of Rule 17g–2 in a manner that, 
for the applicable retention period 
specified in paragraph (c) of Rule 17g– 
2, makes the original record or copy 
easily accessible to the principal office 
of the NRSRO and to any other office 
that conducted activities causing the 
record to be made or received. The 
Commission believes this rule is 
necessary or appropriate in the public 
interest or for the protection of investors 
because it is designed to facilitate 
Commission examination of the NRSRO 
and to avoid delays in obtaining the 
records during an on-site examination. 
The rule does not specify the format in 
which the records must be retained. 
Consequently, NRSROs may retain them 
in, for example, paper form, on 
microfilm or microfiche, or 
electronically. 

The Commission did not receive any 
comments on this provision and is 
adopting it substantially as proposed. 

5. Paragraph (e) of Rule 17g–2 

As adopted, paragraph (e) of Rule 
17g–2 provides that an NRSRO can use 
the services of a third-party record 
custodian to make and retain the 
records identified in paragraphs (a) and 
(b), provided the NRSRO furnishes the 
Commission with a written undertaking 
of the custodian. The rule prescribes the 
form of the undertaking; namely, that 
the third-party must represent that the 
records are the exclusive property of the 
NRSRO, will be produced promptly to 
the NRSRO or the Commission or its 
representatives at the request of the 
NRSRO, and will be available for 
inspection by the Commission or its 
representatives. The rule also provides 

that an NRSRO remains responsible for 
complying with the Commission’s books 
and records rules, notwithstanding the 
fact that a third-party is making and/or 
storing them. The Commission believes 
this rule is necessary or appropriate in 
the public interest or for the protection 
of investors because it is designed to 
ensure that storing the records with a 
third-party does not make them less 
accessible than records stored at an 
NRSRO’s offices. 

The Commission received three 
comments on this provision.289 One 
commenter stated that the form of the 
undertaking could conflict with certain 
foreign business practices and, 
therefore, suggested that the NRSRO be 
required to provide the undertaking.290 
The Commission notes, however, that 
the undertaking is designed to ensure 
that a third-party custodian is under a 
direct obligation to produce the records 
to the Commission and its 
representatives. An NRSRO already is 
obligated under Section 17(b)(1) of the 
Exchange Act and Rule 17g–2 to 
produce these records.291 This 
obligation is in no way diminished 
because a third-party custodian is 
holding the records. The undertaking 
establishes a direct obligation on the 
third-party to produce the records to the 
Commission and its representatives. 
This direct obligation will be 
particularly important in situations 
where the NRSRO is unable or 
unwilling to request that the third-party 
produce the records. 

The second commenter requested that 
the form of the undertaking be modified 
in a manner that would obligate the 
third-party to only comply with 
‘‘reasonable’’ requests for records and 
only to the extent that producing the 
records was permitted by local law.292 
While the Commission is not codifying 
this suggestion into the rule, the 
Commission and its representatives 
make every effort to work with regulated 
entities on the scope and timing of 
record requests to lessen the burden and 
establish a production schedule that is 
practicable, given the circumstances. 

The final commenter stated that an 
NRSRO should not be required to use a 
third-party to store its records.293 The 
Commission notes that the rule does not 
require an NRSRO to use a third-party 
custodian to store its records. Rather, it 
provides the option for an NRSRO to 
use a third-party record custodian. 

For these reasons, the Commission is 
adopting paragraph (e) of Rule 17g–2 
substantially as proposed. 

6. Paragraph (f) of Rule 17g–2 
As adopted, paragraph (f) of Rule 17g– 

2 requires an NRSRO to promptly 
furnish the Commission or its 
representatives with legible, complete, 
and current copies, and, if specifically 
requested English translations, of those 
records of the NRSRO required to be 
retained under Rule 17g–2, or any other 
records of the NRSRO subject to 
examination under Section 17(b) of the 
Exchange Act 294 that are requested by 
the Commission or its representatives. 
As discussed in the next section, the 
proposed rule has been modified to 
incorporate a provision that the 
produced records be translated if 
necessary. The Commission believes 
this rule is necessary or appropriate in 
the public interest or for the protection 
of investors because it is designed to 
facilitate Commission examinations of 
NRSROs. 

The Commission received one 
comment on the provision.295 
Specifically, the commenter stated that 
the provision should not require an 
NRSRO to produce compliance and 
audit reports because doing so could 
adversely impact deliberations related 
to these functions and chill 
whistleblowers. The Commission 
explained above how the retention of 
compliance and audit reports under 
paragraphs (b)(4) and (b)(5) of Rule 17g– 
2, respectively, will assist Commission 
examiners in reviewing NRSROs. 
However, the retention of these records 
without the corresponding requirement 
to produce them would prevent the 
Commission and its examiners from 
using the records for these purposes. 
Therefore, the Commission believes 
they must be produced upon request to 
the Commission and its representatives. 

For these reasons, the Commission is 
adopting the provisions in paragraph (f) 
of Rule 17g–2 substantially as proposed. 

7. Non-Resident NRSROs 
Rule 17g–2, as proposed, contained 

provisions in two paragraphs 
(paragraphs (f) and (h)) designed to 
address the fact that credit rating 
agencies not located in the U.S. may 
become NRSROs. After consideration of 
the comments and for the reasons 
discussed below, the Commission is 
eliminating these provisions from Rule 
17g–2, as adopted, except for the 
provision concerning translating 
records. 

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33590 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

296 See AEI Letter; R&I Letter; DBRS Letter; Fitch 
Letter. 

297 See, e.g., DBRS Letter. 
298 See AEI Letter. 
299 See 15 U.S.C 78q(b). 

300 An applicant can request that the Commission 
keep this information confidential. See 17 CFR 
200.80 and 17 CFR 200.83. 

301 15 U.S.C. 78o–7(k). 
302 Id. 
303 15 U.S.C. 78o–7(d). 
304 Id. 
305 15 U.S.C. 78o–7(b)(1). 

306 An applicant can request that the Commission 
keep this information confidential. See 17 CFR 
200.80 and 17 CFR 200.83. 

307 15 U.S.C. 78o–7(a)(3). 
308 The Commission notes that some NRSROs 

may have fiscal year ends that are not on December 
31. Therefore, if the Commission required that this 
financial information be updated through 
furnishing Form NRSROs, these entities would not 
be able to furnish the update with their annual 
certifications, which—pursuant to Section 15E(b)(2) 
of the Exchange Act (15 U.S.C. 78o–7(b)(2))—must 
be furnished on a calendar year basis. 

309 See 15 U.S.C. 78o–7(k). 

Paragraph (f) of proposed Rule 17g–2 
would have required that a non-resident 
NRSRO must undertake to send books 
and records to the Commission and its 
representatives upon request. The 
undertaking would have been required 
to be attached to an initial application 
for registration as an NRSRO. The 
Commission explained in the proposing 
release that the undertaking was 
designed to provide a mechanism for 
the Commission examination staff to 
inspect records maintained overseas 
without having to travel to the location. 
In addition, because some non-resident 
NRSROs may maintain original records 
in a language other than English, the 
proposed undertaking would have 
required a translation if the Commission 
requested it. 

The Commission received four 
comments on the proposed rule text in 
this paragraph.296 Generally, the 
commenters objected to various 
representations in the form of the non- 
resident undertaking 297 or to the 
requirement to provide the undertaking 
altogether.298 After considering the 
comments, the Commission believes the 
requirement for non-resident NRSROs to 
provide a special undertaking is 
unnecessary. As NRSROs, they are 
subject to the production requirements 
of Section 17(b) of the Exchange Act 299 
and Rule 17g–2(f). Therefore, the 
Commission and its representatives will 
not require the non-resident 
undertaking to compel a foreign NRSRO 
to produce the records. Moreover, Rule 
17g–2(f), as adopted, requires the 
records to be ‘‘furnished’’ to the 
Commission. Thus, an NRSRO located 
outside the U.S. is required to send the 
records to the Commission upon 
request. 

However, the Commission continues 
to believe that the representation in the 
proposed undertaking to provide 
translated records is necessary or 
appropriate in the public interest or for 
the protection of investors. Providing 
un-translated records to the Commission 
could significantly delay and hinder its 
oversight function. Consequently, this 
provision has been moved into the 
provisions of paragraph (f) of Rule 17g– 
2. In all other respects, the provisions of 
paragraph (f) of proposed Rule 17g–2 
have been eliminated from the final 
rule. 

The provisions of paragraph (h) of 
proposed Rule 17g–2 would have 
defined the term non-resident rating 

organization for the purpose of 
specifying the type of NRSRO that 
would have been required to provide 
the non-resident undertaking. The 
definition is no longer necessary and 
has been eliminated from the adopted 
rule. 

For these reasons, the Commission is 
eliminating the provisions in Rule 17g– 
2 relating to non-resident NRSROs 
except for the provision concerning the 
translation of records. 

D. Rule 17g–3—Annual Financial 
Reports 

Section 15E(k) of the Exchange Act 
requires an NRSRO to furnish to the 
Commission, on a confidential basis 300 
and at intervals determined by the 
Commission, such financial statements 
and information concerning its financial 
condition as the Commission, by rule, 
may prescribe as necessary or 
appropriate in the public interest or for 
the protection of investors.301 The 
statute also provides that the 
Commission may, by rule, require that 
the financial statements be certified by 
an independent public accountant.302 
Rule 17g–3 requires an NRSRO to 
furnish the Commission on an annual 
basis certain financial reports. The 
furnishing of these reports will serve 
two important functions in the NRSRO 
regulatory program. 

First, Section 15E(d) of the Exchange 
Act provides that the Commission shall, 
by order, censure, place limitations on 
the activities, functions or operations of, 
suspend for a period not exceeding 12 
months, or revoke the registration of an 
NRSRO if, among other things, the 
NRSRO fails to maintain adequate 
financial and managerial resources to 
consistently produce credit ratings with 
integrity.303 The financial reports will 
assist the Commission in monitoring the 
NRSRO’s financial resources and the 
resources it commits to management to 
evaluate whether the Commission must 
take action under Section 15E(d) of the 
Exchange Act.304 

Second, Section 15E(b)(1) of the 
Exchange Act requires an NRSRO to 
promptly amend its application for 
registration, as prescribed in that 
section, if any information or document 
provided in the application becomes 
materially inaccurate.305 Form NRSRO 
requires the following financial 
information: a list of large customers in 

terms of net revenues; audited financial 
statements; information about revenues; 
and information about credit analyst 
compensation. This information is 
required to be as of, or for, the NRSRO’s 
previous fiscal year. Accordingly, the 
information only will become materially 
inaccurate and, therefore, be required to 
be updated on an annual basis. In 
addition, the information will be 
submitted with Form NRSRO on a 
confidential basis to the extent 
permitted by law 306 and will not have 
to be made publicly available pursuant 
to Section 15E(a)(3) of the Exchange 
Act 307 and Rule 17g–1(i) thereunder. 
Therefore, because the information only 
will be disclosed to the Commission, it 
is more appropriate to require that it be 
updated through the Commission’s 
authority under Section 15E(k) of the 
Exchange Act and Rule 17g–3 
thereunder than through annual 
furnishings of Form NRSRO.308 

After consideration of the comments, 
Rule 17g–3 has been modified in several 
ways. In particular, the rule has been 
restructured to prescribe that the audit 
requirement only applies to the 
financial statements. The proposed 
schedules to the financial statements are 
now separate financial reports that are 
not required to be audited. For the 
reasons discussed above and below, the 
Commission believes Rule 17g–3, as 
modified, is necessary or appropriate in 
the public interest or for the protection 
of investors.309 

1. Paragraph (a) to Rule 17g–3 
As adopted, paragraph (a) of Rule 

17g–3 requires an NRSRO to annually 
furnish the Commission four, or in some 
cases five, financial reports. The reports 
must be furnished not more than 90 
days after the end of the NRSRO’s fiscal 
year and the information in the reports 
must be as of the most recently ended 
fiscal year. The reports will consist 
substantially of the same information 
that would have been in the financial 
statements and schedules required 
under Rule 17g–3, as proposed. The 
Commission received numerous 
comments requesting that the proposed 
schedules to the audited financial 

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33591 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

310 See DBRS Letter; A.M. Best Letter; Fitch 
Letter; AEI Letter; Moody’s Letter. 

311 See R&I Letter. 
312 See S&P Letter; Moody’s Letter. 

313 See Letter dated March 12, 2007 from Makoto 
Utsumi, President & CEO, Japan Credit Rating 
Agency, Ltd. (‘‘JCR Letter’’); R&I Letter; DBRS 
Letter. 

314 Id. 
315 See JCR Letter; R&I Letter; DBRS Letter; Fitch 

Letter. 

316 The Commission notes NRSROs that furnish 
consolidated audited financial statements of parents 
that are public companies should furnish those 
statements as they are prepared in accordance with 
all applicable reporting requirements for public 
companies, which may include adhering to all 
provisions of Regulation S–X. 

317 See Final Rule: Strengthening the 
Commission’s Rules Regarding Auditor 
Independence, Securities Act Release No. 8183 
(January 28, 2003), 68 FR 6005 (February 5, 2003). 

statements not be subject to the audit 
requirement.310 The comments stated 
generally that obtaining an audit of the 
information in the proposed schedules 
would be difficult and unduly 
expensive. After consideration of these 
comments, the Commission has 
modified Rule 17g–3 to eliminate the 
requirement that the information that 
would have been provided in the 
schedules be audited. This will lessen 
the burden of preparing the information 
for submission to the Commission. 
Moreover, Rule 17g–3 no longer requires 
that this information be submitted in 
schedules to the NRSRO’s financial 
statements. Instead, the information 
must be furnished in separate financial 
reports. This is intended to clarify that 
the independent auditor that certifies 
the NRSRO’s financial statements is not 
required to include the other unaudited 
financial reports in the opinion covering 
the financial statements. 

As noted above, Rule 17g–3 requires 
that the financial reports be furnished 
within 90 days after the end of the 
NRSRO’s fiscal year. One commenter 
requested that the period be lengthened 
to 120 days for non-resident NRSROs.311 
The Commission notes that paragraph 
(c) of Rule 17g–3 provides a mechanism 
for an NRSRO to seek an extension of 
the time to furnish the financial reports. 
An NRSRO that cannot provide its 
financial reports within 90 days will be 
able to request an extension under this 
provision. Therefore, the Commission 
does not believe it is necessary to create 
a different standard for non-resident 
NRSROs, particularly since Rule 17g–3 
has been modified to make the 
preparation of the financial reports less 
burdensome. 

a. Paragraph (a)(1): Audited Financial 
Statements 

The first report, required under 
paragraph (a)(1) of Rule 17g–3, must 
contain audited financial statements of 
the NRSRO. Rule 17g–3, as proposed, 
also required the submission of audited 
financial statements and, as noted 
above, certain schedules to the financial 
statements. The schedules are now 
separate financial reports that are not 
required to be audited. Two commenters 
stated that an NRSRO that is a 
separately identifiable department or 
division of a public company should be 
permitted to furnish audited financial 
statements of its parent.312 As noted 
above with respect to Exhibit 11, the 
Commission believes that, in this case, 

the financial statements of the parent 
provide information from which it can 
assess the financial resources of the 
NRSRO. The Commission believes, 
however, that certain financial 
information about the NRSRO must be 
furnished as well. For these reasons, the 
rule has been modified to permit an 
NRSRO to furnish audited consolidated 
financial statements of its parent; 
however, the NRSRO also will have to 
furnish unaudited consolidating 
financial statements under paragraph 
(a)(2) of Rule 17g–3 discussed below. 

The audited financial statements must 
include a balance sheet, an income 
statement and statement of cash flows, 
and a statement of changes in 
ownership equity. They must be 
prepared in accordance with generally 
accepted accounting principles in the 
jurisdiction where the NRSRO or its 
parent is incorporated, organized, or has 
its principal office. Finally, the audited 
financial statements must be certified by 
an accountant who is qualified and 
independent in accordance with 17 CFR 
240.210.2–01(a), (b), and (c)(1), (2), (3), 
(4), (5) and (8). In addition, the 
accountant must give an opinion on the 
financial statements in accordance with 
17 CFR 210.2–02(a), (b), (c) and (d). The 
first financial report is how an NRSRO 
will update the information initially 
provided in Exhibit 11 of Form NRSRO. 

The requirement to have the financial 
statements audited will provide the 
Commission with an independent 
verification that the information in them 
is presented fairly, in all material 
respects. The Commission received 
numerous comments on these audit 
requirements. Several commenters 
stated that non-resident NRSROs should 
be permitted to provide financial 
statements prepared in accordance with 
generally accepted accounting 
principles of the jurisdiction where the 
NRSRO is incorporated or has its 
principal place of business.313 The 
commenters stated that preparing them 
according U.S. generally accepted 
accounting principles could be very 
expensive.314 Similarly, several 
commenters stated that complying with 
certain provisions of Regulation S–X (17 
CFR 210.1–01—12–29) would be unduly 
burdensome for non-resident NRSROs 
and non-reporting companies.315 

The Commission notes that the 
financial statements will be prepared to 
assist the Commission in carrying out its 

oversight responsibilities with respect to 
monitoring the financial resources of 
NRSROs and not as a disclosure item for 
public consumption. The Commission 
staff will have the opportunity to 
discuss the financial statements with a 
non-resident NRSRO to gain an 
understanding of any material 
divergences from U.S. generally 
accepted accounting principles. 
Accordingly, the Commission believes 
that it is appropriate to permit the 
financial statements to be prepared in 
accordance with generally accepted 
accounting principles in the jurisdiction 
where the NRSRO or its parent is 
incorporated, organized, or has its 
principal office. This will lessen the 
burden for non-resident NRSROs and 
still provide the Commission with the 
financial information necessary to carry 
out its oversight responsibilities. 

For these reasons, the Commission 
also agrees that applying many 
provisions of Regulation S–X would be 
unnecessary and, therefore, has 
eliminated most of this requirement 
from the rule. The Commission does 
believe that certain provisions of 
Regulation S–X relating to the 
qualifications and independence of the 
auditor and the auditor’s attestation and 
the scope of the auditor’s opinion are 
appropriate for all NRSROs, including 
non-residents and non-public 
companies. Consequently, Rule 17g–2, 
as adopted, eliminates the proposed 
requirement to comply with all the 
provisions of Regulation S–X. Instead, 
the rule requires the auditor to be 
qualified and independent in 
accordance with 17 CFR 240.210.2– 
01(a), (b), and (c)(1), (2), (3), (4), (5) and 
(8).316 These provisions are designed to 
ensure that auditors are independent of 
their audit clients.317 In addition, the 
accountant must give an opinion on the 
financial statements in accordance with 
17 CFR 210.2–02(a), (b), (c) and (d). The 
retained provisions of Regulation S–X 
are appropriate for any audit as they 
relate to general standards of 
competence, independence, and audit 
work and are not specifically designed 
for public companies. Accordingly, the 
audited financial statements in Rule 
17g–3 must be prepared in accordance 
with them. 

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33592 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

318 See EJR Letter; LACE Letter. 
319 See LACE Letter. 
320 See 17 CFR 240.17a–5. 
321 15 U.S.C. 78o–7(d). 

322 See DBRS Letter. 
323 15 U.S.C. 78o–7(k). 
324 See, e.g., Section 13(a) of the Exchange Act (15 

U.S.C. 78m(a)) and the rules thereunder; Section 17 
of the Exchange Act (15 U.S.C. 78q). 

325 See Moody’s Letter. 
326 15 U.S.C. 78o–7(d). 

327 See Fitch Letter. 
328 15 U.S.C. 78o–7(d). 
329 See Fitch Letter. 

As noted with respect to Exhibit 11, 
two commenters also requested that the 
proposed rule be modified to permit an 
NRSRO to furnish a tax return prepared 
by an accountant in lieu of audited 
financial statements.318 One of the 
commenters suggested that this lesser 
requirement only apply to smaller 
entities (less than $5 to $10 million in 
asset size) and could be augmented with 
a requirement to include with the tax 
return a balance sheet and income 
statement signed by an accountant.319 

As discussed with respect to Exhibit 
11, the Commission does not believe a 
tax return will provide sufficient 
information. Further, the Commission 
notes that the financial responsibility 
rules for broker-dealers require audited 
financial statements for small broker- 
dealers with a minimum capital 
requirement of $5,000.320 The 
accountants performing an audit of a 
small NRSRO will tailor the audit and 
audit report to the size and complexity 
of the entity’s business. This will keep 
costs for smaller NRSROs lower. This is 
especially true in light of the changes 
discussed above with respect to 
eliminating requirements with respect 
to Regulation S–X and the proposed 
requirement that the information 
proposed for the schedules be audited. 
Moreover, in response to the second 
commenter, it is unclear to the 
Commission in what capacity an 
accountant would sign financial 
statements short of performing an audit 
of them. For the purposes of Rule 17g– 
3, the Commission believes that the only 
appropriate review of the financial 
statements is an audit by an 
independent accountant. The audit, as 
noted above, is designed to provide a 
reasonable level of assurance that the 
financial statements are free of material 
misstatement. 

The Commission believes that the 
annual audit will be integral to its 
ability to effectively monitor the 
financial resources of an NRSRO as 
required under Section 15E(d) of the 
Exchange Act, since it provides an 
independent verification of an NRSRO’s 
financial condition. For these reasons, 
Rule 17g–3, as adopted, requires audited 
financial statements on an annual 
basis.321 

Finally, one commenter suggested 
that the requirement that the audited 
financial statements be ‘‘certified’’ by 
the accountant is inconsistent with 
accounting practice because financial 
statements are either ‘‘audited’’ or 

‘‘certified.’’ 322 The Commission notes 
that the authority to require that an 
auditor ‘‘certify’’ the audited financial 
statements is set forth in Section 15E(k) 
of the Exchange Act.323 Moreover, this 
provision is consistent with other 
Commission financial reporting 
requirements.324 Consequently, the final 
rule retains the provision. 

b. Paragraph (a)(2): Consolidating 
Financial Statements 

As adopted, paragraph (a)(2) of Rule 
17g–3 requires an NRSRO furnishing 
audited consolidated financial 
statements of its parent to furnish a 
second report containing unaudited 
consolidating financial statements of its 
parent that include the NRSRO. This 
will provide the Commission with 
information about the financial 
condition of the NRSRO as distinct from 
the financial condition of its parent. 
One commenter requested that this 
information not be subject to the audit 
requirement if the audited consolidated 
statements include operating segment 
reporting in accordance with Regulation 
S–X.325 As noted above, this financial 
report is not required to be audited. 

c. Paragraph (a)(3): Revenue Information 
The third report, required under 

paragraph (a)(3) of Rule 17g–3, must 
contain the following unaudited 
information about the NRSRO’s 
revenues: (1) Revenue from determining 
and maintaining credit ratings; (2) 
revenue from subscribers; (3) revenue 
from granting licenses or rights to 
publish credit ratings; and (4) revenue 
from all other services and products 
offered by the NRSRO. This financial 
report will be how an NRSRO updates 
the information initially provided in 
Exhibit 12 to Form NRSRO. This 
information would have been required 
in the first schedule to the financial 
statements required under Rule 17g–3, 
as proposed. 

This information will augment the 
audited financial statements by 
providing detail as to the revenues 
generated specifically from credit rating 
services. The revenue information will 
assist the Commission in monitoring 
whether an NRSRO maintains adequate 
financial resources to consistently 
produce credit ratings with integrity.326 
As discussed with respect to Exhibit 12, 
one commenter requested the 
elimination of a requirement in the 

proposed rule to separately report 
revenues from determining private 
credit ratings (i.e., credit ratings that are 
not made readily accessible to the 
public).327 The commenter stated that it 
would be difficult to separate private 
ratings revenue from public ratings 
revenue. The Commission agrees and 
the requirement to separately itemize 
private ratings revenue has been 
eliminated. This revenue must be 
included in the revenue item for 
determining or maintaining credit 
ratings. 

The Commission is adopting this 
provision with the modifications 
discussed above. 

d. Paragraph (a)(4): Credit Analyst 
Compensation 

The fourth report, required under 
paragraph (a)(4) of Rule 17g–3, must 
contain the total aggregate and median 
annual compensation of the NRSRO’s 
credit analysts. The information in this 
report is not required to be audited. This 
financial report will be how an NRSRO 
updates the information initially 
provided in Exhibit 13 to Form NRSRO. 
This information would have been 
required in the second schedule to the 
financial statements required under 
Rule 17g–3, as proposed. 

The information on analyst 
compensation will augment the audited 
financial statements by providing detail 
as to expenses necessary to retain the 
credit rating agency’s credit analysts. 
This information collectively will assist 
the Commission in monitoring whether 
an NRSRO maintains adequate financial 
resources to consistently produce credit 
ratings with integrity.328 As discussed 
with respect to Exhibit 13, one 
commenter requested that the 
Commission clarify how an NRSRO 
should treat deferred compensation.329 
The Commission believes an NRSRO 
should have the flexibility to include or 
exclude deferred compensation in 
making the calculation. If deferred 
compensation is excluded, the rule 
requires the NRSRO to make a note of 
that fact in the financial report. The 
Commission also believes that an 
NRSRO must be consistent in its 
approach of either including or 
excluding deferred compensation. 

The Commission is adopting this 
provision with the modifications 
discussed above. 

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330 17 CFR 240.17a–5(e)(2). 

331 See A.M. Best Letter. 
332 15 U.S.C. 78o–7(g)(1). 
333 15 U.S.C. 78a et seq. 

334 15 U.S.C. 78o–7(g)(2). 
335 See Proposed Rule: Definition of Nationally 

Recognized Statistical Rating Organization, 
Securities Act Release No. 8570 (April 19, 2005), 70 
FR 21306 (April 25, 2005). 

336 Id. 
337 See 17 CFR 243.100. 
338 17 CFR 243.100(b)(2)(iii). 
339 See Commission 2003 CRA Report and 

Commission 2003 Concept Release, Securities Act 
Release No. 8236 (June 4, 2003), 68 FR 35258 (June 
12, 2003), noting the concern raised by some that 
subscribers may have preferential access to credit 
analysts and, as a result, may inappropriately learn 
material nonpublic information in the possession of 
a credit analyst. 

340 Id. 

e. Paragraph (a)(5): List of Large 
Customers 

The fifth report, required under 
paragraph (a)(5) of Rule 17g–3, must 
contain a list of the NRSRO’s 20 largest 
issuer and subscriber customers in 
terms of net revenue earned from the 
customers and, include in the list, any 
obligor or underwriter customers that 
are as large as or larger than the 20th 
largest issuer or subscriber customer. 
The information in this report is not 
required to be audited. This financial 
report will be the mechanism that an 
NRSRO uses to update the information 
initially provided in Exhibit 10 to Form 
NRSRO. This information would have 
been required in the third schedule to 
the financial statements required under 
Rule 17g–3, as proposed. 

The largest customers will be 
determined applying the same 
definitions of ‘‘net revenues’’ and 
‘‘credit rating services’’ used for Exhibit 
10, including the changes to those 
definitions discussed above with respect 
to Exhibit 10. In addition, just as with 
Exhibit 10, obligor and underwriter 
customers must be added to the list to 
the extent they are as large as, or larger 
than, the 20th largest issuer or 
subscriber customer. 

The list will assist the Commission in 
identifying conflicts arising from any 
influence a person may have on the 
NRSRO given the amount of revenue the 
person provides the credit rating 
agency. 

2. Paragraph (b) of Rule 17g–3 

Paragraph (b) of Rule 17g–3 requires 
that the NRSRO attach to each financial 
report provided under paragraph (a) a 
statement by a duly authorized person 
of the NRSRO that the information in 
the report presents fairly, in all material 
respects and as applicable, the financial 
condition, results of operations, income, 
cash flows, revenues, and analyst 
compensation of the NRSRO. This 
information will provide a level of 
assurance that the information in the 
financial reports has been reviewed by 
the NRSRO. Further, the requirement 
parallels Commission Rule 17a–5(e)(2), 
which requires a duly authorized officer 
of a broker-dealer (or, in the case of a 
general partnership, the general partner) 
to attach an oath or affirmation stating 
the financial statements and schedules 
required under that rule are true and 
correct.330 This requirement was 
proposed in paragraph (c) of Rule 17g– 
3. 

One commenter suggested that the 
Commission eliminate this requirement 

because it was unnecessary given the 
NRSRO’s legal exposure for furnishing 
an inaccurate report.331 The commenter 
stated that the requirement could 
dissuade a credit rating agency from 
registering with the Commission. The 
Commission believes it is important that 
a person within the NRSRO be 
responsible for reviewing the 
information in the financial reports and 
stating that they are a fair representation 
of its financial condition, results of 
operations, income, cash flows, 
revenues, and analyst compensation. 
This provision is designed to enhance 
the accuracy of these reports insomuch 
as the individual within the NRSRO 
will perform some level of due diligence 
before executing the statements. 
Moreover, since only the information in 
the first financial report will be audited, 
the Commission believes a person 
within the NRSRO must be responsible 
for the information in all the reports. 
For these reasons, the Commission is 
retaining the requirement in the final 
rule. 

3. Paragraph (c) of Rule 17g–3 

Paragraph (c) of Rule 17g–3 provides 
that the Commission may grant an 
extension of time or exemption from 
any requirements in the rule either 
unconditionally or on specified terms 
and conditions on the written request of 
an NRSRO, if the Commission finds that 
such extension or exemption is 
necessary or appropriate in the public 
interest, and is consistent with the 
protection of investors. This provision 
was proposed in paragraph (d) of Rule 
17g–3. The Commission did not receive 
any comments on this provision and is 
adopting it substantially as proposed. 

E. Rule 17g–4—Procedures To Prevent 
the Misuse of Material, Nonpublic 
Information 

Rule 17g–4 will require an NRSRO to 
establish procedures to address three 
areas where material, nonpublic 
information could be inappropriately 
disclosed or used. Section 15E(g)(1) of 
the Exchange Act 332 requires an NRSRO 
to establish, maintain, and enforce 
written policies and procedures 
reasonably designed to prevent the 
misuse of material, nonpublic 
information in violation of the Exchange 
Act.333 Section 15E(g)(2) of the 
Exchange Act provides that the 
Commission shall adopt rules requiring 
an NRSRO to establish specific policies 
and procedures reasonably designed to 

prevent the misuse of material, 
nonpublic information.334 

1. Paragraph (a)(1) of Rule 17g–4 

Paragraph (a)(1) of Rule 17g–4 
requires procedures reasonably 
designed to prevent the inappropriate 
dissemination within and outside the 
NRSRO of material nonpublic 
information obtained for the purpose of 
developing a credit rating. Some credit 
rating agencies, as part of their analysis, 
contact senior management of the 
obligors and issuers subject to their 
credit ratings. In the course of these 
contacts, an issuer or obligor may 
provide the credit rating agency with 
nonpublic information including 
contemplated business transactions or 
estimated financial projections.335 
Credit rating agencies have commented 
that this confidential information 
greatly assists them in issuing credible 
and reliable ratings.336 In fact, the 
Commission’s Regulation FD, which 
governs the disclosure of material, 
nonpublic information by issuers, 
contains an exception that permits 
issuers to intentionally disclose such 
information to a credit rating agency 
without making a simultaneous public 
disclosure of the information.337 The 
selective disclosure to the credit rating 
agency, however, must be solely for the 
purpose of developing a publicly 
available credit rating.338 

One concern that has been raised in 
the past is that subscribers to a credit 
rating agency’s more detailed credit 
reports also may be granted direct 
access to the credit analysts.339 If the 
credit analyst is in possession of 
material, nonpublic information, there 
is a risk the information may be 
inappropriately disclosed to the 
subscriber during the course of 
communications with the credit 
analyst.340 

The rule does not prescribe specific 
procedures that must be established. 
Therefore, NRSROs will have flexibility 
to develop procedures tailored to their 
organizational structures and business 

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33594 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

341 See S&P Letter. 
342 Id. 
343 15 U.S.C. 78o–7(g)(1). 
344 15 U.S.C. 78a et seq. 
345 See, e.g., Commission complaint in 

Commission v. Rick A. Marano, William Marano 
and Carl Loizzi, 04 CV 5828 (Judge Kimba Wood) 

(S.D.N.Y.); see also Commission Litigation Release 
No. 18799 (July 27, 2004). 

346 See S&P Letter. 
347 Id. 
348 See Moody’s Letter. 
349 See 17 CFR 240.10b5–1. 

350 See Moody’s Letter. 
351 See Moody’s Letter. 
352 15 U.S.C. 78o–7(g)(1). 
353 15 U.S.C. 78a et seq. 

models. An NRSRO may have 
procedures requiring credit analysts to 
receive training in the laws governing 
the misuse of material, nonpublic 
information; defining the persons 
within the NRSRO with whom the 
credit analyst can share the information; 
prohibiting the credit analyst from 
disclosing the information to any other 
persons; and requiring the credit analyst 
to take steps to safeguard documents 
containing the information. An NRSRO 
that does not use management contacts 
as part of its methodology for 
determining credit ratings may prohibit 
credit analysts from contacting rated 
issuers or obligors. 

The Commission received one 
comment on this provision.341 The 
commenter stated that an NRSRO 
should be permitted to disclose 
material, nonpublic information in 
aggregate form (e.g., through usage in 
models) in a manner that does not 
identify individual issuers.342 The 
Commission notes, however, that the 
rule, by itself, does not expressly 
prohibit any types of disclosures. As 
discussed above, Section 15E(g)(1) of 
the Exchange Act 343 requires an NRSRO 
to establish, maintain, and enforce 
written policies and procedures to 
prevent the misuse of material, 
nonpublic information in violation of 
the Exchange Act and the rules 
thereunder.344 Rule 17g–4 requires an 
NRSRO to address the inappropriate 
disclosure of material, nonpublic 
information when establishing these 
procedures required by statute. 

For these reasons, the Commission is 
adopting paragraph (a)(1) of Rule 17g– 
4 substantially as proposed. 

2. Paragraph (a)(2) of Rule 17g–4 

Paragraph (a)(2) of Rule 17g–4 
requires procedures reasonably 
designed to prevent a person within the 
NRSRO from purchasing, selling, or 
otherwise benefiting from any 
transaction in securities or money 
market instruments when the person is 
aware of material, nonpublic 
information obtained for the purpose of 
developing a credit rating. This 
provision requires an NRSRO to address 
the risk that individuals in possession of 
material, nonpublic information about 
an issuer or obligor may trade securities 
or money market instruments on the 
information.345 

As with paragraph (a), the provision 
does not prescribe specific procedures 
that must be established. An NRSRO 
may have policies prohibiting persons 
within the NRSRO from purchasing or 
selling a security or money market 
instrument that is subject to a pending 
credit rating action; requiring persons 
within the NRSRO to obtain pre- 
approval before purchasing or selling a 
security or money market instrument; or 
requiring persons within the NRSRO to 
be notified of securities or money 
market instruments that are on a ‘‘do not 
trade’’ list. 

The Commission made three 
modifications to the provision, as 
proposed, to address comments. The 
Commission believes the commenters 
identified areas where the provision 
could cause some practical difficulties 
in designing procedures. The changes 
are designed to remove these 
impediments. 

First, the Commission deleted a 
reference in the provision to members of 
the household of an NRSRO employee. 
This change was made in response to a 
comment that it would be difficult to 
design procedures addressing the 
trading activities of household members 
since a household may include persons 
that the employee has no influence over, 
such as roommates.346 The commenter 
further noted that procedures designed 
to prevent an employee ‘‘from otherwise 
benefiting’’ from the use of material 
non-public information would cover an 
employee’s immediate family 
members.347 

Second, the Commission replaced a 
reference in the provision to an 
employee ‘‘possess[ing]’’ or having 
‘‘access’’ to material, non-public 
information. The provision, as adopted, 
refers to an employee being ‘‘aware’’ of 
material, nonpublic information. This 
change was made in response to a 
comment that having ‘‘access’’ to 
material, nonpublic information could 
be interpreted very broadly, which 
would make designing procedures to 
address the issue difficult.348 The 
commenter also noted that Commission 
Rule 10b5–1, which concerns trading on 
the basis of material, nonpublic 
information in insider trading cases, 
refers to being ‘‘aware’’ of material, 
nonpublic information.349 

The third modification narrowed the 
scope of the provision to ‘‘persons 
within’’ the NRSRO. As proposed, the 

provision would have required 
procedures designed to prevent persons 
‘‘associated’’ with the NRSRO from 
trading on material, nonpublic 
information. A commenter stated that 
this made the provision overly broad 
since the definition of persons 
‘‘associated’’ with an NRSRO in Section 
3(a)(63) of the Exchange Act includes 
employees of affiliates engaged in 
activities wholly unrelated to credit 
rating services.350 Similar to Item 8 of 
Form NRSRO (statutory disclosures) 
and, as discussed next, Rule 17g–5, the 
Commission is narrowing the scope of 
this provision to persons ‘‘within’’ the 
NRSRO. Paragraph (b) of Rule 17g–4 
defines a person ‘‘within’’ the NRSRO to 
mean the NRSRO, its credit rating 
affiliates identified on Form NRSRO, 
and any partner, officer, director, branch 
manager, and employee of the NRSRO 
or its credit rating affiliates (or any 
person occupying a similar status or 
performing similar functions). 

Finally, a commenter stated that the 
provision should not apply to indirect 
trading in securities such as through 
transactions in mutual funds.351 The 
Commission notes that the rule by itself 
does not expressly prohibit any types of 
transactions. As discussed above, 
Section 15E(g)(1) of the Exchange 
Act 352 requires an NRSRO to establish, 
maintain, and enforce written policies 
and procedures to prevent the misuse of 
material, nonpublic information in 
violation of the Exchange Act and the 
rules thereunder.353 Rule 17g–4 requires 
an NRSRO to address the inappropriate 
use of material, nonpublic information 
when establishing these procedures 
required by statute. 

For these reasons, paragraph (a)(2) of 
Rule 17g–4 is being adopted with the 
modifications described above. 

3. Paragraph (a)(3) of Rule 17g–4 

Paragraph (a)(3) of Rule 17g–4 
requires procedures reasonably 
designed to prevent the inappropriate 
dissemination within and outside the 
NRSRO of a credit rating action before 
issuing the credit rating on the Internet 
or through another readily accessible 
means. This provision recognizes that a 
credit rating action of an NRSRO may be 
material, nonpublic information. 
Consequently, an NRSRO must have 
policies designed to ensure that its 
pending credit rating actions are not 
selectively disclosed before the credit 
rating is issued on the Internet or 

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33595 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

354 15 U.S.C. 78o–7(h)(1). 

355 15 U.S.C. 78o–7(h)(2). 
356 See 15 U.S.C. 78o–7(h)(2)(A)–(D). 
357 See 15 U.S.C. 78o–7(h)(2)(E). 
358 15 U.S.C. 78o–7(h)(1). 
359 15 U.S.C. 78o–7(h)(2); see also R&I Letter. 

360 See DBRS Letter proposing that the conflicts 
identified in Exhibit 6 and Rule 17g–5 better track 
one another. 

361 For example, the conflicts identified in 
paragraphs (b)(1), (2) and (3) were all identified in 
paragraph (b)(1) of the proposed rule. 

362 15 U.S.C. 78o–7. 

through another readily accessible 
means. 

As with paragraphs (a)(1) and (a)(2), 
paragraph (a)(3) does not prescribe 
specific procedures. However, as 
applicable to the business model of the 
NRSRO, these policies may include 
procedures designed to ensure that a 
credit rating action is issued in a way 
that makes it readily accessible to the 
market place, such as posting the credit 
rating or an announcement of the credit 
rating action on the NRSRO’s Web site 
or through a news or information 
service used by market participants or 
by making it available to all subscribers 
simultaneously. The policies also may 
include procedures prohibiting credit 
analysts from selectively disclosing the 
pending action to persons outside the 
NRSRO and to persons inside the 
NRSRO who do not need to know of the 
pending action. 

At the same time, some credit rating 
agencies, as part of their methodologies 
for determining credit ratings, will 
discuss a proposed credit rating action 
with the management of the issuer or 
obligor being rated to solicit their views 
or provide an opportunity to appeal the 
decision. NRSROs engaging in this 
practice must have procedures 
reasonably designed to ensure that the 
discussions with the issuer or obligor do 
not lead to the selective disclosure of 
the information to persons other than 
those persons within the issuer or 
obligor who are authorized to receive 
the information. 

For these reasons, the Commission is 
adopting paragraph (a)(3) of Rule 17g– 
4 substantially as proposed. 

4. Paragraph (b) of Rule 17g–4 

As discussed above with respect to 
paragraph (a)(2) of Rule 17g–4, 
paragraph (b) of Rule 17g–4 contains the 
definition of a person ‘‘within’’ the 
NRSRO. The definition narrows the 
scope of the paragraph (a)(2) to persons 
involved in credit rating activities. 

F. Proposed Rule 17g–5—Management 
of Conflicts of Interest 

Section 15E(h)(1) of the Exchange Act 
requires an NRSRO to establish, 
maintain, and enforce policies and 
procedures reasonably designed, taking 
into consideration the nature of its 
business, to address and manage 
conflicts of interest.354 Section 15E(h)(2) 
of the Exchange Act requires the 
Commission to adopt rules to prohibit 
or require the management and 
disclosure of conflicts of interest 
relating to the issuance of credit 

ratings.355 The statute also identifies 
certain types of conflicts relating to the 
issuance of credit ratings that the 
Commission may include in its rules.356 
It also contains a catchall provision for 
any other potential conflict of interest 
the Commission deems is necessary or 
appropriate in the public interest or for 
the protection of investors to include in 
its rules.357 Rule 17g–5 implements 
these statutory provisions by prohibiting 
the conflicts identified in the statute 
and certain additional conflicts either 
outright or if the NRSRO has not 
disclosed them and established policies 
and procedures to manage them. 

1. Paragraph (a) of Rule 17g–5 

Paragraph (a) of Rule 17g–5 prohibits 
a person within an NRSRO from having 
a conflict of interest relating to the 
issuance of a credit rating that is 
identified in paragraph (b) of the rule 
unless the NRSRO has disclosed the 
type of conflict of interest in compliance 
with Rule 17g–1 (i.e., in Exhibit 6 to 
Form NRSRO) and has implemented 
policies and procedures to address and 
manage the type of conflict of interest in 
accordance with Section 15E(h)(1) of the 
Exchange Act.358 Paragraph (d) of Rule 
17g–5 defines a person within an 
NRSRO. The Commission believes that 
these prohibitions are appropriate in the 
public interest and for the protection of 
investors because they are designed to 
ensure that users of credit ratings are 
made aware of the potential conflicts of 
interest that arise from an NRSRO’s 
business activities and that an NRSRO 
establishes policies and procedures for 
managing the specific conflicts it 
identifies. 

This provision, as proposed, would 
have made it ‘‘unlawful’’ for an NRSRO 
to have a conflict in these 
circumstances. As adopted, paragraph 
(a) ‘‘prohibits’’ an NRSRO from having 
the conflict. The Commission adopted 
this change to make the rule text more 
consistent with the Section 15E(h)(2) of 
the Exchange Act, which provides the 
Commission with authority to ‘‘prohibit, 
or require the management and 
disclosure of’’ conflicts of interest.359 

For these reasons, the Commission is 
adopting paragraph (a) of Rule 17g–5 
substantially as proposed with the 
modification described above. 

2. Paragraph (b) of Rule 17g–5 

The types of conflicts identified in 
paragraph (b) of Rule 17g–5 are the same 

conflicts listed in the instructions to 
Exhibit 6 of Form NRSRO.360 These are 
the types of conflicts that commonly 
arise from the business of providing 
credit rating services. Prohibiting these 
types of conflicts outright may adversely 
impact the ability of an NRSRO to 
operate as a credit rating agency. 
Nonetheless, the conflicts must be 
managed through policies and 
procedures and disclosed so that users 
of the credit ratings can assess whether 
the conflict impacts the NRSRO’s 
judgment. 

Paragraph (b), as adopted, has been 
restructured from the proposed version 
of the rule. For example, certain 
conflicts are now identified in separate 
paragraphs as opposed to a single 
paragraph.361 The Commission’s intent 
is to provide greater clarity to the 
descriptions of the types of conflicts 
and, as noted above, to have them track 
the conflicts described in Exhibit 6 to 
Form NRSRO. As discussed below, the 
conflicts identified in paragraph (b) of 
Rule 17g–5 are substantially the same 
conflicts identified in the paragraph as 
proposed; though they have been 
refined to address comments. The one 
exception is the conflict identified in 
paragraph (b)(5) of Rule 17g–5, which— 
as discussed below—the Commission 
added in response to a comment 
identifying it as a potential conflict. 

a. Paragraph (b)(1) Rule 17g–5 

The conflict identified in paragraph 
(b)(1) of Rule 17g–5 involves being paid 
by an issuer or underwriter to determine 
credit ratings with respect to securities 
or money market instruments they issue 
or underwrite. The Commission believes 
the inclusion of this conflict in the rule 
is necessary or appropriate in the public 
interest or for the protection of 
investors. The concern is that an 
NRSRO may be influenced to issue a 
more favorable credit rating than 
warranted in order to obtain or retain 
the business of the issuer or 
underwriter. The Commission did not 
receive any comments on prohibiting 
this type of conflict unless it is 
disclosed and managed as required 
pursuant to Section 15E of the Exchange 
Act 362 and Rule 17g–1 and is adopting 
the requirement substantially as 
proposed. 

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33596 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

363 15 U.S.C. 78o–7(h)(2)(A). 
364 15 U.S.C. 78o–7. 
365 15 U.S.C. 78o–7(h)(2)(B). 
366 See Commission 2003 CRA Report noting 

concerns of some that conflicts in this area could 
become much greater if these ancillary services 
were to become a substantial portion of an NRSRO’s 
business. See also Commission 2003 CRA Concept 
Release, Securities Act Release No. 8236 (June 4, 
2003), 68 FR 35258 (June 12, 2003), noting concerns 
of some that greater concerns about conflicts of 
interest that arise when a credit rating agency offers 
consulting or other advisory services to issuers it 
rates. 

367 15 U.S.C. 78o–7. 

368 See 17 CFR 240.15c3–1(c)(2)(vi)(E), (F), and 
(H). 

369 See DBRS Letter; S&P Letter; Moody’s Letter. 

370 See DBRS Letter. 
371 See Proposed Rule: Definition of Nationally 

Recognized Statistical Rating Organization, 
Securities Act Release No. 8570 (April 19, 2005), 70 
FR 21306 (April 25, 2005), which noted that 
conflicts may arise when a person associated with 
a credit rating agency also is associated with, or has 
an interest in, an issuer that is being rated. 

372 15 U.S.C. 78o–7(h)(2)(C). 

b. Paragraph (b)(2) of Rule 17g–5 
The conflict identified in paragraph 

(b)(2) of Rule 17g–5 involves being paid 
by an obligor to determine a credit 
rating of the obligor as an entity. This 
conflict is identified in Section 
15E(h)(2)(A) of the Exchange Act.363 
This business practice raises the same 
concerns as being paid by an issuer or 
underwriter to determine a credit rating 
on a security or money market 
instrument. The Commission did not 
receive any comments on prohibiting 
this type of conflict unless it is 
disclosed and managed as required 
pursuant to Section 15E of the Exchange 
Act 364 and Rule 17g–1 and is adopting 
the requirement substantially as 
proposed. 

c. Paragraph (b)(3) of Rule 17g–5 
The conflict identified in paragraph 

(b)(3) of Rule 17g–5 involves being paid 
by issuers, underwriters, or obligors for 
ancillary services when they also have 
paid for a credit rating. This conflict as 
it relates to obligors is identified in 
Section 15E(h)(2)(B) of the Exchange 
Act.365 The Commission believes the 
inclusion of this conflict in the rule as 
it relates to issuers and underwriters is 
necessary or appropriate in the public 
interest or for the protection of 
investors. The concern with respect to 
all of these types of entities is that the 
NRSRO may issue a more favorable than 
warranted credit rating in order to 
obtain business from them for the 
ancillary services.366 The Commission 
did not receive any comments on the 
requirement that this type of conflict be 
prohibited unless it is disclosed and 
managed as required pursuant to 
Section 15E of the Exchange Act 367 and 
Rule 17g–1 and is adopting the 
requirement substantially as proposed. 

d. Paragraph (b)(4) of Rule 17g–5 
The conflict identified in paragraph 

(b)(4) of Rule 17g–5 involves being paid 
by subscribers for access to credit 
ratings and for other credit ratings 
services where such subscribers may 
use the credit ratings to comply with, 
and obtain benefits or relief under, 

statutes and regulations using the term 
‘‘nationally recognized statistical rating 
organization.’’ The Commission believes 
the inclusion of this conflict in the rule 
is necessary or appropriate in the public 
interest or for the protection of 
investors. The concern is that a 
subscriber potentially could be subject 
to one or more of these statutes and 
regulations and, consequently, benefit 
depending on how the NRSRO rates the 
subscriber, or securities held or issued 
by the subscriber. A broker-dealer 
subscriber holding debt securities is 
able to apply lower haircuts when 
computing its net capital under 
Exchange Act Rule 15c3–1 if the 
securities are rated investment grade by 
two NRSROs.368 Broker-dealers 
frequently subscribe to receive credit 
analysis or other services from credit 
rating agencies. 

As noted with respect to Exhibit 6 to 
Form NRSRO, several commenters 
raised a concern with the identification 
of this conflict because, as proposed, it 
could have been construed to require an 
NRSRO to affirmatively ascertain 
whether, and how, its subscribers were 
using its credit ratings.369 For this 
reason, the Commission has modified 
the description in Exhibit 6 and Rule 
17g–5 to make it generally applicable to 
any subscriber, since any subscriber 
potentially could be a user of credit 
ratings for regulatory purposes. 
Consequently, an NRSRO that has 
subscribers will be required to make the 
disclosure in Exhibit 6 and have a 
policy and procedure to address the 
conflict. 

The Commission notes, however, that 
Rule 17g–5 does not prescribe any 
specific policies and procedures to 
address conflicts of interest. The 
Commission does not expect that an 
NRSRO will be required to affirmatively 
ascertain whether, and how, its 
subscribers were using its credit ratings 
to manage this conflict. General policies 
and procedures designed to keep 
persons within the NRSRO who 
participate in the determination of 
credit ratings free of the undue 
influence of all persons who pay the 
NRSRO for credit rating services (e.g., 
issuers, underwriters, obligors, and 
subscribers) will be a way of addressing 
this conflict. 

For these reasons, the Commission is 
adopting the requirement with the 
modifications discussed above. 

e. Paragraph (b)(5) of Rule 17g–5 
The conflict identified in paragraph 

(b)(5) of Rule 17g–5 involves being paid 
by subscribers that also may own 
investments or have entered into 
transactions that could be favorably or 
adversely impacted by a credit rating 
issued by the nationally recognized 
statistical rating organization. As 
discussed with respect to Exhibit 6, this 
conflict was added in response to a 
commenter who pointed out that 
subscribers who manage investment 
portfolios also may have interests in a 
particular credit rating.370 The 
Commission believes the inclusion of 
this conflict in the rule is necessary or 
appropriate in the public interest or for 
the protection of investors. The 
Commission believes the commenter 
identified a conflict that should be 
disclosed and managed because certain 
large investors that may derive benefits 
from the issuance of a particular credit 
rating could provide a credit rating 
agency with substantial revenues for 
credit rating services. As with potential 
regulatory users, the Commission does 
not expect that an NRSRO will be 
required to affirmatively ascertain how 
the investment portfolios of its 
subscribers would be impacted by a 
pending credit rating. General policies 
and procedures designed to keep 
persons within the NRSRO who 
participate in the determination of 
credit ratings free of the undue 
influence of clients will be a way of 
addressing this conflict. 

For these reasons, the Commission is 
adding this conflict to the conflicts 
identified in paragraph (b) of Rule 17g– 
5. 

f. Paragraph (b)(6) of Rule 17g–5 
The conflict identified in paragraph 

(b)(6) of Rule 17g–5 involves allowing 
persons within the NRSRO to own 
directly securities or money market 
instruments of, or having any other 
direct ownership interests in, issuers or 
obligors subject to a credit rating 
determined by the NRSRO.371 This 
conflict as it relates to obligors is 
identified in Section 15E(h)(2)(C) of the 
Exchange Act.372 The Commission 
believes the inclusion of this conflict in 
the rule as it relates to issuers is 
necessary or appropriate in the public 
interest or for the protection of 

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33597 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

373 As discussed below, the NRSRO and a person 
within the NRSRO who participated in the 
determination of a credit rating is prohibited from 
having this conflict under paragraph (c) of Rule 
17g–5. 

374 Cf. 17 CFR 275.204A–1(e)(1) (defining ‘‘access 
person’’ for purposes of requiring investment 
advisers to establish procedures requiring access 
persons to report their personal securities holdings). 

375 See, e.g., S&P Letter; JCR 2nd Letter. 376 15 U.S.C. 78o–7(h)(2)(C). 

377 See, e.g., Moody’s Letter. 
378 15 U.S.C. 78o–7(h)(2)(D). 
379 15 U.S.C. 77b(a)(11). 

investors. The concern is that allowing 
persons within the NRSRO, even if they 
are not directly involved in determining 
the credit rating, to own securities of an 
issuer or obligor subject to a credit 
rating could lead to situations where 
they seek to influence a credit analyst to 
issue a credit rating favorable to their 
trading position.373 For example, a 
manager or supervisor may be in a 
position to exert undue influence on a 
credit analyst. 

The Commission, however, does not 
believe this conflict should be 
prohibited for employees that have no 
involvement in determining or 
approving the credit rating. They should 
be able to own securities or money 
market instruments of an issuer or 
obligor subject to a credit rating issued 
by the NRSRO, provided the practice is 
disclosed and managed.374 A 
prohibition against owning any rated 
securities may be a particular hardship 
for the employees of an NRSRO that 
issues credit ratings with respect to 
most public companies. 

The Commission has modified the 
description of the conflict so it now 
involves ‘‘allowing’’ persons within the 
NRSRO to have these ownership 
interests. This is intended to clarify that 
the conflict does not arise only when 
these persons actually have such an 
ownership interest. This distinction is 
intended to simplify the rule. 
Specifically, as proposed, the rule could 
have been construed as requiring an 
NRSRO to affirmatively determine if, 
and when, an employee purchased a 
rated security. The rule, as adopted, 
only requires the NRSRO to disclose 
that it allows persons within the NRSRO 
to have these direct ownership interests 
in rated securities. 

Finally, two commenters noted that 
indirect ownership of rated securities— 
such as through mutual funds and blind 
trusts—should not be within the scope 
of the provision.375 The Commission 
believes that indirect ownership of rated 
securities by employees does not 
present the same concerns as direct 
ownership, since an indirect ownership 
interest implies the investor does not 
have control over the decision to 
purchase or sell a specific security. 
Therefore, the provision specifically 
references ‘‘direct’’ ownership. The 

Commission also believes that an 
NRSRO must have flexibility to define 
through its policies and procedures 
when an ownership interest would not 
be ‘‘direct’’ for the purposes of this 
provision. 

For these reasons, the Commission is 
adopting the requirement with the 
modifications described above. 

g. Paragraph (b)(7) of Rule 17g–5 
The conflict identified in paragraph 

(b)(7) of Rule 17g–5 involves allowing 
persons within the NRSRO to have a 
business relationship that is more than 
an ordinary course business relationship 
with an issuer or obligor subject to a 
credit rating determined by the NRSRO. 
This conflict as it relates to obligors is 
identified in Section 15E(h)(2)(C) of the 
Exchange Act.376 The Commission 
believes the inclusion of this conflict in 
the rule as it relates to issuers is 
necessary or appropriate in the public 
interest or for the protection of 
investors. The concern is that persons 
within the NRSRO having these types of 
business relationships may be 
influenced to determine a favorable 
credit rating for the entity based on the 
business relationship or exert improper 
influence on credit analysts to 
determine a favorable credit rating. The 
Commission believes an NRSRO should 
be required to disclose that it allows 
these types of relationships and be 
required to have policies and 
procedures to manage them. Otherwise, 
the conflicts should be prohibited. 

The Commission notes that in the 
case of a credit analyst it may be 
difficult to remain impartial with 
respect to an issuer or obligor where the 
credit analyst has a non-ordinary course 
business relationship with the entity. 
For example, in the case where the 
issuer or obligor extends a loan to the 
credit analyst that has an interest rate 
far below market rates. However, the 
Commission believes that NRSROs 
should have flexibility in designing 
policies and procedures to address these 
types of conflicts, in part, because of the 
difficulty of defining when a business 
relationship creates too much potential 
for a loss of impartiality on behalf of the 
credit analyst or person within the 
NRSRO. Consequently, the Commission 
is not prohibiting these conflicts 
outright. 

The Commission is modifying the 
provision to clarify that it does not 
apply to ordinary course business 
relationships such as arms length 
mortgage loans and bank and credit card 
accounts. Commenters stated that these 
types of business relationships do not 

raise conflict of interest concerns.377 
The Commission agrees that, for 
example, a credit analyst likely would 
not be influenced to issue a favorable 
credit rating simply because the analyst 
has a bank account at the rated entity. 
Examples of a non-ordinary course 
business relationship would be an 
employee entering into a joint business 
venture with a rated obligor or, as noted 
above, obtaining a loan from an obligor 
with an interest rate far below market 
rates. 

For these reasons, the Commission is 
adopting the requirement with the 
modifications discussed above. 

h. Paragraph (b)(8) of Rule 17g–5 

The conflict identified in paragraph 
(b)(8) of Rule 17g–5 involves having a 
person associated with the NRSRO that 
is a broker or dealer engaged in the 
business of underwriting securities or 
money market instruments. This type of 
conflict is identified in Section 
15E(h)(2)(D) of the Exchange Act.378 The 
Commission believes the inclusion of 
this conflict in the rule is necessary or 
appropriate in the public interest or for 
the protection of investors. As the 
Commission discussed with respect to 
Exhibit 6 of Form NRSRO, an affiliation 
with a broker or dealer that is in the 
business of underwriting securities 
would raise concerns that the NRSRO 
might be influenced by the affiliation to 
issue favorable credit ratings for these 
securities. 

This requirement was in paragraph 
(b)(5) of Rule 17g–5, as proposed. 
However, the conflict identified was 
broader in that it referred to ‘‘having any 
* * * affiliation with * * * an 
underwriter of securities or money 
market instruments rated by the 
[NRSRO].’’ As discussed with respect to 
Exhibit 6, the Commission has narrowed 
the description of the conflict to address 
concerns that the requirement, as 
proposed, could have created a difficult 
compliance standard by requiring an 
NRSRO to monitor whether any person 
associated with the NRSRO is an 
‘‘underwriter’’ as that term is defined in 
Section 2(a)(11) of the Securities Act of 
1933.379 

For these reasons, the Commission is 
adopting the requirement with the 
modifications discussed above. 

i. Paragraph (b)(9) of Rule 17g–5 

The conflict referred to in paragraph 
(b)(9) of Rule 17g–5 is any other type of 
conflict that the NRSRO identifies on 
Form NRSRO in compliance with 

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33598 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

380 15 U.S.C. 78o–7(a)(1)(B)(vi). 
381 See 15 U.S.C. 78o–7(h)(2)(E). 
382 15 U.S.C. 78o–7. 
383 15 U.S.C. 78o–7(h)(2). 
384 See, e.g., S&P Letter stating that all the 

conflicts identified in paragraph (c) of Rule 17g–5 
should not be prohibited as they can be managed. 

385 The determination of ‘‘net revenue’’ is same as 
the determination of net revenue for purposes of 
Form NRSRO and Rule 17g–3. 

386 As noted in the Commission 2003 CRA Report, 
some participants in the Commission 2002 CRA 
Hearings expressed concern that ancillary services 
could become much greater in the future and 
suggestions were made that their percentage 
contribution to total revenue be capped. 

387 As noted in the Commission 2003 CRA Report, 
fees from any single issuer typically comprise a 
very small percentage, less than 1%, of an NRSRO’s 
total revenue. 

388 See R&I Letter; Fitch Letter; S&P Letter; AEI 
Letter; Langohr Letter; AST Letter; ASF Letter. 

389 See LACE Letter. 
390 See R&I Letter. 

391 15 U.S.C. 78o–7(h)(2)(C). 
392 The Senate Report notes that rating agencies 

argue that although the pay-for-rating business 
model presents inherent conflicts of interest, the 
conflict is effectively managed inasmuch as credit 
analysts do not benefit financially from any of their 
ratings decisions. The Senate Report further notes 
that credit analysts are not permitted to own any 
of the securities they follow. 

393 See S&P Letter. 

Section 15E(a)(1)(B)(vi) of the Exchange 
Act 380 and Rule 17g–1. The 
Commission believes the inclusion of 
this provision is necessary or 
appropriate in the public interest or for 
the protection of investors. This catchall 
provision will capture conflicts not 
specifically listed in the instructions for 
Exhibit 6 and Rule 17g–5 that the 
NRSRO has identified on Exhibit 6 to 
Form NRSRO as arising from its 
business activities.381 The Commission 
did not receive any comments on the 
proposal that this type of conflict be 
prohibited unless it is disclosed and 
managed as required pursuant to 
Section 15E of the Exchange Act 382 and 
Rule 17g–1 and is adopting the 
requirement substantially as proposed. 

3. Paragraph (c) of Rule 17g–5 
Section 15E(h)(2) of the Exchange Act 

requires the Commission to adopt rules 
to prohibit or require the management 
and disclosure of conflicts of interest 
relating to the issuance of credit 
ratings.383 Paragraph (c) of proposed 
Rule 17g–5 specifically prohibits 
outright four types of conflicts of 
interest. The Commission believes 
prohibiting these conflicts is necessary 
or appropriate in the public interest or 
for the protection of investors. These are 
conflicts that are not a necessary 
consequence of how credit rating 
agencies operate. They would be 
difficult to manage given the risk that 
they could cause undue influence. 
Therefore, the Commission is 
prohibiting them; rather than requiring 
they be disclosed and managed. 
Nonetheless, the Commission intends to 
monitor how the prohibitions operate in 
practice and, if it appears a prohibition 
is interfering inappropriately, the 
Commission will re-evaluate whether it 
should be subject to disclosure and 
management (rather than prohibited).384 

a. Paragraph (c)(1) of Rule 17g–5 
As adopted, paragraph (c)(1) prohibits 

an NRSRO from having a conflict 
relating to the issuance of a credit rating 
where the person soliciting the credit 
rating was the source of 10% or more of 
the total net revenue of the NRSRO 
during the most recently ended fiscal 
year.385 Such a person will be in a 
position to exercise substantial 

influence on the NRSRO.386 
Consequently, it will be difficult for the 
NRSRO to remain impartial, given the 
impact on the NRSRO’s income if the 
person withdrew its business. Given the 
Commission’s understanding that fees 
from a single entity generally compose 
a very small percentage of the revenues 
of entities currently identified as 
NRSROs, the Commission believes that 
a 10% threshold is a reasonable 
threshold for registered NRSROs.387 

Several commenters stated that this 
conflict should not be prohibited but 
rather subject to procedures to manage 
it.388 One commenter, while not 
requesting that the proposal be changed, 
noted that in an atypical circumstance 
such as issuing credit ratings for 
structured products sponsored by a 
large client an NRSRO may be required 
to request a waiver of the prohibition.389 
Another commenter also mentioned 
structured product sponsors as clients 
that potentially could approach the 10% 
revenue threshold and, therefore, that 
exemptive relief may be appropriate in 
such circumstances.390 The Commission 
continues to believe that 10% of net 
revenues is a very high threshold. 
Moreover, the definition of net revenues 
has been narrowed to exclude revenues 
earned by affiliates that are not persons 
within the NRSRO. Therefore, the 
threshold will be higher than that 
proposed for NRSROs with affiliates 
engaged in activities unrelated to credit 
ratings. Consequently, the Commission 
does not believe the conflict should be 
subject to a requirement that it be 
managed (rather than prohibited). 

Nonetheless, as noted above, the 
Commission intends to monitor how the 
prohibition operates in practice, 
particularly with respect to structured 
products. The intent behind all the 
prohibitions in paragraph (c) is not to 
prohibit a business practice that is a 
normal part of an NRSRO’s activities. 
Rather, the intent is to prohibit conflicts 
that are not a necessary consequence of 
providing credit rating services. If the 
prohibition in paragraph (c)(1) interferes 
with how NRSROs as a matter of course 
deal with structured product sponsors, 
the Commission will evaluate whether 

the rule should be modified to 
accommodate this business practice or 
whether—as suggested by the 
commenter—an exemption would be 
appropriate. 

For these reasons, the Commission is 
adopting the prohibition substantially as 
proposed. 

b. Paragraph (c)(2) of Rule 17g–5 

As adopted, paragraph (c)(2) prohibits 
an NRSRO from having a conflict 
relating to the issuance of a credit rating 
with respect to a person (excluding a 
sovereign governments nation or an 
agency of a sovereign nation) where the 
nationally recognized statistical rating 
organization, a credit analyst who 
participated in determining the credit 
rating, or a person responsible for 
approving the credit rating, directly 
owns securities of, or has any other 
direct ownership interest in, the rated 
person. This conflict as it relates to 
obligors is identified in Section 
15E(h)(2)(C) of the Exchange Act.391 The 
Commission believes prohibiting these 
conflicts, including with respect to 
issuers, is necessary or appropriate in 
the public interest or for the protection 
of investors. An NRSRO and persons 
within the NRSRO that participate in 
the credit rating should not have a 
direct financial interest in the issuer or 
obligor subject to the credit rating. It 
will be difficult for these persons to 
remain impartial and issue an objective 
credit rating in this circumstance.392 

As with the provision in paragraph 
(b)(6) of Rule 17g–5, the Commission 
has narrowed the scope of this provision 
to ‘‘direct’’ ownership interests. These 
persons will be permitted to have 
indirect ownership interests, for 
example, through mutual funds or blind 
trusts. The prohibition also excludes 
from its scope ownership of securities 
issued by a sovereign government or an 
agency of a sovereign government. The 
Commission added this exclusion in 
response to a comment that sovereign 
government and agency securities may 
be held as cash equivalents.393 Further, 
the Commission believes for many of 
these securities it would be difficult to 
influence their market price through the 
issuance of a credit rating. Therefore, a 
prohibition on a credit analyst owning 
securities of sovereign governments the 

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33599 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

394 See Section 3(a)(63) of the Exchange Act (15 
U.S.C. 78c(a)(63)) defining ‘‘person associated with 
an NRSRO.’’ 

395 15 U.S.C. 78o–7(h)(2)(C). 
396 See Moody’s Letter; S&P Letter. 

397 Cf. Rule 2711 of the National Association of 
Securities Dealers, Inc. (‘‘NASD’’) allowing a 
securities research analyst to be an officer or 
director of a subject company if proper disclosure 
is made. 

398 15 U.S.C. 78o–7(h)(2)(C). 
399 15 U.S.C. 78o–7(i)(1). 
400 15 U.S.C. 78o–7(i)(1)(A), (B) and (C). 
401 Id. 

402 15 U.S.C. 78o–7(i)(1). 
403 See Commission 2003 CRA Report, which 

noted that some participants in the Commission 
2002 CRA Hearings questioned the appropriateness 
of unsolicited credit ratings because they could 
used to engage in ‘‘strong-arm’’ tactics to induce 
payment for a credit rating the issuer did not 
request. 

404 15 U.S.C. 78o–7(i)(1)(A). 
405 See Commission 2003 CRA Report, which 

noted that some participants in the Commission’s 
2002 CRA Hearings worried that issuers could be 
unduly pressured to purchase advisory services, 
particularly in cases where they were solicited by 
the credit rating analyst. 

analyst rates is not necessary. The 
Commission notes that this ownership 
interest is subject to the requirements of 
paragraphs (a) and (b)(6) of Rule 17g–5. 
Consequently, it will be required to be 
addressed in the procedures for 
managing the conflicts that arise from 
direct ownership of rated securities. 

For the reasons, the Commission is 
adopting the prohibition with the 
modifications discussed above. 

c. Paragraph (c)(3) of Rule 17g–5 
Paragraph (c)(3) prohibits an NRSRO 

from having a conflict relating to the 
issuance of a credit rating where the 
rated entity is a person associated with 
the NRSRO (i.e., a company directly or 
indirectly controlling, controlled by, or 
under common control with, the 
NRSRO).394 This conflict as it relates to 
obligors is identified in Section 
15E(h)(2)(C) of the Exchange Act.395 The 
Commission believes prohibiting this 
conflict, including with respect to 
issuers, is necessary or appropriate in 
the public interest or for the protection 
of investors. The Commission believes 
that it is appropriate to prohibit such 
conflicts because of the degree of 
difficulty the Commission foresees in 
maintaining an appropriate level of 
impartiality, when issuing a credit 
rating with respect to an affiliated 
entity. 

Two commenters stated that this 
conflict can be managed and should not 
be prohibited.396 The Commission 
believes that for a credit analyst to 
determine a credit rating for the 
company where the analyst works or an 
affiliate of that company would place 
the analyst in an untenable position. 
Moreover, the Commission does not 
believe there will be a need for such a 
credit rating as long as other NRSROs 
are available to determine credit ratings 
for these companies. The Commission 
will entertain requests for exemptive 
relief from this prohibition where 
appropriate, such as if circumstances 
develop to a point where an NRSRO or 
its affiliate requires a public credit 
rating and cannot obtain one from 
another NRSRO. For these reasons, the 
Commission is adopting this prohibition 
substantially as proposed. 

d. Paragraph (c)(4) of Rule 17g–5 
Paragraph (c)(4) prohibits an NRSRO 

from having a conflict relating to the 
issuance of a credit rating where the 
credit analyst who participated in 
determining the credit rating, or a 

person responsible for approving the 
credit rating, also is an officer or 
director of the person that is the subject 
of the credit rating.397 This conflict as 
it relates to obligors is identified in 
Section 15E(h)(2)(C) of the Exchange 
Act.398 The Commission believes 
prohibiting this conflict, including with 
respect to issuers, is necessary or 
appropriate in the public interest or for 
the protection of investors. The 
Commission believes that an NRSRO or 
person associated with the NRSRO 
having such a position will have 
difficulty remaining objective in these 
circumstances. 

The Commission did not receive any 
comments on this specific prohibition 
and is adopting it substantially as 
proposed. 

F. Rule 17g–6—Prohibited Unfair, 
Coercive, or Abusive Practices 

Section 15E(i)(1) of the Exchange 
Act 399 provides that the Commission 
shall adopt rules prohibiting any act or 
practice by an NRSRO that the 
Commission determines is unfair, 
abusive, or coercive, including certain 
acts and practices set forth in 
paragraphs (i)(1)(A)–(C) of Section 15E 
of the Exchange Act.400 In explaining 
this statutory provision, the Senate 
Report stated that ‘‘the Commission, as 
a threshold consideration, must 
determine that the practices subject to 
prohibition under this section are 
unfair, coercive or abusive before 
adopting rules prohibiting such 
practices.’’ 

In the proposing release, the 
Commission made a preliminary 
determination that the acts and 
practices described in paragraphs 
(i)(1)(A)–(C) of Section 15E of the 
Exchange Act 401 would be unfair, 
coercive, or abusive. Consequently, the 
Commission proposed that they be 
prohibited through provisions in 
paragraphs (a)(1) through (a)(4) of Rule 
17g–6, with one conditional exception. 
The Commission also made a 
preliminary determination in the 
proposing release that using an 
unsolicited credit rating to pressure an 
issuer or obligor into paying for the 
rating or another service would be 
unfair, coercive, or abusive. 
Consequently, the Commission 
proposed to use its authority under 

Section 15E(i)(1) of the Exchange Act 402 
to prohibit such act and practice 
through the provisions in paragraph 
(a)(5) of Rule 17g–6.403 

1. Paragraph (a)(1) of Rule 17g–6 

Section 15E(i)(1)(A) of the Exchange 
Act provides that the Commission shall 
prohibit the following practice if the 
Commission determines it is unfair, 
coercive, or abusive: 

Conditioning or threatening to condition 
the issuance of a credit rating on the 
purchase by the obligor or an affiliate thereof 
of other services or products, including pre- 
credit rating assessment products of the 
nationally recognized statistical rating 
organization or any person associated with 
such nationally recognized statistical rating 
organization[.] 404 
In the proposing release, the 
Commission preliminarily determined 
that this practice would be unfair, 
coercive, or abusive. Consequently, the 
Commission proposed to prohibit it in 
paragraph (a)(1) of Rule 17g–6. 
Specifically, this paragraph, as 
proposed, would have prohibited an 
NRSRO from conditioning or 
threatening to condition the issuance of 
a credit rating on the purchase of other 
products or services, including pre- 
credit rating assessment products.405 

Credit ratings play an important role 
in the financial markets. Market 
participants use them in making 
financial decisions on whether to buy or 
sell debt securities and extend credit to 
rated entities. Moreover, credit ratings 
of NRSROs are used in federal and state 
laws and regulations to establish limits 
or confer exemptions or privileges. 
Consequently, an entity may benefit 
from having an NRSRO credit rating 
because the credit rating makes its 
securities more marketable; or the credit 
rating qualifies the entity for an 
exemption or privilege or makes holding 
the entity’s debt securities or transacting 
with the entity more attractive to other 
regulated entities. An NRSRO could 
abuse this incentive by using it to coerce 
an issuer or obligor to purchase services 
from the NRSRO or its affiliates. 

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33600 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

406 See Moody’s Letter. 
407 Id. 
408 Id. 

409 15 U.S.C. 78o–7(i)(1)(C). 

410 Paragraph (a)(2) of Rule 17g–6. 
411 Presumably, an issuer or obligor would not 

agree to compensate an NRSRO for a credit rating 
that was lower than would result from applying the 
NRSRO’s methodologies. Nonetheless, if an NRSRO 
agreed to issue a lower than warranted credit rating 
in return for compensation, the NRSRO would 
violate paragraph (a)(2) as well. 

412 See Commission 2003 CRA Report, which 
noted that some participants in the Commission 
2002 CRA Hearings believed that, even if the 
purchase of ancillary services did not impact the 
credit rating decision, issuers may be pressured into 
using the services out of fear that their failure to do 
so may adversely impact their credit rating. 

413 As noted above, the prohibitions in paragraphs 
(a)(2) and (a)(3) Rule 17g–6 are being adopted 
pursuant to authority in Section 15E(i)(1)(C) of the 
Exchange Act (15 U.S.C. 78o–7(i)(1)(C)). 

The Commission did not receive any 
comments objecting to its preliminary 
determination that this practice would 
be unfair, coercive, or abusive. The 
Commission has determined this 
practice would be unfair, coercive, or 
abusive and, consequently, is adopting 
paragraph (a)(1) of Rule 17g–6 
substantially as proposed in order to 
prohibit it. 

One commenter did state that there 
are certain circumstances where it 
would not be unfair, coercive, or 
abusive to condition the determination 
of a credit rating on a security on further 
analysis of the issuer.406 Specifically, 
the commenter stated that to determine 
a credit rating for a subordinated debt 
security, a credit rating agency may be 
required to analyze the overall capital 
structure of the issuer and determine 
credit ratings for the issuer as an entity 
and for its senior debt.407 The 
commenter requested that the rule text 
in paragraph (a)(1) of proposed Rule 
17g–6 be amended to clarify that this 
specific practice is not prohibited.408 

The Commission believes that the rule 
text as proposed and as adopted would 
not prohibit this specific practice. The 
prohibition applies to conditioning a 
credit rating on the purchase of ‘‘other’’ 
services of the credit rating agency. In 
the situation described above, the 
requirement to analyze the capital 
structure of the issuer and the 
creditworthiness of its senior debt is 
part of the process of determining the 
credit rating on the subordinated debt. 
Therefore, the Commission views this as 
all part of one service and not three 
different services. 

For these reasons, the Commission is 
adopting the prohibition substantially as 
proposed. 

2. Paragraphs (a)(2) and (a)(3) of Rule 
17g–6 

Section 15E(i)(1)(C) of the Exchange 
Act provides that the Commission shall 
prohibit the following practices if the 
Commission determines they are unfair, 
coercive, or abusive: 

Modifying or threatening to modify a credit 
rating or otherwise departing from systematic 
procedures and methodologies in 
determining credit ratings, based on whether 
the obligor, or an affiliate of the obligor, 
purchases or will purchase the credit rating 
or any other service or product of the 
nationally recognized statistical rating 
organization or any person associated with 
such organization.409 
In the proposing release, the 
Commission preliminarily determined 

that these practices would be unfair, 
coercive, or abusive. Consequently, the 
Commission proposed to prohibit them 
through paragraphs (a)(2) and (a)(3) of 
proposed Rule 17g–6. The Commission 
did not receive any comments objecting 
to its preliminary determination that 
these practices are unfair, coercive, or 
abusive. The Commission has 
determined they are unfair, coercive, or 
abusive for the reasons discussed below 
and, consequently, is adopting 
paragraphs (a)(2) and (a)(3) of Rule 17g– 
6 substantially as proposed in order to 
prohibit them. 

As adopted, paragraph (a)(2) prohibits 
an NRSRO from issuing, or offering or 
threatening to issue, a credit rating that 
is not determined in accordance with 
the NRSRO’s established procedures for 
determining credit ratings based on 
whether the rated person purchases or 
will purchase the credit rating or 
another product or service.410 Under 
this provision, an NRSRO is prohibited 
from issuing or threatening to issue a 
credit rating that is lower than would 
result from using its methodology for 
determining credit ratings based on 
whether the issuer or obligor pays for 
the credit rating or any other service or 
product of the NRSRO and its affiliates. 
The NRSRO also will be prohibited from 
issuing or promising to issue a higher 
credit rating in these circumstances.411 

The practice prohibited in this 
paragraph is distinguishable from the 
practice prohibited in Paragraph (a)(1) 
of Rule 17g–6. Paragraph (a)(1) 
addresses the situation where an 
NRSRO conditions the issuance of a 
credit rating on the purchase of another 
service or product. Paragraph (a)(2) 
addresses the situation where an 
NRSRO conditions the opinion reached 
in the credit rating on the purchase of 
the credit rating or another service or 
product.412 Thus, unlike paragraph 
(a)(1), an NRSRO will violate paragraph 
(a)(2) if it conditions the issuance of the 
credit rating on the obligor or issuer 
paying for the credit rating. This is 
because the NRSRO will not be agreeing 
to determine a credit rating that 
reflected the NRSRO’s assessment of the 

creditworthiness of the issuer or obligor 
as determined by its methodologies. 
Rather, the NRSRO will be agreeing to 
skew the credit rating higher based on 
the issuer or obligor agreeing to pay for 
it. 

Paragraph (a)(3) Rule 17g–6 prohibits 
an NRSRO from modifying, or offering 
or threatening to modify, a credit rating 
in a manner contrary to its procedures 
for modifying a credit rating based on 
whether the rated person, or an affiliate 
of the rated person, purchases or will 
purchase the credit rating or any other 
service or product of the NRSRO and its 
affiliates. The prohibition in paragraph 
(a)(2) of Rule 17g–6 applies to threats or 
promises with respect to the issuance of 
a credit rating. Paragraph (a)(3) extends 
this prohibition to threats or promises 
with respect to changing an existing 
credit rating.413 

The Commission believes these 
practices are unfair, coercive, or abusive 
because an entity’s cost of credit and, in 
some cases, ability to obtain credit, 
generally depends on its credit rating. 
Entities with lower credit ratings must 
pay higher interest rates to borrow funds 
or issue debt. In some cases, a low credit 
rating could block an entity’s access to 
credit. Thus, it is in a borrower’s 
economic interest to have a high credit 
rating. This creates the potential for an 
NRSRO to have inappropriate leverage 
over an issuer or obligor. 

An NRSRO could use this leverage to 
obtain business by threatening to issue 
or modify a credit rating in a manner 
that results in a lower credit rating than 
would have resulted from using its 
established methodologies. The NRSRO 
also could issue a lower credit rating or 
lower an existing rating to punish an 
issuer or obligor for not purchasing the 
credit rating or another service or 
product of the NRSRO and its affiliates. 
Conversely, the NRSRO could promise 
to issue or modify a credit rating in a 
manner that results in a higher credit 
rating than would have resulted from 
using its established methodologies as a 
reward for purchasing the credit rating 
or other services or products. 
Paragraphs (a)(2) and (3) of Rule 17g–6 
are designed to provide a check on the 
potential inappropriate influence an 
NRSRO may have over issuers and 
obligors by prohibiting an NRSRO from 
using this leverage to coerce an issuer or 
obligor into purchasing a credit rating or 
other services and products of the 
NRSRO and its affiliates. 

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33601 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

414 The Commission is mindful of the limitation 
in Section 15E(c)(2) of the Exchange Act that the 
rules the Commission adopts under the Exchange 
Act not regulate the substance of credit ratings (15 
U.S.C. 78o–7(c)(2)). The Commission does not 
believe that this prohibition will interfere with the 
process by which an NRSRO assesses the 
creditworthiness of a security, money market 
instrument, or obligor. An issuer’s or obligor’s 
agreement or refusal to pay the NRSRO or its 
affiliate for a service or product is, of itself, not 
relevant to a credit assessment of the issuer or 
obligor. Moreover, this is a practice that Congress 
specifically identified in Section 15E(i)(1)(C) of the 
Exchange Act as potentially unfair, coercive, or 
abusive (15 U.S.C. 78o–7(i)(1)(C)). 

415 15 U.S.C. 78o–7(i)(1)(B). 

416 See DBRS Letter; Fitch Letter; letter dated 
April 11, 2007 from Charles D. Brown, General 
Counsel, Fitch Ratings (‘‘Fitch 2nd Letter’’). 

417 See letter dated March 30, 2007 from 
Raymond W. McDaniel, President, Moody’s 
Investor Services (‘‘Moody’s 2nd Letter’’); letter 
dated April 24, 2007 from Jeanne M. Dering, 
Executive Vice President, Global Regulatory Affairs 
& Compliance (‘‘Moody’s 3rd Letter); S&P Letter; 
Moody’s Letter. 

418 Id. 
419 Id. 
420 Id. 
421 Id. 
422 Id. 

423 See e.g., DBRS Letter; Fitch letter; Fitch 2nd 
Letter. See also letter dated February 13, 2007 from 
Janet M. Tavakoli, President, Tavakoli Structured 
Finance, Inc.; letter dated February 14, 2007 from 
Gregory G. Raab, Chief Executive Officer, Axon; 
letter dated February 16, 2007 from Emile Van den 
Bol, Managing Director, Deutsche Bank; letter dated 
February 16, 2007 from Kent D. Born, Senior 
Managing Director, PPM America; letter dated 
February 23, 2007 from Patti Unti, Managing 
Director, Capmark Investments LP; letter dated 
February 23, 2007 from David Lazarus, Managing 
Director, Capmark Securities, Inc.; letter dated 
February 28, 2007 from Ronald E. Schrager, Chief 
Executive Officer, LNR Property Corporation; letter 

Continued 

The Commission further notes that 
these practices could result in credit 
ratings that mislead the marketplace and 
undermine the regulatory use of NRSRO 
credit ratings. An NRSRO that follows 
through on a threat to issue a low credit 
rating or promise to issue a high credit 
rating will be issuing a credit rating that 
does not accurately reflect the credit 
rating agency’s true assessment of the 
creditworthiness of the issuer or obligor. 
The credibility and reliability of an 
NRSRO and its credit ratings depends 
on the NRSRO developing and 
implementing sound methodologies for 
determining credit ratings and following 
those methodologies. The fact that an 
issuer or obligor agrees or refuses to 
purchase a credit rating or other service 
or product from the NRSRO and its 
affiliates should have no bearing on the 
NRSRO’s credit assessment of the issuer 
or obligor.414 

For these reasons, the Commission is 
adopting the prohibition substantially as 
proposed. 

3. Paragraph (a)(4) of Rule 17g–6 

Section 15E(i)(1)(B) of the Exchange 
Act provides that the Commission by 
rule shall prohibit any act or practice 
the Commission determines to be unfair, 
coercive, or abusive relating to: 

Lowering or threatening to lower a credit 
rating on, or refusing to rate, securities or 
money market instruments issued by an asset 
pool or as part of any asset-backed or 
mortgage-backed securities transaction, 
unless a portion of the assets within such 
pool or part of such transaction, as 
applicable, also is rated by the nationally 
recognized statistical rating 
organization[.] 415 

In explaining this statutory 
provisions, the Senate Report stated that 
‘‘there may be instances when a rating 
agency may refuse to rate securities or 
money market instruments for reasons 
that are not intended to be anti- 
competitive.’’ The Senate Report further 
stated that ‘‘the Commission * * * 
should prohibit only those ratings 
refusals that occur as part of unfair, 
coercive or abusive conduct.’’ 

a. Structured Product Credit Rating 
Practices 

Two of the current NRSROs—Fitch 
and DBRS—believe two other 
NRSROs—S&P and Moody’s engage in 
anti-competitive practices in the area of 
determining credit ratings for structured 
products and, consequently, these 
practices should be found by the 
Commission to be unfair, coercive, or 
abusive.416 These practices relate to 
instances where the credit rating agency 
has not rated particular securities that 
have been rated by another credit rating 
agency and that underlie a structured 
product. S&P and Moody’s believe their 
practices are necessary to determine a 
credible credit rating.417 

The practices take several forms. The 
credit rating agency may, as a condition 
of issuing a credit rating for a structured 
product, require that it effectively issue 
a public credit rating for a fee for most, 
if not all, the assets underlying the 
structured product.418 The second form 
involves the credit rating agency 
insisting that it provide a private credit 
rating or credit assessment for a fee with 
respect to the unrated assets.419 The 
third form involves the credit rating 
agency taking into consideration the 
internal credit analysis of another 
person (e.g., the underwriter, sponsor, 
or manager of the structured product) 
with respect to the unrated assets to 
determine a credit rating or private 
credit rating, or perform a credit 
assessment of the unrated assets.420 The 
fourth form involves the credit rating 
agency taking into consideration but not 
necessarily adopting the credit ratings of 
another credit rating agency to 
determine a credit rating or private 
credit rating, or perform a credit 
assessment of the unrated assets.421 
Under this last form, the credit rating 
agency may employ a standardized 
methodology to discount (notch down) 
the credit ratings of the other credit 
rating agency based on the type of 
security and category of credit rating.422 

b. Proposed Rule 17g–6(a)(4) 
In the proposing release, the 

Commission preliminarily determined 

that it would be unfair, coercive, or 
abusive for an NRSRO to issue or 
threaten to issue a lower credit rating, 
lower or threaten to lower an existing 
credit rating, refuse to issue a credit 
rating, or to withdraw a credit rating 
with respect to a structured product 
unless a portion of the assets underlying 
the structured product also are rated by 
the NRSRO. Consequently, the 
Commission proposed to prohibit these 
practices in paragraph (a)(4) of proposed 
Rule 17g–6. 

The Commission also proposed an 
exception to the prohibition that would 
permit an NRSRO to refuse to issue the 
credit rating or withdraw the credit 
rating if the NRSRO has rated less than 
85% of the market value of the assets 
underlying the structured product. This 
was designed to address the concern 
that an NRSRO when assessing the 
creditworthiness of the structured 
product would be forced to issue a 
credit rating either when a substantial 
portion of the underlying assets were 
not rated or when the underlying assets 
have been rated by another credit rating 
agency. If the underlying assets were 
unrated, the NRSRO may not have 
sufficient information for issuing a 
credit rating on the structured product. 
In the case where the underlying assets 
were rated by another credit rating 
agency, the other credit rating agency 
may have used different methodologies 
to assess the creditworthiness of the 
asset and may have determined a credit 
rating that is different than the credit 
rating the NRSRO would issue, if it had 
rated the asset. 

c. Comments on Proposed Rule 17g– 
6(a)(4) 

i. Support for a Prohibition 

The Commission received far more 
comments on this provision of the 
proposed rules than on any other 
provision. Many commenters expressed 
strong support for the prohibition; 
though many of the supporters stated 
that the 85% exception was too high 
and should be lowered to at least 
66%.423 These commenters generally 

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33602 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

dated March 5, 2007 from David Hynes, Partner, 
Northcross Capital LLP; letter dated March 6, 2007 
from S. Trezevant Moore, Jr., President & COO, 
Luminent Mortgage Capital, Inc.; letter dated March 
7, 2007 from Bruce E. Stern, Chairman, Government 
Affairs Committee, Association of Financial 
Guaranty Insurers; letter dated March 9, 2007 from 
Petra Spiegel, Eurohypo AG; letter dated March 9, 
2007 from Landon D. Parsons, Managing Director, 
G-Bass (‘‘G-Bass Letter’’); letter dated March 9, 2007 
from Pat G. Halter, Chief Executive Officer, 
Principal Real Estate Investors; letter dated March 
12, 2007 from Charles Covell, Executive Vice 
President, Citigroup Alternative Investments; letter 
dated March 12, 2007 from Rodney J. Dillman, 
General Counsel, Babson Capital Management LLC; 
letter dated March 12, 2007 from Louis C. Lucido, 
Group Managing Director, Trust Company of the 
West; letter dated March 12, 2007 from Daniel 
Ivascyn, Managing Director, PIMCO (‘‘PIMCO 
Letter’’); letter dated March 27, 2007 from Dottie 
Cunningham, Chief Executive Officer, Commercial 
Mortgage Securities Association; letter dated April 
23, 2007 from Dwight M. Jaffe, Professor, Haas 
School of Business (‘‘Jaffe Letter’’); letter dated 
April 24, 2007 from Daniel Rubinfeld, Professor, 
Boalt Law School (‘‘Rubinfeld Letter’’); letter dated 
April 25, 2007 from Dottie Cunningham, Chief 
Executive Officer, Commercial Mortgage Securities 
Association; letter dated May 11, 2007 from Kent 
Wideman, Group Managing Director, Policy and 
Rating Committee, and Mary Keogh, Managing 
Director, Policy and Regulatory Affairs, Dominion 
Bond Rating Service (‘‘DBRS 2nd Letter’’). 

424 Id. 
425 See DBRS Letter; DBRS 2nd Letter. 
426 See Fitch Letter. 
427 Id. 

428 Fitch Letter. 
429 See Rubinfeld Letter; Jaffe Letter. 
430 Id. 
431 See Jaffe Letter. 
432 See, e.g., Fitch Letter; PIMCO Letter; G-Bass 

Letter. 
433 Id. 
434 Id. 
435 See, e.g., Fitch Letter. 
436 Id. 
437 See Fitch Letter. 
438 See Fitch 2nd Letter. 

439 See, e.g., S&P Letter; S&P 2nd Letter; Moody’s 
Letter; Moody’s 3rd; R&I Letter; FSR Letter; 
Rutherfurd Letter; Langohr Letter; AST Letter; letter 
dated March 30, 2007 from Raymond W. McDaniel, 
President, Moody’s Investor Services (‘‘Moody’s 
2nd Letter’’); letter dated March 30, 2007 from 
Charles W. Calomiris, Professor, Columbia 
University, et al. (‘‘Calomiris Letter’’); letter dated 
April 3, 2007, from J. Darrell Duffie, Professor, 
Stanford University, Graduate School of Business; 
letter dated April 6, 2007 from Jean Helwege, 
Associate Professor of Finance, Penn State 
University; letter dated April 13, 2007 from Robert 
M. Chilstrom, Esq., Skadden, Arps, Slate, Meagher 
& Flom LLP, on behalf of Moody’s Investor 
Services; letter dated April 18, 2007 from Gunter 
Loeffler, Professor, University of Ulm, Germany; 
letter dated April 26, 2007 from Louis H. 
Ederington, Professor, Price College of Business, 
University of Oklahoma; letter dated April 28, 2007 
from Mitchell A. Petersen, Professor, Kellogg 
School of Management, Northwestern University; 
letter dated May 3, 2007 from the Honorable 
Charles E. Schumer, Senator, Robert Menendez, 
Senator, John E. Sununu, Senator, and Mike Enzi, 
Senator, U.S. Senate; letter dated May 12, 2007 from 
Ren-Raw Chen, Professor, Rutgers University. 

440 Id. 
441 See Calomiris Letter. 
442 See Moody’s 3rd Letter; Calomiris Letter. 
443 See Moody’s Letter; Calomiris Letter. 
444 See Langohr Letter. 
445 See Moody’s 2nd Letter. 

believe the proposed rule would serve 
to increase competition within the 
credit ratings market, thus benefiting 
investors in structured products.424 

For example, DBRS stated that 
notching has a ripple effect on 
competition wider than just the 
structured products and affects 
competition in the corporate bond rating 
market and that the practices employed 
by S&P and Moody’s could have a 
profound and harmful effect on efforts 
to increase competition among 
NRSROs.425 Fitch stated that adoption 
of the proposed rule is critical to 
achieving the Rating Agency Act’s 
objective of greater accountability, 
transparency, and competition in the 
credit ratings market.426 Fitch noted that 
structured products increasingly are 
designed to hold other structured 
products.427 Fitch stated that the 
practices employed by S&P and 
Moody’s have increased their market 
share in rating structured products, 

As the structured finance market has 
grown exponentially in terms of both dollar 
value and number of market participants, it 
has become increasingly circular. Most 
notably, [structured product] issuers 
regularly acquire securities of other 
[structured product] issuers. The circularity 
of the market, in which large, intertwined 
investors are each subject to notching 
guidelines mandated by Moody’s and S&P, 
has allowed Moody’s and S&P to extend their 
partner monopoly in the traditional bond 
market to the increasingly prominent 

structured finance market. Therein lies the 
power of the unfair, coercive, and abusive 
practice of notching.428 

Academic commenters also stated that 
Moody’s and S&P’s practices are unfair, 
coercive, and abusive within the 
meaning of the Rating Agency Act.429 
They stated that the securities market 
would benefit from increased 
competition in the credit rating market, 
and that these practices have served to 
hinder Fitch’s ability to compete.430 
One commenter also argued that these 
practices may lead to misleading credit 
ratings if another credit rating agency’s 
ratings are categorically reduced 
without analytic support.431 

As noted above, many of the 
commenters that supported the 
prohibition stated that the 85% 
threshold should be lowered to 66% or 
less.432 They based this assertion on 
Fitch’s showing that S&P, Moody’s, and 
Fitch each shared approximately 66% of 
the structured product market before 
S&P and Moody’s began their practices 
in 2001.433 They further stated that as a 
direct result of notching, S&P and 
Moody’s have significantly increased 
their market share; while Fitch has lost 
market share.434 

The commenters that support 
prohibiting the practices of S&P and 
Moody’s believe that the remedy is to 
require an NRSRO to rely on the credit 
ratings of another NRSRO without 
employing any mapping methodology 
that would lower the credit rating.435 
For example, Fitch argues that historical 
default, transition rate, and rating 
comparability studies indicate that the 
credit ratings of S&P, Moody’s, and 
Fitch for structured products are 
comparable.436 Therefore, Fitch asserts 
that NRSROs should rely on the credit 
ratings of other NRSROs at face 
value.437 Fitch suggested that the 
proposed rule be modified to provide 
that if an NRSRO has rated 66% of the 
par value of an asset pool, and all assets 
in the pool are publicly rated by two or 
more NRSROs, for those assets the 
NRSRO has not itself rated, the NRSRO 
be required to use one of the two or 
more public ratings assigned to the 
underlying asset.438 

ii. Opposition to a Prohibition 
S&P, Moody’s, and several other 

commenters (including academic 
commenters) strongly opposed the 
prohibition in paragraph (a)(4) of 
proposed Rule 17g–6.439 They cited a 
number of reasons, most notably that it 
would require one NRSRO to rely on the 
credit ratings of another NRSRO.440 
Several commenters asserted that the 
proposed rule would have an 
anticompetitive effect.441 They argued 
that requiring an NRSRO to adopt the 
credit ratings of competitors in its credit 
ratings analysis would reduce 
competition because the ability of an 
NRSRO to reach an independent 
determination of creditworthiness based 
on different methodologies or criteria 
would be impeded.442 These 
commenters state that value is brought 
to the market by allowing NRSROs to 
deliver different analytical perspectives 
on issuers and securities.443 Another 
commenter wrote that the proposed rule 
would require an NRSRO to put its own 
reputation at risk on behalf of the 
commercial interests of a competitor.444 
Further, Moody’s argued that 
differences among credit rating opinions 
on the same security tend to be larger 
than those observed when comparing 
only published credit ratings on jointly- 
rated securities, and that differences 
between credit rating opinions are more 
common and are often greater when 
Moody’s rates securities in a category 
other than Aaa.445 A rule that prohibited 
notching would, in the view of many 
commenters, prohibit an agency from 

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446 See, e.g., Moody’s Letter. 
447 See S&P Letter; Moody’s Letter. 
448 Id. 
449 See S&P Letter. 
450 Id. 
451 Id. 
452 See Moody’s 3rd Letter. 
453 See Moody’s Letter; Moody’s 2nd Letter; 

Moody’s 3rd Letter; S&P Letter; S&P 2nd Letter. 
454 Id. 
455 Id. 
456 Id. 

457 See S&P Letter; S&P 2nd Letter. 
458 See S&P 2nd Letter; Moody’s 3rd Letter. 
459 See S&P 2nd Letter. 
460 See Moody’s Letter; Moody’s 2nd Letter; 

Moody’s 3rd Letter; S&P Letter; S&P 2nd Letter. 
461 Id. 
462 Id. 
463 See Moody’s Letter; Moody’s 2nd Letter; 

Moody’s 3rd Letter; S&P Letter; S&P 2nd Letter. 
464 Id. 
465 See Calomiris Letter. 

466 See Moody’s Letter. 
467 See S&P Letter; see also DBRS 2nd Letter 

supporting increased recordkeeping and revising its 
earlier comment that an NRSRO should be required 
to rely on the credit ratings of another NRSRO in 
light of objections that this would interfere with 
how an NRSRO determines credit ratings. 

468 See S&P Letter. 
469 Id. 

forming its own opinion about the risks 
of collateral in a structured product.446 

Additionally, S&P and Moody’s 
believe the proposed rule would unduly 
interfere with their methodologies for 
determining credit ratings, could lead to 
inaccurate credit ratings and credit 
ratings that violate securities laws, and 
unnecessarily raise constitutional 
issues.447 They argue that users of credit 
ratings believe ratings reflect the 
agency’s bona fide opinion of the 
creditworthiness of a particular issuer, 
security, or transaction.448 S&P wrote 
that when an agency is asked to rate 
structured products it must understand 
the credit quality of all of the 
underlying assets.449 If an NRSRO was 
required to use the credit rating of 
another NRSRO, it would in effect lose 
the right to understand the credit 
quality of the underlying assets, and 
lose control over the credit rating 
opinions it publishes.450 Such a result, 
it argues, would be contrary to the 
legislative intent that credit ratings be 
independent and free from interference 
by third parties, including governments, 
issuers, investors, and competitors.451 
Moody’s similarly argues that such a 
credit rating would not reflect an 
evaluation of the credit risk of all the 
assets in the pool, and therefore, 
negatively impact the credibility and 
reliability of its credit ratings and 
increase the risks to investors who rely 
on its credit ratings.452 

S&P and Moody’s argue that 
prohibiting their practices, in effect, 
would require them to rely on another 
NRSRO’s credit rating even when they 
believed that credit rating to be 
unsupportable.453 Further, if they were 
required to rely on a credit rating from 
another NRSRO, they argue they would 
be placed in a position of having to 
publish credit ratings that they do not 
believe are accurate or engage in a 
prohibited practice.454 They state that 
this would create the untenable choice 
of taking an action that is inconsistent 
with general securities law principles or 
violating Rule 17g–6.455 

S&P and Moody’s state that their 
practices are analytically justified 
methods of forming an independent 
credit rating opinion.456 S&P asserts that 

it is appropriate to reserve the right to 
discount the credit ratings of other 
credit rating agencies when 
incorporating these credit ratings into 
its own analysis to account for 
differences in analytical and 
surveillance practices among credit 
rating agencies, preserve its ability to 
perform its own surveillance of the 
underlying assets, and account for the 
possibility that the assets could be 
down-rated by another credit rating 
agency without notice.457 

S&P and Moody’s also have disputed 
the assertion that there are no 
differences between their credit ratings 
and Fitch’s credit ratings.458 S&P argues 
that historical correlations that may 
have existed are not a justification for 
adopting a rule that would require 
recognition of future credit ratings 
issued by credit rating agencies that may 
register as NRSROs.459 Moreover, S&P 
and Moody’s say that their practice of 
mapping to other credit ratings was 
developed to accommodate structured 
product sponsors who did not want to 
wait or pay for credit analysis on the 
assets underlying a structured product 
that the agency had not previously 
rated.460 They asserted that this practice 
provides a quicker means to close a 
structured product issuance because the 
existing credit rating serves as a starting 
point in analyzing a portion of the pool 
of underlying assets.461 Therefore, in 
their view, prohibiting their practices 
would harm users of credit ratings.462 

S&P and Moody’s also commented on 
how paragraph (a)(4) of proposed Rule 
17g–6 should be revised. For example, 
Moody’s commented that the 85% 
threshold in the proposed rule was not 
appropriate.463 It argued that credit 
ratings for tranches of structured 
products are sensitive to the accuracy of 
credit ratings for even small portions of 
the underlying asset pool. Further, S&P 
and Moody’s argued that the 85% 
threshold would create an incentive for 
collateral managers to include the 
riskiest securities in the 15% unrated 
portion of the structured product.464 
Other commenters also argued the 
proposed rule would undermine the 
market’s ability to offset potential harm 
from credit rating shopping.465 

Moody’s and S&P recommended that 
the Commission strike paragraph (a)(4) 
of Proposed Rule 17g–6 in its entirety. 
Alternatively, Moody’s commented that 
if paragraph (a)(4) is retained, the rule 
should be revised to clearly prohibit 
only conduct that is motivated by an 
‘‘unfair, coercive or abusive’’ intent.466 
Moody’s suggested that the rule be 
amended to provide, among other 
things, that the prohibitions of 
paragraph (a)(4) shall not apply if any 
such action is taken in accordance with 
the NRSRO’s analytical procedures and 
methodologies and that the rule should 
not compel credit rating agencies to use 
or to rely upon the credit rating 
opinions of other persons as their own. 

S&P commented that one alternative 
to prohibiting these practices would be 
a record retention regime whereby 
NRSROs would be required to retain 
records related to their decisions to treat 
another NRSRO’s credit ratings, 
including the NRSRO’s reasons for the 
treatment.467 S&P stated that requiring 
the firm to explain its reasons would 
guard against unfair, coercive, or 
abusive practices.468 

In lieu of striking paragraph (a)(4) or 
adopting only recordkeeping 
requirements, S&P commented that 
paragraph (a)(4) should be revised to 
provide that in situations where it has 
not rated 100% of the underlying assets, 
an NRSRO should have three options: (i) 
Accepting the credit ratings of others at 
face value; (ii) refusing to rate the 
transaction at all; or (iii) reviewing all 
the underlying assets and receiving 
compensation for the additional work 
involved.469 

d. Final Rule 17g–6(a)(4) 
At this time, the Commission cannot 

determine that the acts and practices 
described above are unfair, coercive, or 
abusive in and of themselves. The 
Commission needs more information 
about these practices to gain a better 
understanding of how they were 
developed and are being employed. The 
Commission is concerned, however, that 
these practices have adversely affected 
competition among credit rating 
agencies and that they may occur for 
anticompetitive purposes. 
Consequently, the Commission is 
adopting a final rule that is intended to 
increase accountability and 

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33604 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

470 15 U.S.C. 78o–7(i)(1)(B). 
471 See S&P Letter; DBRS 2nd Letter. 
472 See S&P Letter. 

473 See DBRS Letter; Fitch Letter; Fitch 2nd 
Letter; Moody’s Letter; Moody’s 2nd Letter; 
Moody’s 3rd Letter; S&P Letter; S&P 2nd Letter. 

474 Id. 
475 Id. 
476 Id. 

477 Id. 
478 Id. 
479 See S&P Letter; Moody’s Letter. 

transparency in the structured product 
credit ratings market. 

First, the Commission has determined 
that the practices identified in Section 
15E(i)(1)(B) of the Exchange Act 470 are 
unfair, coercive, or abusive to the extent 
they are practiced with anticompetitive 
intent. Consequently, paragraph (a)(4) of 
Rule 17g–6 prohibits an NRSRO from 
issuing or threatening to issue a lower 
credit rating, lowering or threatening to 
lower an existing credit rating, refusing 
to issue a credit rating, or withdrawing 
or threatening to withdraw a credit 
rating, with respect to securities or 
money market instruments issued by an 
asset pool or as part of any asset-backed 
or mortgage-backed securities 
transaction, unless all or a portion of the 
assets within such pool or part of such 
transaction also are rated by the 
nationally recognized statistical rating 
organization where such practice is 
engaged in by the nationally recognized 
statistical rating organization for an 
anticompetitive purpose. 

The Commission recognizes that 
proving anticompetitive intent will be 
difficult, particularly where an NRSRO 
has analysis to support the contention 
that its methodology is not arbitrary and 
is designed to make the credit rating of 
a structured product more accurate. 
Nonetheless, the Commission believes 
this prohibition will be an important 
deterrent against anticompetitive 
practices when combined with the 
enhanced recordkeeping requirements 
in Rule 17g–2 discussed below. 

e. Enhanced Recordkeeping 
Requirements 

As noted above, two commenters 
suggested that an alternative to banning 
the practices of S&P and Moody’s would 
be a record retention regime whereby 
NRSROs would be required to retain 
records related to their decisions on 
how to treat, and methodology for 
treating, another NRSRO’s credit ratings 
into the credit rating of a structured 
product.471 S&P stated that requiring an 
NRSRO to explain its reasons for the 
treatment would guard against unfair, 
coercive, or abusive practices.472 

The Commission believes that 
recordkeeping requirements aimed at 
these practices are necessary or 
appropriate in the public interest or for 
the protection of investors. 
Consequently, the Commission is 
adopting three recordkeeping 
requirements in this area. These 
requirements will assist the Commission 
in better understanding how these 

practices are developed and employed. 
This information may provide a basis 
for the Commission to determine 
whether it should find a specific 
practice to be unfair, coercive, or 
abusive. The Commission also believes 
that increased scrutiny on the practices 
coupled with the potential for liability 
under Rule 17g–6 will deter an NRSRO 
from acting with anticompetitive intent. 

i. Paragraph (a)(7) of Rule 17g–2 

As adopted, paragraph (a)(7) of Rule 
17g–2 requires an NRSRO to make a 
record that lists each security and its 
corresponding credit rating issued by an 
asset pool or as part of any asset-backed 
or mortgage-backed securities 
transaction where the NRSRO in 
determining the credit rating for the 
security treats assets within such pool 
or as a part of such transaction that are 
not subject to a credit rating of the 
NRSRO by any or a combination of the 
practices described above and identified 
in paragraphs (a)(7)(i) through (iv) of 
Rule 17g–2. 

As discussed above, there are four 
practices by which a credit rating 
agency may treat unrated assets 
underlying a structured product when 
determining a credit rating for the 
structured product.473 Moreover, the 
credit rating agency may condition the 
issuance of a credit rating for the 
structured product on its employing one 
or more of these practices. First, the 
credit rating agency may require that it 
effectively issue a public credit rating 
for most, if not all, the assets underlying 
the structured product.474 This practice 
is described in paragraph (a)(7)(i) of 
Rule 17g–2. Second, the credit rating 
agency may require that it provide a 
private credit rating or credit assessment 
for a fee with respect to the unrated 
assets.475 This practice is described in 
paragraph (a)(7)(ii) of Rule 17g–2. 

Third, the credit rating agency may 
take into consideration the internal 
credit analysis of another person (e.g., 
the underwriter, sponsor, or manager of 
the structured product) with respect to 
the unrated assets to determine a credit 
rating or private credit rating, or 
perform a credit assessment of the 
unrated assets.476 This practice is 
employed after the credit rating agency 
has done a review of how the person 
performs its credit analysis, including a 
review of the specific procedures and 
methodologies employed by the person. 

This practice is described in paragraph 
(a)(7)(iii) of Rule 17g–2. 

Fourth, the credit rating agency may 
take into consideration but not 
necessarily adopt the credit ratings of 
another credit rating agency for the 
unrated assets to determine a credit 
rating or private credit rating, or 
perform a credit assessment of the 
unrated assets.477 Under this last 
practice, the credit rating agency may 
employ a standardized methodology to 
discount (notch down) the credit ratings 
of the other credit rating agency based 
on the type of security and category of 
credit rating.478 This practice is 
described in paragraph (a)(7)(iv) of Rule 
17g–2. 

The intent of the recordkeeping 
provision in paragraph (a)(7) of Rule 
17g–2 is to alert Commission examiners 
to those structured product credit 
ratings issued by an NRSRO that have 
been determined using one or more of 
these practices, which commenters have 
argued are unfair, coercive, or abusive. 
This will assist the examiners in 
requesting the records relating to these 
credit ratings in order to monitor these 
practices and get a better understanding 
of how they are employed. The 
Commission believes this provision is 
necessary or appropriate in the public 
interest or for the protection of investors 
because it will assist the Commission in 
reviewing whether these practices are 
being engaged in with anticompetitive 
intent in violation of Rule 17g–6(a)(4). 

For these reasons, the Commission is 
adopting the provision in Rule 17g–2. 

ii. Paragraph (b)(8) of Rule 17g–2 
As adopted, paragraph (b)(8) of Rule 

17g–2 requires an NRSRO to retain 
internal documents that contain 
information, analysis, or statistics that 
were used to develop a procedure or 
methodology to treat the credit ratings 
of another NRSRO for the purpose of 
determining a credit rating of a security 
or money market instrument issued by 
an asset pool or part of any asset-backed 
or mortgage-backed securities 
transaction. 

As discussed above, the commenters 
who opposed the prohibition in Rule 
17g–6(a)(4), as proposed, stated that 
there were legitimate reasons for using, 
but lowering, another credit rating 
agency’s credit ratings or insisting on 
performing an independent assessment 
of the assets rated by another credit 
rating agency.479 As noted above, the 
Commission has insufficient 
information at this time to determine 

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480 See Moody’s 3rd Letter. 
481 See 17 CFR 240.17g–2(b)(8). 

482 See Fitch Letter. 
483 See R&I Letter; FSR Letter; DBRS Letter; A.M. 

Best Letter; Fitch Letter; S&P Letter; Moody’s Letter; 
Langohr Letter; LACE Letter. 

484 Id. 

485 44 U.S.C. 3501 et seq.; 5 CFR 1320.11. 
486 Pub. L. 109–291 (2006). 
487 Section 15E(a)(1) of the Exchange Act (15 

U.S.C. 78o–7(a)(1)) and Rule 17g–1(a). 

that such practices are a pretext for 
anticompetitive behavior or that such 
practices are appropriate. The records 
that an NRSRO must retain under this 
provision will assist the Commission in 
understanding whether the NRSROs 
that engage in these practices have 
analytical, statistical, or other bases to 
support their methodologies. The 
existence (or absence) and nature of 
such information will assist the 
Commission in analyzing whether the 
practices are employed with the intent 
to improve the quality and accuracy of 
credit ratings or as pretexts for 
anticompetitive behavior. 

For example, the Commission 
understands issuers may ask for pre- 
credit rating assessments for a security 
from three or more credit rating agencies 
and, based on the assessments or other 
considerations, hire one or more, but 
not all, of the credit rating agencies to 
issue the credit rating.480 A credit rating 
agency that was not hired to issue a 
credit rating for the security may use its 
pre-credit rating assessment as part of 
an analysis of how it would rate this 
type of security as compared to the 
other credit rating agencies. This 
analysis may be used to develop a 
procedure or methodology to treat the 
credit ratings of the other credit rating 
agencies for securities underlying a 
structured product in developing a 
credit rating for the structured 
product.481 The treatment may include 
a schedule in which the credit ratings of 
the other credit rating agencies are 
notched down to the extent they are 
included in the structured product. 
Under paragraph (b)(8) of Rule 17g–2, 
an NRSRO that uses pre-credit rating 
assessments to develop such a schedule 
will need to retain any records 
documenting its pre-credit rating 
assessments and the process by which 
the pre-credit rating assessments were 
used to arrive at the number of notches 
the securities will be discounted. 

The Commission believes this 
provision is necessary or appropriate in 
the public interest or for the protection 
of investors because it will assist the 
Commission in reviewing whether these 
practices are being engaged in with 
anticompetitive intent in violation of 
Rule 17g–6(a)(4). 

iii. Paragraph (b)(9) of Rule 17g–2 
As adopted, paragraph (b)(9) of Rule 

17g–2 requires an NRSRO to retain for 
each security identified in the record 
required under paragraph (a)(7) of Rule 
17g–2, any document that contains a 
description of how assets within such 

pool or as a part of such transaction not 
rated by the NRSRO but rated by 
another NRSRO were treated for the 
purpose of determining the credit rating 
of the security. 

These records will permit 
Commission examiners to review on a 
case-by-case basis the method by which 
an NRSRO incorporates the credit 
ratings of another NRSRO into the credit 
rating of a structured product. For 
example, examiners will be able to 
compare the methodologies for 
incorporating highly rated assets with 
those for lower rated assets. One 
commenter that strongly supports 
prohibiting these practices states that 
credit rating agencies engaging in these 
practices notch down assets they have 
rated in the highest credit rating 
categories even though studies suggest 
that its credit ratings perform 
comparably.482 

The Commission believes this 
provision is necessary or appropriate in 
the public interest or for the protection 
of investors because it will assist the 
Commission in reviewing whether these 
practices are being engaged in with 
anticompetitive intent in violation of 
Rule 17g–6(a)(4). 

5. Unsolicited credit ratings 

In the proposing release, the 
Commission preliminarily determined 
that it would be unfair, coercive, or 
abusive to issue an unsolicited credit 
rating and communicate with the issuer 
or obligor to induce or attempt to induce 
them to pay for the credit rating or 
another product or service of the 
NRSRO or its affiliates. Consequently, 
paragraph (a)(5) of proposed Rule 17g– 
6 would have prohibited this practice. 

Commenters raised a number of 
concerns with respect to how this 
prohibition would operate in 
practice.483 For the most part, they 
worried it was overbroad and, 
consequently, would prohibit legitimate 
business activities that are not 
coercive.484 As discussed with respect 
to Exhibit 2, issuers and obligors, for 
example, may consent to the issuance, 
and participate in the determination, of 
a credit rating even if they did not 
specifically request that the credit rating 
be issued. The Commission wants to 
gain a better understanding through its 
examination function of how credit 
rating agencies define ‘‘unsolicited 
credit ratings’’ and the practices they 
employ with respect to these ratings. 

The Commission believes it must gain 
this understanding before prohibiting 
any practices in this area. 

For these reasons, the prohibition has 
been eliminated from Rule 17g–6. 

V. Paperwork Reduction Act 

Certain provisions of the rules contain 
a ‘‘collection of information’’ within the 
meaning of the Paperwork Reduction 
Act of 1995 (‘‘PRA’’).485 The 
Commission published a notice 
requesting comment on the collection of 
information requirements in the 
proposing release and submitted the 
proposed rules to the Office of 
Management and Budget (‘‘OMB’’) for 
review in accordance with the PRA. The 
Commission will publish notice in the 
Federal Register when it receives 
clearance from OMB. The Commission 
did not receive any comments on the 
burden estimates in the proposing 
release. 

An agency may not conduct or 
sponsor, and a person is not required to 
comply with, a collection of information 
unless it displays a currently valid 
control number. The titles for the 
collections of information are: 

(1) Rule 17g–1, Application for 
registration as a nationally recognized 
statistical rating organization; Form 
NRSRO and the Instructions for Form 
NRSRO; 

(2) Rule 17g–2, Records to be made 
and retained by national recognized 
statistical rating organizations; 

(3) Rule 17g–3, Annual financial 
reports to be furnished by nationally 
recognized statistical rating 
organizations; and 

(4) Rule 17g–4, Prevention of Misuse 
of Material Nonpublic Information. 

A. Collections of Information in the 
Rules 

The rules being adopted implement 
registration, recordkeeping, financial 
reporting, and oversight provisions of 
the Credit Rating Agency Reform Act of 
2006 (the ‘‘Rating Agency Act’’).486 The 
rules contain recordkeeping and 
disclosure requirements that are subject 
to the PRA for registered NRSROs and 
impose mandatory collection of 
information obligations. 

In summary, the rules require a credit 
rating agency that wishes to register as 
an NRSRO to furnish an initial 
application to the Commission for 
registration on Form NRSRO; 487 and a 
credit rating agency or NRSRO to 
furnish a written notice to the 

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488 Rule 17g–1(d); see also Section 15E(a)(1) of the 
Exchange Act (15 U.S.C. 78o–7(a)(1)). 

489 Rule 17g–1(b). 
490 Rule 17g–1(c). 
491 Section 15E(b)(1) of the Exchange Act (15 

U.S.C. 78o–7(b)(1)) and Rule 17g–1(e). 
492 Section 15E(b)(2) of the Exchange Act (15 

U.S.C. 78o–7(b)(2)) and Rule 17g–1(f). 
493 Section 15E(e)(1) of the Exchange Act (15 

U.S.C. 78o–7(e)(1)) and Rule 17g–1(g). 
494 Section 15E(a)(3) of the Exchange Act (15 

U.S.C. 78o–7(a)(3)) and Rule 17g–1(i). 
495 Rule 17g–2 under authority in Section 17(a)(1) 

of the Exchange Act (15 U.S.C. 78q(a)(1)). 
496 Rule 17g–2(e) under authority in Section 

17(a)(1) of the Exchange Act (15 U.S.C. 78q(a)(1)). 
497 Section 15E(k) of the Exchange Act (15 U.S.C. 

78o–7(k)) and Rule 17g–3. 
498 Section 15E(g) of the Exchange Act (15 U.S.C. 

78o–7(g)) and Rule 17g–4. 
499 See 15 U.S.C. 78o–7. 

500 15 U.S.C. 78o–7. 
501 See Report of the Senate Committee on 

Banking, Housing, and Urban Affairs to Accompany 
S. 3850, Credit Rating Agency Reform Act of 2006, 
S. Report No. 109–326, 109th Cong., 2d Sess. (Sept. 
6, 2006) (‘‘Senate Report’’). 

502 15 U.S.C. 78c. 
503 See Section 3 of the Rating Agency Act. 
504 Section 3(a)(62) of the Exchange Act (15 U.S.C. 

78c(a)(62)). Section 3(a)(64) of the Exchange Act (15 
U.S.C. 78c(a)(64)) defines the term ‘‘qualified 
institutional buyer’’ (‘‘QIB’’) as having the 
‘‘meaning given such term in [17 CFR 230.144A(a)] 
or any successor thereto.’’ 

505 Section 3(a)(61) of the Exchange Act (15 U.S.C. 
78c(a)(61)). 

506 Section 3(a)(61)(A) of the Exchange Act (15 
U.S.C. 78c(a)(61)(A)). 

507 Section 3(a)(60) of the Exchange Act (15 U.S.C. 
78c(a)(60)). 

508 The Basel Committee on Banking Supervision 
is comprised of members from Belgium, Canada, 
France, Germany, Italy, Japan, Luxembourg, the 
Netherlands, Spain, Sweden, Switzerland, the 
United Kingdom and the United States. Countries 
are represented by their central bank and also by 
the authority with formal responsibility for the 
prudential supervision of banking business where 
this is not the central bank. More information about 
the Basel Committee for Banking Supervision can 
be found at: http://www.bis.org/. 

509 Credit Ratings and Complementary Sources of 
Credit Quality Information, Working group of the 
Basel Committee on Banking Supervision, No. 3— 
August 2000 (‘‘Basel Report’’). 

510 Id. 
511 Id. 
512 Id. 

Commission to withdraw an initial 
application or application to be 
registered in an additional class of 
credit ratings prior to final action by the 
Commission.488 Further, the rules 
require an NRSRO to (1) furnish an 
application to the Commission on Form 
NRSRO for registration in an additional 
class of credit ratings; 489 (2) furnish an 
application supplement on Form 
NRSRO to update information for an 
initial application or for an application 
to register an additional class of credit 
ratings prior to final Commission 
action; 490 (3) furnish an amendment to 
the Commission on Form NRSRO to 
update information in the application 
after registration; 491 (4) furnish an 
annual certification to the Commission 
on Form NRSRO; 492 (5) furnish a 
withdrawal of registration to the 
Commission on Form NRSRO; 493 (6) 
make the current Form NRSRO and 
Exhibits 1 through 9 publicly available 
on its Web site, or through another 
comparable, readily accessible 
means; 494 (7) make, retain, and preserve 
certain records; 495 (8) furnish an 
undertaking to the Commission if a 
third-party custodian makes or retains 
these records; 496 (9) furnish the 
Commission with annual financial 
reports; 497 and (10) establish certain 
procedures to prevent the misuse of 
material nonpublic information.498 
Many of these requirements are 
prescribed in Section 15E of the 
Exchange Act.499 

B. Use of the Information 
Rules 17g–1 through 17g–6, Form 

NRSRO, and the Instructions for Form 
NRSRO establish a framework for 
Commission oversight of NRSROs. The 
collections of information in the rules 
are designed to allow the Commission to 
determine whether an entity should be 
registered as an NRSRO. Further, they 
will assist the Commission in effectively 
monitoring, through its examination 

function, whether an NRSRO is 
conducting its activities in accordance 
with Section 15E of the Exchange 
Act 500 and the rules thereunder. The 
rules also are designed to assist users of 
credit ratings by requiring the disclosure 
of information that may be used to 
compare the credit ratings quality of 
different NRSROs. The disclosures 
include information about methods for 
determining credit ratings, 
organizational structure, policies for 
safeguarding non-public information, 
conflicts of interest, policies for 
managing conflicts of interest, and 
credit analyst qualifications. As noted in 
the Senate Report accompanying the 
Rating Agency Act, this information 
‘‘will facilitate informed decisions by 
giving investors the opportunity to 
compare ratings quality of different 
firms.’’ 501 

C. Respondents 
The number of respondents will 

depend, in part, on the number of 
entities that meet the statutory 
requirements to be eligible for 
registration. The Rating Agency Act, by 
adding definitions to Section 3 of the 
Exchange Act,502 identifies the types of 
entities that may apply for registration 
with the Commission as an NRSRO.503 
First, it defines an ‘‘NRSRO’’ as a 
‘‘credit rating agency’’ that, in pertinent 
part, has been in business as a credit 
rating agency for at least three 
consecutive years immediately 
preceding the date of its application for 
registration; issues credit ratings 
certified by 10 QIBs (unless exempted 
from that requirement) with respect to 
financial institutions, brokers, dealers, 
insurance companies, corporate issuers, 
issuers of asset-backed securities (as that 
term defined in 17 CFR 229.1101(c)), 
issuers of government securities, issuers 
of municipal securities, or issuers of 
foreign government securities; and is 
registered with the Commission.504  

Section 3 of the Exchange Act also 
defines the term ‘‘credit rating agency’’ 
as, in pertinent part, any person engaged 
in the business of issuing credit ratings 
on the Internet or through another 
readily accessible means, for free or for 

a reasonable fee; employing either a 
quantitative or qualitative model, or 
both, to determine credit ratings; and 
receiving fees from either issuers, 
investors, or other market participants, 
or a combination of these persons.505 
The definition specifically excludes a 
commercial credit reporting 
company.506 Finally, Section 3 of the 
Exchange Act defines the term ‘‘credit 
rating’’ to mean ‘‘an assessment of the 
creditworthiness of an obligor as an 
entity or with respect to specific 
securities or money market 
instruments.’’ 507 

These definitions create threshold 
eligibility requirements with respect to 
the entities that are eligible to apply for 
registration as an NRSRO. Because 
NRSROs have not previously been 
supervised as such, and because credit 
rating agencies include publicly and 
privately held companies located 
throughout the world, it is difficult to 
estimate the number of entities that are 
eligible to register as NRSROs. 

In 2000, a working group of the Basel 
Committee on Banking Supervision 508 
issued a report on credit rating agencies 
that was based, in part, on surveys of 28 
credit rating agencies located around the 
world, including the five credit rating 
agencies currently identified as NRSROs 
through the Commission’s no-action 
letter process.509 In its report, the 
working group estimated that there were 
approximately 150 credit rating agencies 
located world-wide.510 The working 
group also noted that there was a wide 
disparity in size among credit rating 
agencies in terms of number of 
employees and credit ratings issued.511 
In addition, the working group noted 
that some credit rating agencies focus 
exclusively on issuers in the countries 
where they are located.512 

The Web site http:// 
www.DefaultRisk.com, which has 

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33607 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

513 See http://www.defaultrisk.com 
(‘‘DefaultRisk.com’’). 

514 Id. 
515 Section 15E(a)(1) of the Exchange Act makes 

registration voluntary (15 U.S.C. 78o–7(a)(1)). 
516 15 U.S.C. 78o–7. 

517 15 U.S.C. 78o–7. 
518 This total is derived from the total annual 

hours set forth in the order that the totals appear 
in the text: 1 + 1,500 + 300 + 1 + 300 + 7,620 + 
6,000 = 15,722 hours. 

519 This total is derived from the total one-time 
hours set forth in the order that the totals appear 
in the text: 9,000 + 1,200 + 125 + 900 + 9,000 + 
50 + 1,500 = 21,775 hours. 

520 15 U.S.C. 78o–7(a)(1)(B). 
521 15 U.S.C. 78o–7. 
522 Id. 
523 15 U.S.C. 78o–7(a)(1). 
524 See paragraphs (a), (c), and (h) of Rule 17g– 

1. 

tracked the number of credit rating 
agencies, identifies 57 credit rating 
agencies as of February 2006 and 
indicates that this count reflects a 
decrease from a previous count of 74.513 
The Web site attributed the decrease to 
smaller firms either being consolidated 
into larger firms or ceasing 
operations.514 

The estimates in the 2000 Basel 
Report and by DefaultRisk.Com provide 
some basis upon which to estimate the 
number of entities engaging in the 
business of issuing credit ratings. We 
cannot determine how many of the 
entities included in these estimates 
meet the statutory requirements to apply 
for, and be registered as, an NRSRO. 

In addition, it is difficult to estimate 
with certitude how many credit rating 
agencies ultimately would volunteer to 
be registered as NRSROs.515 Some credit 
rating agencies may decide not to seek 
registration because, for example, they 
do not believe that being an NRSRO 
would benefit them based on their 
business model. The Commission staff’s 
experience with the expiring no-action 
letter process of identifying NRSROs 
provides some support for the 
conclusion that a substantial number of 
credit rating agencies may not apply for 
registration. Specifically, if the number 
of credit rating agencies has fluctuated 
over the years from between 
approximately 150 as of 2000 (Basel 
Report) and 57 as of February 2006 
(DefaultRisk.com), then a large majority 
of these firms have not applied to the 
Commission to be identified as NRSROs 
under the no-action letter process. It is 
possible that certain firms that did not 
seek NRSRO status previously will seek 
it under Section 15E of the Exchange 
Act.516 In addition, the use of QIB 
certifications as a prerequisite to 
registration (as opposed to the no-action 
letter process which evaluated national 
recognition) also may increase the 
number of credit rating agencies that are 
eligible for registration as an NRSRO. 

For all these reasons, we estimated 
that the number of credit rating agencies 
applying for registration would be larger 
than the sum of the number of credit 
rating agencies currently identified as 
NRSROs plus the handful of entities 
that requested no-action letters. At the 
same time, the Commission did not 
believe that all of the 57 credit rating 
agencies identified by DefaultRisk.Com 
would apply for, or be granted, 

registration. Consequently, the 
Commission estimated that 
approximately 30 credit rating agencies 
would be registered as NRSROs under 
Section 15E of the Exchange Act.517  

The Commission requested comment 
on this estimate and whether more or 
fewer credit rating agencies would be 
registered as NRSROs. The Commission 
also requested comment on whether the 
sources of industry information 
referenced in the proposing release (the 
Basel Report and the DefaultRisk.Com 
Web site) provided a reasonable basis 
for arriving at the estimate of 30 
NRSROs. The Commission further 
requested comment on whether there 
were other industry sources that could 
provide credible statistics that could be 
used to determine the number of credit 
rating agencies that would be registered 
as NRSROs. 

The Commission did not receive any 
comments in response to these requests. 
The Commission continues to estimate, 
for purposes of this PRA, that 
approximately 30 credit rating agencies 
will be registered as NRSROs. 

D. Total Annual Recordkeeping and 
Reporting Burden 

The Commission estimates the total 
recordkeeping burden resulting from 
these rules is approximately 15,722 
hours 518 on an annual basis and 21,755 
hours519 on a one-time basis. 

The total annual and one-time hour 
burden estimates are averages across all 
types of expected NRSROs. The size and 
complexity of NRSROs will range from 
small entities to entities that are part of 
complex global organizations employing 
thousands of credit analysts. Larger 
NRSROs generally have established 
written policies and procedures and 
recordkeeping systems that comply with 
a substantial portion of the requirements 
in the rules. For example, many of the 
requirements in the rules are consistent 
with the IOSCO Code, which a number 
of credit rating agencies have adopted. 
The Commission assumed in its 
estimate that these firms would be 
required to augment or modify existing 
policies and procedures and 
recordkeeping systems to comply with 
the rules. 

The Commission further estimated 
that some smaller entities also have 
implemented the policies, procedures, 

and recordkeeping systems that 
substantially would comply with the 
proposed rules. Moreover, given their 
smaller size and simpler structure, the 
Commission assumed that smaller 
entities would require significantly 
fewer hours to comply with a 
substantial portion of the requirements 
in the proposed rules. 

Consequently, the burden hour 
estimates in the proposing release were 
designed to represent the average time 
across all NRSROs (regardless of size) 
and taking into account that many firms 
would only be required to augment 
existing policies, procedures, and 
recordkeeping systems and processes to 
comply with the proposed rules. The 
Commission noted that, given the 
significant variance in size between the 
largest credit rating agencies and the 
smaller firms, the burden estimates, as 
averages across all NRSROs, were 
skewed higher by the largest firms. 
Furthermore, because the Commission 
proposed to require additional 
information in Form NRSRO beyond 
that prescribed in Section 15E(1)(B) of 
the Exchange Act,520 the burden 
estimates for Rule 17g–1 included 
estimates arising from requirements of 
Section 15E of the Exchange Act.521 The 
intent was to quantify the incremental 
burden of complying with these 
statutory requirements as a result of the 
additional information that would be 
required under Rule 17g–1. Thus, the 
estimates did not seek to capture 
paperwork burden that would be solely 
attributable to requirements in Section 
15E of the Exchange Act.522 

The Commission sought comment on 
whether these factors were reasonably 
incorporated into the burden estimates. 
The Commission did not receive any 
comments in response to this request. 
The Commission continues to believe 
that it is appropriate to incorporate 
these factors into the final estimates, 
and has done so. 

1. Rule 17g–1, Form NRSRO, and 
Instructions for Form NRSRO 

Section 15E(a)(1) of the Exchange Act 
requires a credit rating agency applying 
for registration with the Commission to 
furnish an application containing 
certain specified information and such 
other information as the Commission 
prescribes as necessary or appropriate in 
the public interest or for the protection 
of investors.523 Rule 17g–1 524 

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525 15 U.S.C. 78o–7. 
526 As a comparison, the proposing release noted 

that Form ADV, the registration form for investment 
advisers, is estimated to take approximately 22.25 
hours to complete. See Investment Advisor Act of 
1940 Release No. 2266 (July 20, 2004). The 
Commission estimated that the hour burden under 
Rule 17g–1 would be greater, given the substantially 
larger amount of information that will be required 
in Form NRSRO. 

527 300 hours × 30 entities = 9,000 hours. 
528 40 hours × 30 entities = 1,200 hours. 

529 $400 per hour × 40 hours = $16,000. 
530 $16,000 × 30 NRSROs = $480,000. 
531 See paragraphs (c), (d), and (h) of Rule 17g– 

1. 
532 As noted above, the Commission’s burden 

estimate for Form ADV is approximately 22.25 
hours to complete. See Investment Advisor Act of 
1940 Release No. 2266 (July 20, 2004). 

533 Section 3(a)(62)(B) of the Exchange Act (15 
U.S.C. 78c(a)(62)(B)). 

534 Section 3(a)(62)(B)(v) of the Exchange Act (15 
U.S.C. 78c(a)(62)(B)(v)). 

535 Section 3(a)(62)(B)(iv) of the Exchange Act (15 
U.S.C. 78c(a)(62)(B)(iv)). 

536 25 hours × 5 NRSROs = 125 hours. 
537 See paragraph (d) of Rule 17g–1. 
538 See Exchange Act Release No. 49830 (June 8, 

2004); see also 17 CFR 240.17a–11. 

implements this statutory provision by 
requiring a credit rating agency to 
furnish a completed initial application 
on Form NRSRO to the Commission to 
apply to be registered under Section 15E 
of the Exchange Act.525 The 
Commission estimated that the average 
time necessary to complete the initial 
Form NRSRO, and compile the various 
attachments, would be approximately 
300 hours per applicant. This estimate 
was based on staff experience with the 
current NRSRO no-action letter 
process.526 The Commission, therefore, 
estimated that the total one-time burden 
to the industry as a result of this 
requirement would be approximately 
9,000 hours.527 

The Commission did not receive any 
comments on these specific estimates. 
The Commission notes that Form 
NRSRO has been changed to ease the 
burden of completing the Form. For 
example, applicants will not be required 
to provide information about each credit 
analyst, credit analyst supervisor, and 
compliance employee that assists the 
designated compliance officer. As 
discussed above, we developed these 
estimates based on the rules as 
proposed. We continue to believe the 
estimates are appropriate for the rules as 
now modified. Indeed, because we have 
in a variety of respects narrowed the 
requirements of the rules, we believe the 
estimates are likely to be conservative. 
We also note that NRSROs with small 
staffs will be less impacted by these 
modifications. 

The Commission also noted that an 
NRSRO likely would engage outside 
counsel to assist it in the process of 
completing and submitting a Form 
NRSRO. The Commission estimated that 
the amount of time an outside attorney 
will spend on this work would depend 
on the size and complexity of the 
NRSRO. Therefore, the Commission 
estimated that, on average, an outside 
counsel would spend approximately 40 
hours assisting an NRSRO in preparing 
its application for registration for a one- 
time aggregate burden to the industry of 
1,200 hours.528 The Commission further 
estimated that this work would be split 
between a partner and associate, with an 
associate performing a majority of the 
work. Therefore, the Commission 

estimated that the average hourly cost 
for an outside counsel would be 
approximately $400 per hour. For these 
reasons, the Commission estimated that 
the average one-time cost to an NRSRO 
would be $16,000 529 and the one-time 
cost to the industry would be 
$480,000.530 The Commission did not 
receive any comments on these specific 
estimates and continues to believe that 
they are appropriate. Therefore, the 
Commission is retaining these estimates 
without revision. 

Rule 17g–1 requires that an NRSRO 
registered for fewer than the five classes 
of credit ratings listed in Section 
3(a)(62)(B) of the Exchange Act apply to 
be registered for an additional class by 
furnishing an amendment on a 
completed Form NRSRO.531 The 
Commission estimated that it would 
take an NRSRO substantially less time 
to update the Form NRSRO for this 
purpose than to prepare the initial 
application. For example, much of the 
information on the Form and many of 
the Exhibits would still be current and 
not have to be updated. Based on the 
burden estimate to complete a Form 
ADV, the Commission estimated that 
furnishing an application on Form 
NRSRO for this purpose would take an 
average of approximately 25 hours per 
NRSRO.532 

The Commission further estimated 
based on staff experience that 
approximately five of the 30 credit 
rating agencies expected to register with 
the Commission would apply to register 
for additional classes of credit ratings 
within the first year. The Commission 
explained that almost all NRSROs 
would initially apply to register for the 
first three classes of credit ratings 
identified in the definition of NRSRO: 
(1) Financial institutions, brokers, or 
dealers; (2) insurance companies; and 
(3) corporate issuers.533 These are the 
most common types of credit ratings 
issued, particularly since some credit 
rating agencies limit their credit ratings 
to domestic companies. The 
Commission explained that, after these 
three classes, the next largest class of 
credit ratings for which most NRSROs 
would be registered would be for credit 
ratings with respect to issuers of 
government securities, municipal 
securities, and foreign government 

securities.534 These types of credit 
ratings take additional expertise. 
Finally, the Commission explained that 
the class of credit ratings for which the 
least number of NRSROs would be 
registered would be credit ratings of 
issuers of asset-backed securities (as that 
term is defined in 17 CFR 
229.1101(c)).535 This assumption was 
based on the fact that determining a 
credit rating for an asset-backed security 
takes specialized expertise beyond that 
for determining credit ratings of 
corporate issuers and obligors. For 
example, it requires analysis of complex 
legal structures. 

For these reasons, the Commission 
anticipated that some NRSROs might 
register for less than all five classes of 
credit ratings. Moreover, these NRSROs, 
in time, may develop their businesses to 
include issuing credit ratings in a class 
for which they are not initially 
registered. Based on staff experience, 
the Commission estimated that 
approximately five of the 30 NRSROs 
would apply to add another class of 
credit ratings to their registration within 
the first year. Therefore, given the 25 
hour per NRSRO average burden 
estimate, the total aggregate one-time 
burden to the industry for filing the 
amended Form NRSRO to change the 
scope of registration was estimated be 
approximately 125 hours.536 The 
Commission did not receive any 
comments on these specific estimates 
and continues to believe that they are 
appropriate. Therefore, the Commission 
is retaining these estimates without 
revision. 

Rule 17g–1 requires a credit rating 
agency to provide the Commission with 
a written notice if it intends to 
withdraw its application prior to final 
Commission action.537 Based on staff 
experience, the Commission estimated 
that one credit rating agency per year 
would withdraw a Form NRSRO prior to 
final Commission action on the 
application and, consequently, would 
furnish a notice of its intent to withdraw 
the application. Based on current 
estimates for a broker-dealer to file a 
notice under Rule 17a–11, the 
Commission estimated the average 
burden to an NRSRO to furnish the 
notice of withdrawal would be one 
hour.538 Thus, the Commission 
estimated that the aggregate annual 
burden to the industry of providing a 

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33609 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

539 1 hour × 1 entity = 1 hour. 
540 15 U.S.C. 78o–7(b)(1). 
541 See paragraph (e) of Rule 17g–1. 
542 This estimate also is based on the estimates for 

the collection of information on Rule 17i–2 under 
the Exchange Act (17 CFR 240.17i–2). 

543 25 hours per amendment × 2 amendments × 
30 NRSROs = 1,500 hours. 

544 15 U.S.C. 78o–7(b)(2). 
545 See paragraph (f) of Rule 17g–1. 
546 See 17 CFR 240.17h–1T and 2T. 

547 10 hour × 30 NRSROs = 300 hours. 
548 See paragraph (g) of Rule 17g–1. 
549 See Exchange Act Release No. 49830 (June 8, 

2004); see also 17 CFR 240.17a–11. 
550 1 hour × 1 entity = 1 hour. 
551 15 U.S.C. 78o–7(a)(3). 
552 See Rule 17g–1(i). 

553 30 hours × 30 NRSROs = 900 hours. 
554 10 hours × 30 NRSROs = 300 hours. 
555 See Section 5 of the Rating Agency Act. 
556 See Section 5 of the Rating Agency Act and 

15 U.S.C 78q(a)(1). 
557 15 U.S.C. 78o–7. 
558 See 17 CFR 15c3–1g. 

notice of withdrawal prior to final 
Commission action would be one hour 
per year.539 The Commission did not 
receive any comments on these specific 
estimates and continues to believe that 
they are appropriate. Therefore, the 
Commission is retaining these estimates 
without revision. 

Section 15E(b)(1) of the Exchange Act 
requires an NRSRO to promptly amend 
its application for registration if any 
information or document provided in 
the application becomes materially 
inaccurate.540 Rule 17g–1 requires an 
NRSRO to comply with this statutory 
requirement by furnishing the 
amendment on Form NRSRO.541 Based 
on staff experience, the Commission 
estimated that an NRSRO would file two 
amendments of its Form NRSRO per 
year on average. Furthermore, for the 
reasons discussed above, the 
Commission estimated that it would 
take an average of approximately 25 
hours to prepare and furnish an 
amendment on Form NRSRO.542 
Therefore, the Commission estimated 
that the total aggregate annual burden to 
the industry to update Form NRSRO 
would be approximately 1,500 hours 
each year.543 The Commission did not 
receive any comments on these specific 
estimates and continues to believe that 
they are appropriate. Therefore, the 
Commission is retaining these estimates 
without revision. 

Section 15E(b)(2) of the Exchange Act 
requires an NRSRO to furnish an annual 
certification.544 Rule 17g–1 requires an 
NRSRO to furnish the annual 
certification on Form NRSRO.545 The 
Commission estimated that the annual 
certification, generally, would take less 
time than an amendment to Form 
NRSRO because it would be done on a 
regular basis (albeit yearly) and, 
therefore, become more a matter of 
routine over time. Consequently, the 
Commission estimated that the burden 
would be similar to that of broker- 
dealers filing the quarterly reports 
required under Rules 17h–1T and 17h– 
2T, which is approximately 10 hours 
per year for each respondent.546 
Therefore, the Commission estimated it 
would take an NRSRO approximately 10 
hours to complete the annual 
certification for a total aggregate annual 

hour burden to the industry of 300 
hours.547 The Commission did not 
receive any comments on these specific 
estimates and continues to believe that 
they are appropriate. Therefore, the 
Commission is retaining these estimates 
without revision. 

Rule 17g–1 has been modified to 
require an NRSRO to furnish the 
Commission with a withdrawal of 
registration on Form NRSRO.548 As 
proposed, the Commission required a 
written notice without prescribing the 
form of the notice. The Commission 
expects that the furnishing of these 
withdrawals will be rare, given that only 
30 credit rating agencies are expected to 
register. Based on staff experience, the 
Commission estimates that one NRSRO 
per year will withdraw its registration. 
Further, the instructions to Form 
NRSRO provide that only the items on 
the Form are required to be completed 
in the case of a withdrawal; an NRSRO 
would not be required to update or 
attach any of the information required 
in the Exhibits. Based on current 
estimates for a broker-dealer to file a 
notice under Rule 17a–11, the 
Commission estimates the average 
burden to an NRSRO to furnish the 
notice of withdrawal would be one 
hour.549 Thus, the Commission 
estimates that the aggregate annual 
burden to the industry of providing a 
notice of withdrawal prior to final 
Commission action would be one hour 
per year.550 

Section 15E(a)(3) of the Exchange Act 
requires an NRSRO to make certain 
information and documents submitted 
in its application publicly available on 
its Web site, or through another 
comparable, readily accessible 
means.551 Rule 17g–1 requires that this 
be done within 10 business days of the 
granting of an NRSRO’s registration or 
the furnishing of an amendment, annual 
certification, or withdrawal.552 The 
Commission believed that each NRSRO 
already would have a Web site and 
would choose to use its Web site to 
comply with Section 15E(a)(3) of the 
Exchange Act (15 U.S.C. 78o–7(a)(3)). 
Therefore, based on staff experience, the 
Commission estimated that, on average, 
an NRSRO would spend 30 hours to 
disclose the information in its initial 
application on its Web site and, 
thereafter, 10 hours per year to disclose 
updated information. Accordingly, the 

total aggregate one-time burden to the 
industry to make Form NRSRO publicly 
available would be 900 hours 553 and the 
total aggregate annual burden would be 
300 hours.554 The Commission did not 
receive any comments on these specific 
estimates and continues to believe that 
they are appropriate. Therefore, the 
Commission is retaining these estimates 
without revision. 

2. Rule 17g–2 
Section 17(a)(1) of the Exchange Act 

(as amended by the Rating Agency 
Act) 555 provides the Commission with 
authority to require an NRSRO to make 
and maintain such records as the 
Commission prescribes by rule as 
necessary or appropriate in the public 
interest, for the protection of investors, 
or otherwise in furtherance of the 
Exchange Act.556 Rule 17g–2 
implements this rulemaking authority 
by requiring an NRSRO to make and 
keep current certain records relating to 
its business. In addition, the rule 
requires an NRSRO to preserve these 
and other records for certain prescribed 
time periods. This rule is designed to 
assist the Commission in monitoring, 
through its examination function, 
whether NRSROs are complying with 
the requirements of Section 15E of the 
Exchange Act 557 and the regulations 
thereunder. The Commission estimated 
that the average one-time burden of 
implementing a recordkeeping system to 
comply with this rule would be 
approximately 300 hours. This estimate 
was based on the Commission’s 
experience with, and burden estimates 
for, certain recordkeeping requirements 
of consolidated supervised entities 
(‘‘CSEs’’) subject to Commission 
supervision.558 

The Commission also estimated that 
an NRSRO might be required to 
purchase recordkeeping system software 
to establish a recordkeeping system in 
conformance with the rule. The 
Commission estimated that the cost of 
the software would vary based on the 
size and complexity of the NRSRO. 
Also, the Commission estimated that 
some NRSRO’s would not require such 
software because they already have 
adequate recordkeeping systems or, 
given their small size, such software 
would not be necessary. Based on these 
estimates, the Commission estimated 
that the average cost for recordkeeping 
software across all NRSROs would be 

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33610 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

559 See 17 CFR 240.17a–4 (recordkeeping 
requirements for broker-dealers). This rule has 
previously been subject to notice and comment and 
has been approved by OMB. The Commission noted 
in the proposing release that Rule 17g–2 is based, 
in part, on Exchange Act Rules 17a–3 (17 CFR 
240.17a–3) and 17a–4 (17 CFR 240.17a–4). The 
annual hour burden estimate for the rule, however, 
was based only on the PRA estimate for Rule 17a– 
4. The rule requires substantially less records to be 
made and maintained than Rules 17a–3 and 17a– 
4. Therefore, the Commission based its estimate 
only on the estimate for Rule 17a–4 (as opposed to 
Rules 17a–3 and 17a–4 combined). 

560 300 hours × 30 NRSROs = 9,000 hours. 
561 254 hours × 30 NRSROs = 7,620 hours. 
562 The estimated 10 hours includes drafting, 

legal review and receiving corporate authorization 
to file the undertaking with the Commission. 

563 10 hours × 5 NRSROs = 50 hours. 

564 15 U.S.C. 78o–7(k). An applicant can request 
that the Commission keep this information 
confidential. See 17 CFR 200.80 and 17 CFR 200.83. 

565 Id. 
566 See 17 CFR 240.15c3–1g and 17 CFR 240.17i– 

5. 
567 200 hours × 30 NRSROs = 6,000 hours. 

568 $15,000 × 30 NRSROs = $450,000. 
569 15 U.S.C. 78o–7(g)(1). 
570 15 U.S.C. 78a et seq. 
571 15 U.S.C. 78o–7(g)(2). 
572 15 U.S.C. 78o–7(g)(1). 

approximately $1000 per firm. 
Therefore, the one-time cost to the 
industry would be $30,000. 

Additionally, the Commission 
estimated that the average annual 
amount of time that an NRSRO would 
spend to make and maintain these 
records would be approximately 254 
hours per year. The estimate for annual 
hours was based on the Commission’s 
present estimate for the amount of time 
it would take a broker-dealer to comply 
with the recordkeeping rule, Rule 17a– 
4.559 Therefore, the Commission 
estimated that the one-time hour burden 
for making and preserving the records 
under proposed Rule 17g–2 would be 
approximately 9,000 hours 560 and the 
total annual hour burden would be 
approximately 7,620 hours per year.561 

Rule 17g–2 also requires an NRSRO 
that uses a third-party record custodian 
to furnish the Commission with an 
undertaking from the custodian. Based 
on staff experience, the Commission 
estimated that approximately five 
NRSROs would file this undertaking on 
a one-time basis. The Commission 
estimated, based on staff experience, it 
would take an NRSRO approximately 10 
hours to process an undertaking prior to 
furnishing it to the Commission.562 
Therefore, the Commission estimated 
the total one-time hour burden for these 
undertakings would be 50 hours.563 

The Commission did not receive any 
comments on these specific burden 
estimates. The Commission notes that 
Rule 17g–2 has been modified in certain 
respects that decrease the burden, but 
also in other respects that will increase 
burden. For example, requirements to 
make records identifying the 
methodology used to determine each 
credit rating and how the credit rating 
was made readily available have been 
eliminated. Further, the retention 
periods for all the records have been 
harmonized and the requirement for a 
non-resident NRSRO to furnish an 
undertaking has been eliminated. On 

the other hand, the rule now requires an 
NRSRO to document its methodologies 
for determining credit ratings and, if 
applicable, to make and retain certain 
records relating to practices with respect 
to rating structured products. The 
Commission believes that these 
adjustments will largely offset each 
other or result in a net decrease in 
burden. For example, the elimination of 
the requirement to identify the 
methodology used to determine a credit 
rating would have impacted all NRSROs 
and required them to make a record for 
each credit rating (which could be in the 
many thousands). Conversely, the 
requirements with respect to structured 
products only will impact NRSROs that 
rate these types of securities, which the 
Commission estimates is less than five. 
While the Commission could reduce its 
burden estimate, it is taking a 
conservative approach to the net results 
of these changes. For these reasons, the 
Commission is retaining the rule’s 
overall burden estimates without 
revision. 

3. Rule 17g–3 
Section 15E(k) of the Exchange Act 

requires an NRSRO to furnish to the 
Commission, on a confidential basis and 
at intervals determined by the 
Commission, such financial statements 
and information concerning its financial 
condition that the Commission, by rule, 
may prescribe as necessary or 
appropriate in the public interest or for 
the protection of investors.564 The 
section also provides that the 
Commission may, by rule, require that 
the financial statements be certified by 
an independent public accountant.565 

Rule 17g–3 implements this statutory 
provision by requiring an NRSRO to 
furnish financial reports to the 
Commission. We estimated that, on 
average, it would take an NRSRO 
approximately 200 hours to prepare for 
and file the annual financial reports. 
This estimate was based on the current 
PRA estimates used for CSEs under 
Appendix G to Exchange Act Rule 
15c3–1, as well as the PRA estimates for 
supervised investment bank holding 
companies under Rule 17i–5.566 
Therefore, the Commission estimated 
that the total annual hour burden to 
prepare and furnish annual audited 
financial statements with the 
Commission would be approximately 
6,000 hours.567 

To comply with Rule 17g–3, an 
NRSRO would be required to engage the 
services of an independent public 
accountant. The Commission estimated 
that the cost of hiring an accountant 
would vary substantially based on the 
size and complexity of the NRSRO. For 
example, the Commission noted that, 
based on staff experience, the annual 
audit costs of a small broker-dealer 
generally range from $3,000 to $5,000 
per year. The Commission estimated 
that the annual audit costs for a small 
NRSRO would be comparable. The costs 
for a large NRSRO would be much 
greater. However, many of these firms 
already are audited by a public 
accountant for other regulatory 
purposes. For these reasons, the 
Commission estimated that the average 
annual cost across all NRSROs to engage 
the services of an independent public 
accountant would be approximately 
$15,000. Therefore, the annual cost to 
the industry would be $450,000.568 

The Commission did not receive any 
comments on these specific estimates. 
The Commission notes that Rule 17g–3 
has been modified to decrease the 
burden. For example, the requirement to 
comply with all provisions of 
Regulation S–X has been eliminated, as 
has the requirement to have the 
information in the proposed schedules 
audited. As discussed above, we 
developed these estimates based on the 
rule as proposed. We continue to 
believe the estimates are appropriate for 
the rule as now modified. Indeed, 
because we have in a variety of respects 
narrowed the requirements of the rule, 
we believe the estimates are likely to be 
conservative. 

4. Rule 17g–4 
Section 15E(g)(1) of the Exchange 

Act 569 requires an NRSRO to establish, 
maintain, and enforce written policies 
and procedures to prevent the misuse of 
material, nonpublic information in 
violation of the Exchange Act.570 
Section 15E(g)(2) of the Exchange Act 
provides that the Commission shall 
adopt rules requiring an NRSRO to 
establish specific policies and 
procedures to prevent the misuse of 
material, non-public information.571 
Rule 17g–4 implements this statutory 
provision by requiring that an NRSRO’s 
policies and procedures established 
pursuant to Section 15E(g)(1) of the 
Exchange Act 572 include three specific 
types of procedures. 

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33611 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

573 For example, the IOSCO Code requires credit 
rating agencies to develop such procedures. 

574 50 hours × 30 NRSROs = 1,500 hours. 
575 15 U.S.C. 78o–7(k). 

576 For the purposes of this cost/benefit analysis, 
the Commission is using salary data from the SIA 
Report on Management and Professional Earnings 
in the Securities Industry 2005 (‘‘SIA Management 
Report 2005’’), which provides base salary and 
bonus information for middle-management and 
professional positions within the securities 
industry. The positions in the report are divided 
into the following categories: Accounting, 
Administration & Finance, Compliance, Customer 
Service, Floor/Trading, Human Resources 
Management, Internal Audit, Legal, Marketing/ 
Corporate Communications, New Business 
Development, Operations, Research, Systems/ 
Technology, Wealth Management, and Business 
Continuity Planning. The Commission believes that 
the salaries for these securities industry positions 
would be comparable to the salaries of similar 
positions in the credit rating industry. The 
Commission also notes that it is using salaries for 
New York-based employees, which tend to be 
higher than the salaries for comparable positions 
located outside of New York. This conservative 
approach is intended to capture unforeseen costs. 
Finally, the salary costs derived from the SIA 
Management Report 2005 and referenced in this 
cost benefit section, are modified to account for an 
1800-hour work year and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits 
and overhead. 

577 15 U.S.C. 78o–7. 
578 Pub. L. 109–291 (2006). 
579 See Report of the Senate Committee on 

Banking, Housing, and Urban Affairs to Accompany 
S. 3850, Credit Rating Agency Reform Act of 2006, 
S. Report No. 109–326, 109th Cong., 2d Sess. (Sept. 
6, 2006) (‘‘Senate Report’’). 

580 Id. 
581 Section 15E of the Exchange Act (15 U.S.C. 

78o–7). 
582 Sections 15E(a)(1) and (b)(1) of the Exchange 

Act (15 U.S.C. 78o–7(a)(1) and (b)(1)). 
583 Section 15E(k) of the Exchange Act (15 U.S.C. 

78o–7(k)). 

The Commission assumed that most 
credit rating agencies already have 
procedures in place to address the 
specific misuses of material nonpublic 
information identified in Rule 17g–4.573 
Nonetheless, the Commission 
anticipated that some NRSROs might 
need to modify their procedures to 
comply with the rule. Based on staff 
experience, the Commission estimated 
that it would take approximately 50 
hours for an NRSRO to establish 
procedures in conformance with the 
rule for a total one-time burden of 1,500 
hours.574 The Commission did not 
receive any comments on these specific 
estimates and continues to believe that 
they are appropriate. Therefore, the 
Commission is retaining these estimates 
without revision. 

E. Collection of Information Is 
Mandatory 

These recordkeeping and notice 
requirements are mandatory. 

F. Confidentiality 
Pursuant to section 15E(a)(1)(B) of the 

Exchange Act, certain information 
collected in Form NRSRO required 
under Rule 17g–1(a) will not be 
confidential. However, credit rating 
agencies and NRSROs may seek 
confidential treatment of information 
furnished to the Commission under 
existing rules, and the Commission will 
keep this information confidential to the 
extent permitted by law. The books and 
records information collected under 
Rules 17g–2 and 17g–4 will be stored by 
the NRSRO and made available to the 
Commission and its representatives as 
required in connection with 
examinations, investigations, and 
enforcement proceedings. 

The information collected under Rule 
17g–3 (the annual financial reports) will 
be generated from the internal records of 
the NRSRO. Pursuant to Section 15E(k) 
of the Exchange Act, the annual 
financial reports will be furnished to the 
Commission on a confidential basis, to 
the extent permitted by law.575 

G. Record Retention Period 
Paragraph (c) of Rule 17g–2 requires 

an NRSRO to retain the records for at 
least three years. 

H. Request for Comment 
The Commission requested comment 

on the collections of information in 
order to: (1) Evaluate whether the 
proposed collection of information is 
necessary for the proper performance of 

the functions of the Commission, 
including whether the information 
would have practical utility; (2) evaluate 
the accuracy of the Commission’s 
estimate of the burden of the proposed 
collection of information; (3) determine 
whether there are ways to enhance the 
quality, utility, and clarity of the 
information to be collected; (4) evaluate 
whether there are ways to minimize the 
burden of the collection of information 
on those who respond, including 
through the use of automated collection 
techniques or other forms of information 
technology; and (5) evaluate whether 
the proposed rules would have any 
effects on any other collection of 
information not previously identified in 
this section. 

VI. Costs and Benefits of the Rules 
The Commission is sensitive to the 

costs and benefits that result from its 
rules. The Commission identified 
certain costs and benefits arising from 
these rules and requested comment on 
all aspects of the cost-benefit analysis 
contained therein, including 
identification and assessment of any 
costs and benefits not discussed in the 
analysis.576 The Commission sought 
comment and data on the value of the 
benefits identified. The Commission 
also elicited comment on the accuracy 
of the cost estimates in each section of 
the cost-benefit analysis, and requested 
those commenters to provide data so the 
Commission could improve the cost 
estimates, including identification of 
industry statistics relied on by 
commenters to reach conclusions on 
cost estimates. The Commission also 
sought comment on the extent to which 
costs were attributable to requirements 

set forth in Section 15E of the Exchange 
Act,577 rather than the rules. Finally, the 
Commission requested estimates and 
views regarding the costs and benefits 
for particular types of market 
participants, as well as any other costs 
or benefits that might result from the 
rules. 

As discussed below, the Commission 
received very limited comment on the 
cost-benefit analysis in the proposing 
release. Except as discussed below, the 
Commission continues to believe that 
the specific estimates are appropriate 
and is retaining these estimates 
generally without revision. 

A. Benefits 
The purposes of the Credit Rating 

Agency Reform Act of 2006 (the ‘‘Rating 
Agency Act’’) 578 are to improve ratings 
quality for the protection of investors 
and in the public interest by fostering 
accountability, transparency, and 
competition in the credit rating 
industry.579 As the Senate Report states, 
the Rating Agency Act establishes 
‘‘fundamental reform and improvement 
of the designation process,’’ and 
‘‘eliminating the artificial barrier to 
entry will enhance competition and 
provide investors with more choices, 
higher quality ratings, and lower 
costs.’’ 580 

To these ends, the Rating Agency Act 
establishes—through statutory 
provisions and the grant of Commission 
rulemaking authority—a regulatory 
program for credit rating agencies opting 
to have their credit ratings qualify for 
purposes of laws and rules using the 
term ‘‘NRSRO.’’ Specifically, the Rating 
Agency Act sets out a voluntary 
mechanism for credit rating agencies to 
register with the Commission as an 
NRSRO.581 It requires an NRSRO to 
make public certain information to help 
users of credit ratings assess the 
NRSRO’s credibility and compare the 
NRSRO with other NRSROs.582 The 
Rating Agency Act also requires an 
NRSRO to furnish the Commission with 
periodic financial reports.583 Further, 
the Rating Agency Act requires an 
NRSRO to implement policies to 
manage the handling of material non- 

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584 Sections 15E(g) and (h) of the Exchange Act 
(15 U.S.C. 78o–7(g) and (h)). 

585 Section 15E(i) of the Exchange Act (15 U.S.C. 
78o–7(i)). 

586 See Report of the Senate Committee on 
Banking, Housing, and Urban Affairs to Accompany 
S. 3850, Credit Rating Agency Reform Act of 2006, 
S. Report No. 109–326, 109th Cong., 2d Sess. (Sept. 
6, 2006) (‘‘Senate Report’’). 

587 Section 3(a)(61) of the Exchange Act (15 U.S.C. 
78c(a)(61)). 

588 15 U.S.C. 78o–7. 
589 See Section 15E(a)(1)(B) of the Exchange Act 

(15 U.S.C. 78o–7(a)(1)(B)). 
590 See 15 U.S.C. 78o–7(a)(2)(C)(ii)(I). 

591 15 U.S.C. 78o–7(a)(1)(B). 
592 15 U.S.C. 78o–7(g), (h), (i) and (j). 
593 15 U.S.C. 78q(a)(1). 
594 15 U.S.C. 78o–7(k). 
595 Id. 

public information and conflicts of 
interest.584 Pursuant to authority under 
the Rating Agency Act, the Commission 
must prohibit certain acts and practices 
the Commission finds to be unfair, 
coercive, or abusive.585 

The rules the Commission is adopting 
under the Rating Agency Act are being 
issued pursuant to specific statutory 
mandates and grants of rulemaking 
authority. They are designed to further 
the goals of the Rating Agency Act, 
including fostering ‘‘competition in the 
credit rating agency business.’’ 586 The 
practice of identifying NRSROs through 
staff no-action letters has been criticized 
as a process that lacks transparency and 
creates a barrier for credit rating 
agencies seeking wider recognition and 
market share. The Commission believes 
that these rules further the goal of 
increasing competition because they 
provide credit rating agencies with a 
transparent process to apply for 
registration as an NRSRO that does not 
favor a particular business model or 
larger, established firms. This will make 
it easier for more credit rating agencies 
to apply for registration. Increased 
competition in the credit ratings 
business could lower the cost to issuers, 
obligors, and underwriters of obtaining 
credit ratings. 

In addition, the Rating Agency Act 
requires NRSROs to make their credit 
ratings and information about 
themselves available to the public. Part 
of the Rating Agency Act’s definition of 
‘‘credit rating agency’’ is that the entity 
must be in the business of issuing credit 
ratings on the Internet or through 
another readily accessible means, for 
free or for a reasonable fee.587 Under the 
Rating Agency Act and the rules 
adopted thereunder, an NRSRO will be 
required to disclose information about 
its credit ratings performance statistics, 
its methods for determining credit 
ratings, its organizational structure, its 
procedures to prevent the misuse of 
material non-public information, the 
conflicts of interest that arise from its 
business activities, its code of ethics, 
and the qualifications of its credit 
analysts and credit analyst supervisors. 
The Commission believes that these 
disclosures will allow users of the credit 
ratings to compare the credit ratings 

quality of different NRSROs. Although 
the information an NRSRO will provide 
on its Form NRSRO and to comply with 
the rules cannot substitute for an 
investor’s due diligence in evaluating a 
credit rating, it will aid investors by 
providing a publicly accessible 
foundation of basic information about 
an NRSRO. 

In addition, the rules implement 
provisions of the Rating Agency Act that 
are designed to improve the integrity of 
NRSROs. For example, the registration 
of a credit rating agency as an NRSRO 
will allow the Commission to conduct 
regular examinations of the credit rating 
agency to evaluate compliance with the 
regulatory scheme set forth in Section 
15E of the Exchange Act 588 and the 
rules thereunder and will subject an 
NRSRO to disclosure, recordkeeping, 
and annual financial reporting 
requirements, as well as requirements 
regarding the prevention of misuse of 
material, nonpublic information, the 
management of conflicts of interest, and 
certain prohibited acts and practices. 
Increased confidence in the integrity of 
NRSROs and the credit ratings they 
issue could promote participation in the 
securities markets. Better quality ratings 
could also reduce the likelihood of an 
unexpected collapse of a rated issuer or 
obligor, reducing risks to individual 
investors and to the financial markets. 
In addition to improving the quality of 
credit ratings, increased oversight of 
NRSROs could increase the 
accountability of an NRSRO to its 
subscribers, investors, and other persons 
who rely on the credibility and 
objectivity of credit ratings in making an 
investment decision. 

Rule 17g–1 prescribes a process for a 
credit rating agency to register with the 
Commission as an NRSRO. The rule 
requires a credit rating agency to apply 
for registration using Form NRSRO. 
Form NRSRO requires that a credit 
rating agency provide information 
required under Section 15E(a)(1)(B) of 
the Exchange Act and certain additional 
information.589 The additional 
information will assist the Commission 
in making the assessment regarding 
financial and managerial resources 
required under Section 15E(a)(2)(C)(ii)(I) 
of the Exchange Act.590 This section 
directs the Commission to grant a credit 
rating agency’s application for 
registration as an NRSRO unless, among 
other things, the Commission finds that 
the applicant does not have adequate 
financial and managerial resources to 

consistently issue ratings with integrity 
and to materially comply with its 
procedures and methodologies 
disclosed under Sections 15E(a)(1)(B) of 
the Exchange Act 591 and with the 
requirements in Sections 15E(g), (h), (i) 
and (j) of the Exchange Act.592 Certain 
other additional information required to 
be made public will assist users of 
credit ratings in assessing the credibility 
of the NRSRO and in comparing the 
NRSRO with other NRSROs. 

Rule 17g–2 implements the 
Commission’s recordkeeping and 
rulemaking authority under Section 
17(a) of the Exchange Act 593 by 
requiring an NRSRO to make and retain 
certain records related to its business as 
a credit rating agency. This 
recordkeeping rule will assist the 
Commission in monitoring whether an 
NRSRO is complying with provisions of 
Section 15E of the Exchange Act and the 
rules thereunder by requiring 
information about each NRSRO’s 
financial condition, management, and 
operations. This information will permit 
the Commission to observe differences 
between NRSROs and changes over time 
in individual NRSROs. The information 
also will permit the Commission to 
review whether an NRSRO is operating 
consistently with the methodologies and 
procedures it establishes to determine 
credit ratings and its policies and 
procedures designed to ensure the 
impartiality of its credit ratings. 

Section 15E(k) of the Exchange Act 
requires an NRSRO to furnish to the 
Commission, on a confidential basis and 
at intervals determined by the 
Commission, such financial statements 
and information concerning its financial 
condition that the Commission, by rule, 
may prescribe as necessary or 
appropriate in the public interest or for 
the protection of investors.594 The 
section also provides that the 
Commission may, by rule, require that 
an independent public accountant 
certify the financial statements.595 Rule 
17g–3 implements this rulemaking 
authority by requiring an NRSRO to 
furnish annual financial reports to the 
Commission. This rule will enhance 
Commission oversight of an NRSRO. 
Specifically, it will aid the Commission 
in monitoring whether the initiation of 
a proceeding under Section 15E(d) of 
the Exchange Act will be appropriate 
because the NRSRO ‘‘fails to maintain 
adequate financial and managerial 
resources to consistently produce credit 

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33613 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

596 15 U.S.C. 78o–7(d). 
597 See, e.g., Rule 17g–5(c)(1) prohibiting an 

NRSRO from issuing or maintaining a credit rating 
for a person that, in the most recently ended fiscal 
year, provided the NRSRO with net revenue 
equaling or exceeding 10% of the NRSRO’s total 
revenue for the year. 

598 15 U.S.C. 78o–7(g)(1). 
599 15 U.S.C. 78a et seq. 
600 15 U.S.C. 78o–7(g)(2). 
601 15 U.S.C. 78o–7(g)(1). 
602 15 U.S.C. 78o–7(g). 
603 15 U.S.C. 78o–7(h)(2). 
604 15 U.S.C. 78o–7(a)(1)(B)(vi) and (h). 

605 15 U.S.C. 78o–7(c)(2). 
606 44 U.S.C. 3501 et seq. 5 CFR 1320.11. 

607 15 U.S.C. 78o–7(a)(1)(B). 
608 15 U.S.C. 78o–7. 
609 Id. 
610 See Lace Letter. 
611 Id. 
612 Id. 
613 This total is derived from the total one-time 

costs set forth in the order that they appear in the 
text: $2,007,000 + $480,000 + $25,625 + $241,200 
+ $1,845,000 + $30,000 + $307,500 = $4,936,325. 

614 This total is derived from the total annual 
costs set forth in the order that they appear in the 
text: $307,500 + $61,500 + $80,400 + $1,562,100 + 
$1,494,000 + $450,000 = $3,955,500. 

ratings with integrity.’’ 596 In addition, 
the financial reports also will assist the 
Commission in monitoring potential 
conflicts of interests of a financial 
nature arising from the operation of an 
NRSRO.597 

Section 15E(g)(1) of the Exchange 
Act 598 requires an NRSRO to establish, 
maintain, and enforce written policies 
and procedures to prevent the misuse of 
material, nonpublic information in 
violation of the Exchange Act.599 
Section 15E(g)(2) of the Exchange Act 
provides that the Commission shall 
adopt rules requiring an NRSRO to 
establish specific policies and 
procedures to prevent the misuse of 
material, nonpublic information.600 
Rule 17g–4 implements this statutory 
provision by requiring that an NRSRO’s 
policies and procedures established 
pursuant to Section 15E(g)(1) of the 
Exchange Act 601 include three specific 
types of procedures. These specific 
procedures establish a baseline for the 
type of procedures an NRSRO must 
implement to meet the statutory 
requirement in Section 15E(g) of the 
Exchange Act.602 By providing this 
baseline, the rule is designed to ensure 
that an NRSRO establishes adequate 
procedures and controls to protect 
material nonpublic information. 

Rule 17g–5 implements Section 
15E(h)(2) of the Exchange Act 603 by 
requiring an NRSRO to disclose and 
manage certain conflicts of interest, as 
well as specifically prohibiting other 
conflicts of interest. This rule will 
promote the disclosure and management 
of conflicts of interest required by 
Sections 15E(a)(1)(B)(vi) and 15E(h) of 
the Exchange Act and mitigate potential 
undue influences on an NRSRO’s credit 
rating process.604 

Rule 17g–6 prohibits an NRSRO from 
engaging in certain unfair, abusive, or 
coercive acts or practices. These 
prohibitions are designed to enhance 
the integrity of NRSROs, promote 
competition and fulfill a statutory 
mandate. 

The Commission requested comment 
on available metrics to quantify these 
benefits and any other benefits the 
commenter may identify, including the 

identification of sources of empirical 
data that could be used for such metrics. 
The Commission did not receive any 
comments in response to this request. 

B. Costs 
The Rating Agency Act requires that 

the rules and regulations that the 
Commission may prescribe ‘‘be 
narrowly tailored’’ to meet its 
requirements.605 The rules being 
adopted by the Commission are 
designed to adhere to this statutory 
mandate and, thereby, keep compliance 
costs as low as possible. 

The cost of compliance to a given 
NRSRO will depend on its size and the 
complexity of its business activities. As 
discussed above, the size and 
complexity of credit rating agencies 
varies significantly. Therefore, it is 
difficult to quantify a cost per NRSRO. 
Instead, the Commission provided 
estimates of the average cost per NRSRO 
taking into consideration the range in 
size and complexity of NRSROs and the 
fact that many already may have 
established policies, procedures, and 
recordkeeping systems and processes 
that will comply substantially with the 
requirements. 

The Commission believes that larger 
NRSROs generally already have 
established written policies and 
procedures and recordkeeping systems 
that will comply with a substantial 
portion of the requirements in the rules. 
Many of the requirements in the rules 
are consistent with the IOSCO Code 
principles, which a number of credit 
rating agencies (including the largest) 
have implemented. These firms will be 
required to augment or modify existing 
policies and procedures and 
recordkeeping systems to comply with 
the rules (rather than establish new 
ones). Some smaller credit rating 
agencies also have implemented the 
policies, procedures, and recordkeeping 
systems necessary to comply with the 
rules. Moreover, given their smaller size 
and simpler structure, smaller entities 
will require less effort and incur less 
cost to comply with a substantial 
portion of the requirements in these 
rules. 

For these reasons, the cost estimates 
represent the average cost across all 
NRSROs (regardless of size) and take 
into account that many firms will only 
be required to augment existing policies, 
procedures, and recordkeeping systems 
and processes to come into compliance 
with the rules. Furthermore, as 
discussed with respect to the Paperwork 
Reduction Act of 1995 (‘‘PRA’’),606 the 

Commission is requiring additional 
information in Form NRSRO beyond 
that prescribed in Section 15E(1)(B) of 
the Exchange Act.607 Therefore, the cost 
estimates for Rule 17g–1 include 
estimates that arise from requirements 
imposed by Section 15E of the Exchange 
Act.608 The intent is to quantify the 
incremental burden of complying with 
these statutory requirements as a result 
of the additional information that will 
be required under Rule 17g–1. Thus, 
those estimates do not seek to capture 
costs that are solely attributable to 
requirements in Section 15E of the 
Exchange Act.609 

The Commission requested 
commenters to provide data for the costs 
that would be solely attributable to the 
requirements of Section 15E of the 
Exchange Act. The Commission 
received one comment from an entity 
that the overall cost of complying with 
the rules would be $207,515.610 The 
commenter did not provide any further 
detail on how these costs would be 
solely attributable to the Commission’s 
proposed rules (as opposed to 
provisions of the Rating Agency Act).611 
The commenter also did not identify the 
specific costs that would arise from each 
discreet rule provision.612 The 
Commission believes that the estimated 
costs the commenter would incur if 
registered as an NRSRO are included in 
the cost estimates discussed below. 

Given the estimates set forth below, 
the Commission estimates that the total 
one-time estimated cost to NRSROs 
resulting from these rule proposals 
would be approximately $4,936,325 613 
and the total estimated annual cost to 
NRSROs resulting from these rule 
proposals would be approximately 
$3,955,500 per year.614 

1. Rule 17g–1, Form NRSRO and 
Instructions to Form NRSRO 

Section 15E(a)(1) of the Exchange Act 
requires a credit rating agency applying 
for registration with the Commission to 
furnish an application containing 
certain specified information and such 
other information as the Commission 
prescribes as necessary or appropriate in 
the public interest or for the protection 

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33614 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

615 15 U.S.C. 78o–7(a)(1). 
616 See paragraphs (a), (c) and (h) of Rule 17g–1. 
617 15 U.S.C. 78o–7. 
618 There is no filing fee for a Form NRSRO. 
619 The Commission estimates that a credit rating 

agency will have a senior compliance examiner 
perform these responsibilities. The SIA 
Management Report 2005 (Senior Compliance 
Examiner) indicates that the average hourly cost for 
a senior compliance examiner is $223. Therefore, 
the average one-time cost per NRSRO will be 
approximately $66,900 [(300 hours) × ($223 per/ 
hour)]. 

620 30 NRSROs × $66,900 = $2,007,000. 
621 $400 per hour × 40 hours = $16,000. 
622 $16,000 × 30 NRSROs = $480,000. 
623 See paragraph (b) of Rule 17g–1. 

624 The Commission estimates an NRSRO will 
have a senior compliance person perform these 
responsibilities. The SIA Management Report 2005 
(Compliance Officer) indicates that the average 
hourly cost for a compliance manager is $205. 
Therefore, the average cost to an NRSRO will be 
$5,125 [(25 hours for one year) × ($205)]. 

625 5 NRSROs × $5,125 = $25,625. 
626 15 U.S.C. 78o–7(b)(1). 
627 See paragraph (e) of Rule 17g–1. 
628 Based on the PRA estimates, an NRSRO will 

spend approximately 50 hours each year updating 
its application on Form NRSRO (25 hours per 
amendment × two amendments). The Commission 
estimates an NRSRO will have a senior compliance 
person perform these responsibilities. The SIA 
Management Report 2005 (Compliance Officer) 
indicates that the average hourly cost for a 
compliance manager is $205. Therefore, the total 
average annual cost to an NRSRO to update its 
registration on Form NRSRO will be $10,250 [(50 
hours per year) × ($205 per hour)]. 

629 $10,250 × 30 NRSROs = $307,500. 
630 15 U.S.C. 78o–7(b)(2). 
631 See paragraph (f) Rule 17g–1. 

632 The Commission estimates an NRSRO will 
have a senior compliance person perform these 
responsibilities. The SIA Management Report 2005 
(Compliance Officer) indicates that the average 
hourly cost for a compliance manager is $205. 
Therefore, the average annual cost will be $2,050 
[(10 hours per year) × ($205 per hour)]. 

633 $2,050 × 30 NRSROs = $61,500. 
634 15 U.S.C. 78o–7(a)(3). 
635 See paragraph (i) of Rule 17g–1. 
636 The Commission estimates that an NRSRO 

will have a Senior Programmer perform this work. 
The SIA Management Report 2005 (Senior 
Programmer) indicates that the average hourly cost 
for a senior programmer is $268. Therefore, the 
average one-time cost will be $8,040 [(30 hours) × 
($268 per hour)] and the average annual cost will 
be $2,680 [(10 hours per year) × ($268 per hour)]. 

637 $8,040 × 30 NRSROs = $241,200. 
638 $2,680 × 30 NRSROs = $80,400. 

of investors.615 Rule 17g–1 616 
implements this statutory provision by 
requiring a credit rating agency to 
furnish an initial application on a 
completed Form NRSRO to apply to be 
registered under section 15E of the 
Exchange Act.617 

NRSROs will incur costs to register 
under Section 15E of the Exchange Act 
and Rule 17g–1.618 As discussed above 
with respect to PRA, the Commission 
estimates that an NRSRO will spend 
approximately 300 hours to complete 
and furnish an initial Form NRSRO. 
Also, as discussed with respect to the 
PRA, the Commission estimates there 
will be 30 NRSROs. For these reasons, 
the Commission estimates that the 
average one-time cost to an NRSRO will 
be $66,900 619 and the total aggregate 
one-time cost to the industry will be 
$2,007,000.620 

Also, as discussed with respect to the 
PRA, the Commission anticipates that 
an NRSRO likely will engage outside 
counsel to assist in the process of 
completing and submitting a Form 
NRSRO. The amount of time an outside 
attorney will spend on this work will 
depend on the size and complexity of 
the NRSRO. Therefore, the Commission 
estimates that, on average, an outside 
counsel will spend approximately 40 
hours assisting an NRSRO in preparing 
its application for registration. The 
Commission further estimates that this 
work will be split between a partner and 
associate, with an associate performing 
a majority of the work. Therefore, the 
Commission estimates that the average 
hourly cost for an outside counsel will 
be approximately $400 per hour. For 
these reasons, the Commission estimates 
that the average one-time cost to an 
NRSRO will be $16,000 621 and the one- 
time cost to the industry will be 
$480,000.622 

Under Rule 17g–1, an NRSRO 
applying to be registered for an 
additional class of credit ratings will be 
required to file an amended Form 
NRSRO with the Commission.623 As 
discussed with respect to the PRA, the 

Commission estimates, on average, an 
NRSRO will spend 25 hours completing 
and furnishing a Form NRSRO for this 
purpose. The Commission also 
estimates with respect to the PRA that 
five of the 30 NRSROs will apply to 
register for an additional class of credit 
ratings. For these reasons, the 
Commission estimates that the average 
one-time cost to an NRSRO will be 
$5,125 624 and the total aggregate one- 
time cost to the industry will be 
$25,625.625 

Section 15E(b)(1) of the Exchange Act 
requires an NRSRO to promptly amend 
its application for registration if any 
information or document provided in 
the application becomes materially 
inaccurate.626 Rule 17g–1 requires an 
NRSRO to comply with this statutory 
requirement by furnishing the 
amendment on Form NRSRO.627 As 
discussed with respect to the PRA, the 
Commission estimates that an NRSRO 
will furnish two amendments on Form 
NRSRO per year on average. The 
Commission also estimates with respect 
to the PRA that it will take 
approximately 25 hours to prepare and 
furnish an amendment and that there 
will be 30 NRSROs. For these reasons, 
the Commission estimates that the 
average annual cost to an NRSRO will 
be $10,250 628 and the total aggregate 
annual cost to the industry will be 
$307,500.629 

Section 15E(b)(2) of the Exchange Act 
requires an NRSRO to furnish an annual 
certification.630 Rule 17g–1 will require 
an NRSRO to furnish the annual 
certification on Form NRSRO.631 As 
discussed with respect to the PRA, the 
Commission estimates an NRSRO will 
spend approximately 10 hours per year 
completing and furnishing the annual 
certification and that there will be 30 
NRSROs. For these reasons, the 

Commission estimates that the average 
annual cost to an NRSRO will be 
$2,050 632 and the total aggregate annual 
cost to the industry will be $61,500.633 

Section 15E(a)(3) of the Exchange Act 
requires an NRSRO to make certain 
information and documents submitted 
in its application publicly available on 
its Web site, or through another 
comparable, readily accessible 
means.634 Rule 17g–1 requires that this 
be done within 10 business days of the 
granting of an NRSRO’s application or 
the furnishing of an amendment to the 
form or annual certification.635 As 
discussed with respect to the PRA, the 
Commission estimates that the average 
hour burden for an NRSRO to disclose 
this information on its Web site will be 
approximately 30 hours on a one-time 
basis and 10 hours per year. 
Furthermore, as discussed with respect 
to the PRA, the Commission estimates 
that there will be 30 NRSROs. For these 
reasons, the Commission estimates that 
an NRSRO will incur an average one- 
time cost of $8,040 and an average 
annual cost of $2,680.636 Consequently, 
the total aggregate one-time cost to the 
industry will be $241,200 637 and total 
aggregate annual cost to the industry 
will be $80,400 per year.638 

The Commission believes the 
requirements in Rule 17g–1 to furnish a 
notice on Form NRSRO when an 
NRSRO withdraws its registration will 
result in de minimis costs. 

The Commission requested comment 
on these cost estimates. We also 
requested comment on whether there 
would be costs in addition to those 
identified above, such as costs arising 
from systems changes. Comment also 
was sought on whether these 
requirements would impose costs on 
other market participants, including 
persons who use credit ratings to make 
investment decisions or for regulatory 
purposes, and persons who purchase 
services and products from NRSROs. 
Commenters were asked to identify the 

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33615 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

639 See Section 5 of the Rating Agency Act and 
15 U.S.C. 78q(a)(1). 

640 Id. 
641 The Commission estimates that an NRSRO 

will have a compliance manager perform these 
responsibilities. The SIA Management Report 2005 
indicates that the average hourly cost for a 
compliance manager is $205. Therefore, the average 
one-time cost will be $61,500 [(300 hours) × ($205 
per hour)] and the average annual cost will be 
$52,070 [(254 hours per year) × ($205 per hour)]. 

642 $61,500 × 30 NRSROs = $1,845,000. 
643 $52,070 × 30 NRSROs = $1,562,100. 

644 $1,000 × 30 NRSROs = $30,000. 
645 An applicant can request that the Commission 

keep this information confidential to the extent 
permitted by law. See 17 CFR 200.80 and 17 CFR 
200.83. 

646 15 U.S.C. 78o–7(k). 
647 Id. 
648 The Commission estimates that a senior 

internal auditor will perform these responsibilities. 
The SIA Management Report 2005 (Senior Internal 
Auditor) indicates that the average hourly cost for 
a senior internal auditor is $249. Therefore, the 
average annual cost will be $49,800 [(200 hours per 
year) × ($249 per hour)]. 

649 $49,800 × 30 NRSROs = $1,494,000. 

650 See Fitch Letter. 
651 Id. 
652 15 U.S.C. 78o–7(a)(1)(B)(viii). 

metrics and sources of any empirical 
data that supported their costs 
estimates. The Commission did not 
receive any comments in response to 
these requests. 

2. Rule 17g–2 

Section 17(a)(1) of the Exchange 
Act 639 provides the Commission with 
authority to require an NRSRO to make 
and maintain such records as the 
Commission prescribes by rule as 
necessary or appropriate in the public 
interest, for the protection of investors, 
or otherwise in furtherance of the 
Exchange Act.640 Rule 17g–2 
implements this rulemaking authority 
by requiring an NRSRO to make and 
preserve specified records related to its 
credit rating business. 

As discussed with respect to the PRA, 
the Commission estimates that an 
NRSRO, on average, will spend 
approximately 300 hours on a one-time 
basis to establish a recordkeeping 
system and 254 hours each year 
updating its books and records. For 
these reasons, the Commission estimates 
that an NRSRO will incur an average 
one-time cost of $61,500 and an average 
annual cost of $52,070.641 
Consequently, the total aggregate one- 
time cost to the industry will be 
$1,845,000,642 and the total aggregate 
annual cost to the industry will be 
$1,562,100 per year.643 

Furthermore, as discussed above with 
respect to the PRA, the Commission also 
estimates that an NRSRO may be 
required to purchase recordkeeping 
system software to establish a 
recordkeeping system in conformance 
with the rule. The Commission 
estimates that the cost of the software 
will vary based on the size and 
complexity of the NRSRO. Also, the 
Commission estimates that some 
NRSROs will not require such software 
because they already have adequate 
recordkeeping systems or, given their 
small size, such software will not be 
necessary. Based on these estimates, the 
Commission estimates that the average 
cost for recordkeeping software across 
all NRSROs will be approximately 

$1,000 per firm. Therefore, the one-time 
cost to the industry will be $30,000.644 

The Commission requested comment 
on these cost estimates. We also 
requested comment on whether there 
would be costs in addition to those 
identified above, such as costs arising 
from restructuring business practices. 
Comment also was sought on whether 
these rules would impose costs on other 
market participants, including persons 
who use credit ratings to make 
investment decisions or for regulatory 
purposes, and persons who purchase 
services and products from NRSROs. 
Commenters were asked to identify the 
metrics and sources of any empirical 
data that supported their costs 
estimates. The Commission did not 
receive any comments in response to 
these requests. 

3. Rule 17g–3 
Section 15E(k) of the Exchange Act 

requires an NRSRO to furnish to the 
Commission, on a confidential basis 645 
and at intervals determined by the 
Commission, such financial statements 
and information concerning its financial 
condition that the Commission, by rule, 
may prescribe as necessary or 
appropriate in the public interest or for 
the protection of investors.646 The 
section also provides that the 
Commission may, by rule, require that 
the financial statements be certified by 
an independent public accountant.647 

Rule 17g–3 implements this statutory 
provision by requiring an NRSRO to 
furnish annual financial reports to the 
Commission. As discussed above with 
respect to the PRA, the Commission 
estimates that an NRSRO, on average, 
will spend approximately 200 hours per 
year preparing for and furnishing these 
financial reports. For these reasons, the 
Commission estimates that the average 
annual cost to an NRSRO will be 
$49,800 648 and the total aggregate 
annual cost to the industry will be 
$1,494,000.649 

As noted above, the average one-time 
and annual costs to NRSROs will vary 
widely depending on the size and 
complexity of the NRSRO. Moreover, 

some large credit rating agencies already 
prepare audited financial statements in 
accordance with other regulatory 
requirements. Nonetheless, these credit 
rating agencies may be required to make 
changes to their accounting systems to 
comply with the requirements in Rule 
17g–3. The Commission believes these 
costs will vary depending on the size 
and complexity of the NRSRO. The 
Commission sought comment on the 
costs that would be incurred to make 
changes to their accounting systems. 

The Commission received one 
comment in response to this specific 
request from a large credit rating 
agency.650 The commenter stated that it 
would cost between $6 and $8 million 
to develop a system that could capture 
revenues received by the credit rating 
agency and its affiliates from customers 
in order to create the list of large 
customers that could be audited.651 The 
Commission notes, as an initial matter, 
that Section 15E(a)((B)(viii) of the 
Exchange Act requires an NRSRO to 
create this list with respect to issuers 
and subscribers.652 Consequently, the 
costs of developing a system that can 
capture this information can largely be 
attributed to the statute. Nonetheless, 
Rule 17g–3 has been modified in ways 
that the Commission believes will 
largely reduce these costs. First, an 
NRSRO is not required to include 
revenue received by affiliates that are 
not part of the credit rating organization 
in determining this list. Second, the list 
is now a separate financial report that is 
not required to be audited. Third, the 
definition of net revenue was modified 
to refer to revenues ‘‘earned’’ by the 
NRSRO (as opposed to revenues 
‘‘received’’). This is designed to provide 
flexibility so that each NRSRO can 
define ‘‘revenues’’ consistent with how 
its accounting system recognizes 
revenues. The Commission believes 
these modifications significantly reduce 
the operational difficulties in 
determining the list of large customers. 

As discussed above with respect to 
the PRA, an NRSRO will be required to 
engage the services of independent 
public accountant to comply with Rule 
17g–3. The cost of hiring an account 
will vary substantially based on the size 
and complexity of the NRSRO. As the 
noted above, based on staff experience, 
the annual audit costs of a small broker- 
dealer generally range from $3,000 to 
$5,000 a year. As the Commission 
estimated above, the annual audit costs 
for a small NRSRO will likely be 
comparable to the costs incurred by a 

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33616 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

653 $15,000 × 30 NRSROs = $450,000. 
654 15 U.S.C. 78o–7(g)(1). 
655 15 U.S.C. 78a et seq. 
656 15 U.S.C. 78o–7(g)(2). 
657 15 U.S.C. 78o–7(g)(1). 
658 The Commission estimates an NRSRO will 

have a senior compliance person perform these 
responsibilities. The SIA Management Report 2005 
(Compliance Officer) indicates that the average 
hourly cost for a compliance manager is $205. 
Therefore, the average one-time cost to an NRSRO 
will be $10,250 [(50 hours) × ($205)]. 659 30 NRSROs × $10,250 = $307,500. 

660 15 U.S.C. 78c(f). 
661 15 U.S.C. 78w(a)(2). 
662 Pub. L. 109–291 (2006). 
663 See Report of the Senate Committee on 

Banking, Housing, and Urban Affairs to Accompany 
S. 3850, Credit Rating Agency Reform Act of 2006, 
S. Report No. 109–326, 109th Cong., 2d Sess. (Sept. 
6, 2006) (‘‘Senate Report’’). 

small broker-dealer. The costs for a large 
NRSRO will be much greater. However, 
many of these firms already are audited 
by a public accountant for other 
regulatory purposes. For these reasons, 
the Commission estimates that the 
average annual cost across all NRSROs 
to engage the services of an independent 
public account will be approximately 
$15,000. Therefore, the annual cost to 
the industry will be $450,000.653 

The Commission requested comment 
on these cost estimates. We also 
requested comment on whether there 
would be costs in addition to those 
identified above. Comment was sought 
on whether these requirements would 
impose costs on other market 
participants, including persons who use 
credit ratings to make investment 
decisions or for regulatory purposes, 
and persons who purchase services and 
products from NRSROs. Commenters 
were asked to identify the metrics and 
sources of any empirical data that 
supported their costs estimates. Other 
than the one comment discussed above, 
the Commission did not receive any 
comments in response to these requests. 

4. Rule 17g–4 
Section 15E(g)(1) of the Exchange 

Act 654 requires an NRSRO to establish, 
maintain, and enforce written policies 
and procedures to prevent the misuse of 
material, nonpublic information in 
violation of the Exchange Act.655 
Section 15E(g)(2) of the Exchange Act 
provides that the Commission shall 
adopt rules requiring an NRSRO to 
establish specific policies and 
procedures to prevent the misuse of 
material, non-public information.656 
Rule 17g–4 implements this statutory 
provision by requiring that an NRSRO’s 
policies and procedures established 
pursuant to Section 15E(g)(1) of the 
Exchange Act 657 include three specific 
types of procedures. 

As discussed above with respect to 
PRA, the Commission estimates that it 
will take approximately 50 hours for an 
NRSRO to establish procedures in 
conformance with the rule and that 
there will be 30 NRSROs. For these 
reasons, the Commission estimates that 
the average one-time cost to an NRSRO 
will be $10,250 658 and the total 

aggregate one-time cost to the industry 
will be $307,500.659 

The Commission requested comment 
on these cost estimates. We also 
requested comment on whether there 
would be costs in addition to those 
identified above, such as costs arising 
from systems changes and restructuring 
business practices. Comment also was 
sought on whether these requirements 
would impose costs on other market 
participants, including persons who use 
credit ratings to make investment 
decisions or for regulatory purposes, 
and persons who purchase services and 
products from NRSROs. Commenters 
were asked to identify the metrics and 
sources of any empirical data that 
supported their costs estimates. The 
Commission did not receive any 
comments in response to these requests. 

5. Rules 17g–5 and 17g–6 
Rules 17g–5 and 17g–6 are conduct 

rules that require NRSROs respectively 
to avoid certain conflicts of interest and 
unfair, abusive or coercive acts and 
practices and, consequently, do not 
require an NRSRO to make records or 
reports or create recordkeeping or 
accounting systems. Moreover, 
15E(1)(B)(vi) of the Exchange Act 
requires an NRSRO to disclose any 
conflicts of interest. Additionally, 
Section 15E(h) of the Exchange Act 
requires an NRSRO establish, maintain, 
and enforce written policies and 
procedures reasonable designed to 
address and manage any conflicts of 
interest that can arise from its business. 
Therefore, the Commission does not 
anticipate that Rule 17g–5 will result in 
any significant incremental costs. 

Rules 17g–5 and 17g–6 prohibit 
respectively certain conflicts of interest 
and unfair, coercive and abusive acts 
and practices. The Commission believes 
that most entities that will become 
NRSROs do not engage in these types of 
conflicts, acts and practices. Therefore, 
the Commission estimates that these 
rules generally will impose de minimis 
costs. However, the Commission 
recognizes that an NRSRO may incur 
costs related to training employees 
about the requirements in these rules. It 
also is possible that the rules may 
require some NRSROs to restructure 
their business models or activities. The 
Commission, therefore, requested 
comment on such training and 
restructuring costs. The Commission 
also requested comment on whether 
there are any other costs associated with 
these rules. The Commission did not 
receive any comments on these specific 
issues. 

VII. Consideration of Burden on 
Competition and Promotion of 
Efficiency, Competition, and Capital 
Formation 

Under Section 3(f) of the Exchange 
Act,660 the Commission must, when 
engaging in rulemaking that requires the 
Commission to consider or determine if 
an action is necessary or appropriate in 
the public interest, consider whether the 
action will promote efficiency, 
competition, and capital formation. 
Section 23(a)(2) of the Exchange Act 661 
requires the Commission to consider the 
anticompetitive effects of any rules the 
Commission adopts under the Exchange 
Act. Section 23(a)(2) prohibits the 
Commission from adopting any rule that 
would impose a burden on competition 
not necessary or appropriate in 
furtherance of the purposes of the 
Exchange Act. 

The Commission’s view is that the 
rules will promote efficiency, 
competition, and capital formation. As 
discussed above with respect to the 
costs and benefits of the rules, the 
primary purpose of the Credit Rating 
Agency Reform Act of 2006 (the ‘‘Rating 
Agency Act’’) 662 is to foster 
‘‘competition in the credit rating agency 
business.’’ 663 The practice of 
identifying NRSROs through staff no- 
action letters has been criticized as a 
process that lacks transparency and 
creates a barrier for credit rating 
agencies seeking wider recognition and 
market share. The Commission believes 
that these rules implementing 
provisions of the Rating Agency Act 
further the Rating Agency Act’s goal of 
increasing competition because they 
will provide credit rating agencies with 
a transparent process to apply for 
registration as an NRSRO that does not 
favor a particular business model or 
larger, established firms. This will make 
it easier for more credit rating agencies 
to apply for registration. Increased 
competition in the credit ratings 
business may lower the cost to issuers, 
obligors, and underwriters of obtaining 
credit ratings. 

In addition, the Rating Agency Act 
requires NRSROs to make their credit 
ratings and information about 
themselves available to the public. Part 
of the definition of ‘‘credit rating 
agency’’ in the Rating Agency Act is that 
the entity must be in the business of 

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33617 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

664 Section 3(a)(61) of the Exchange Act (15 U.S.C. 
78c(a)(61)). 

665 See, e.g., Gross Letter; AFP Letter; FSR Letter; 
ICI Letter; AEI Letter. 

666 See, e.g., Gross Letter; AFP Letter; FSR Letter; 
ICI Letter. 

667 See, e.g., AEI Letter. 
668 Id. 
669 See, e.g., DBRS Letter; Fitch Letter; letter dated 

February 13, 2007 from Janet M. Tavakoli, 

President, Tavakoli Structured Finance, Inc.; letter 
dated February 14, 2007 from Gregory G. Raab, 
Chief Executive Officer, Axon; letter dated February 
16, 2007 from Emile Van den Bol, Managing 
Director, Deutsche Bank; letter dated February 16, 
2007 from Kent D. Born, Senior Managing Director, 
PPM America; letter dated February 23, 2007 from 
Patti Unti, Managing Director, Capmark Investments 
LP; letter dated February 23, 2007 from David 
Lazarus, Managing Director, Capmark Securities, 
Inc.; letter dated February 28, 2007 from Ronald E. 
Schrager, Chief Executive Officer, LNR Property 
Corporation; letter dated March 5, 2007 from David 
Hynes, Partner, Northcross Capital LLP; letter dated 
March 6, 2007 from S. Trezevant Moore, Jr., 
President & COO, Luminent Mortgage Capital, Inc.; 
letter dated March 7, 2007 from Bruce E. Stern, 
Chairman, Government Affairs Committee, 
Association of Financial Guaranty Insurers; letter 
dated March 8, 2007 from Majorie E. Gross; letter 
dated March 9, 2007 from Petra Spiegel, Eurohypo 
AG; letter dated March 9, 2007 from Landon D. 
Parsons, Managing Director, G–Bass; letter dated 
March 9, 2007 from Pat G. Halter, Chief Executive 
Officer, Principal Real Estate Investors; letter dated 
March 12, 2007 from Charles Covell, Executive Vice 
President, Citigroup Alternative Investments; letter 
dated March 12, 2007 from Rodney J. Dillman, 
General Counsel, Babson Capital Management LLC; 
letter dated March 12, 2007 from Louis C. Lucido, 
Group Managing Director, Trust Company of the 
West; letter dated March 12, 2007 from Daniel 
Ivascyn, Managing Director, PIMCO. 

670 See, e.g., S&P Letter; Moody’s Letter; R&I 
Letter; FSR Letter; Rutherfurd Letter; Langohr 
Letter; AST Letter. 

671 15 U.S.C. 78o–7. 

issuing credit ratings on the Internet or 
through another readily accessible 
means, for free or for a reasonable fee.664 
Under the Rating Agency Act and the 
rules adopted thereunder, an NRSRO 
will be required to disclose information 
about its credit ratings performance 
statistics, its methods for determining 
credit ratings, its organizational 
structure, its procedures to prevent the 
misuse of material non-public 
information, the conflicts of interest that 
arise from its business activities, its 
code of ethics, and the qualifications of 
its credit analysts and credit analyst 
supervisors. The Commission believes 
that these disclosures will allow users of 
the credit ratings to compare the ratings 
quality of different NRSROs. Although 
the information an NRSRO will provide 
on its Form NRSRO and to comply with 
the rules cannot substitute for an 
investor’s due diligence in evaluating a 
credit rating, it will aid investors by 
providing a publicly accessible 
foundation of basic information about 
an NRSRO. 

In addition, the rules implement 
provisions of the Rating Agency Act that 
are designed to improve the integrity of 
NRSROs. For example, the registration 
of a credit rating agency as an NRSRO 
will allow the Commission to conduct 
regular examinations of the credit rating 
agency to evaluate compliance with the 
regulatory scheme set forth in Section 
15E of the Exchange Act and the rules 
thereunder and will subject an NRSRO 
to disclosure, recordkeeping, and 
annual audit requirements, as well as 
requirements regarding the prevention 
of misuse of material, nonpublic 
information, the management of 
conflicts of interest, and certain 
prohibited acts and practices. Increased 
confidence in the integrity of NRSROs 
and the credit ratings they issue may 
promote participation in the securities 
markets and facilitate capital formation. 
Better quality credit ratings could also 
reduce the likelihood of an unexpected 
collapse of a rated issuer or obligor, 
reducing risks to individual investors 
and to the financial markets. In addition 
to improving the quality of credit 
ratings, increased oversight of NRSROs 
may increase the accountability of an 
NRSRO to its subscribers, investors, and 
other persons who rely on the 
credibility and objectivity of credit 
ratings in making an investment 
decision. 

The Commission sought comment on 
these matters. In particular, the 
Commission solicited comment on 
whether the rules would have an 

adverse effect on competition that is 
neither necessary nor appropriate in 
furtherance of the purposes of the 
Exchange Act. In addition, comment 
was sought on whether the rules would 
promote efficiency, competition, and 
capital formation. Commenters were 
requested to provide empirical data and 
other factual support for their views, if 
possible. 

The Commission received several 
comments on how the rules will impact 
competition.665 Many commenters 
weighing in on this issue stated that the 
rules will further the goals of the Rating 
Agency Act by fostering more 
competition.666 Other commenters 
stated that the rules create undue 
burden and would be a barrier to entry 
for new or smaller credit rating 
agencies.667 In response to this concern, 
the Commission notes that the rules 
have been modified in ways designed to 
decrease burden. Some of these 
modifications address specific issues 
raised by the commenters. For example, 
one commenter stated that the 
requirements to provide background 
information on each credit analyst and 
for non-resident NRSROs to provide a 
special undertaking should be 
eliminated.668 As discussed above with 
respect to Form NRSRO and Rule 17g– 
2, these requirements have been 
eliminated. As discussed above in the 
sections on each rule, the Commission 
believes that the requirements in the 
rules that have been retained are 
necessary and narrowly tailored. The 
Commission believes these 
requirements represent a proper balance 
in promoting competition and the 
quality and integrity of credit ratings, 
and in fulfilling the Commission’s 
statutory mandate to create a regulatory 
framework for NRSROs. 

Finally, the Commission also notes 
that most of the commenters that 
weighed in on the prohibition in Rule 
17g–6(a)(4) expressed an opinion as to 
how the provision, as proposed, would 
impact competition. For example, many 
of the commenters stated that the 85% 
threshold in the proposed rule was too 
high and, therefore, the prohibition 
would not achieve the desired goal of 
increasing competition insomuch as it 
would maintain the status quo in which 
the two largest credit rating agencies 
dominate the market for rating 
structured products.669 On the other 

side of the issue, as discussed in the 
section describing Rule 17g–6, 
commenters argued that the 
Commission has insufficient data upon 
which to make a finding that a specific 
practice is unfair, abusive, or coercive 
and, consequently, the prohibition, as 
proposed, would interfere with natural 
market forces.670 

The Commission notes that the rule 
has been modified to eliminate the 85% 
threshold. The rule now prohibits the 
practices where the practice is engaged 
in for an anticompetitive purpose. In 
this way, the rule is designed to prohibit 
conduct that inappropriately stifles 
competition and, at the same time, 
avoid the establishment of artificial 
constraints that could interfere with 
natural market forces. The Commission 
recognizes that the two largest credit 
rating agencies dominate the market for 
rating structured products. 
Consequently, the Commission 
intends—aided by the enhanced 
recordkeeping requirements around 
rating structured products—to monitor 
closely the practices NRSROs employ in 
this area. 

VIII. Final Regulatory Flexibility 
Analysis 

The Commission proposed Rules 17g– 
1, 17g–2, 17g–3, 17g–4, 17g–5, and 17g– 
6 and Form NRSRO in the proposing 
release under Section 15E of the 
Exchange Act.671 An Initial Regulatory 

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33618 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

672 5 U.S.C. 603. 
673 15 U.S.C. 78o–7. 
674 Pub. L. 109–291 (2006). 
675 See Report of the Senate Committee on 

Banking, Housing, and Urban Affairs to Accompany 
S. 3850, Credit Rating Agency Reform Act of 2006, 
S. Report No. 109–326, 109th Cong., 2d Sess. (Sept. 
6, 2006) (‘‘Senate Report’’). 

676 See AEI Letter. 
677 See, e.g., Fitch Letter; AEI Letter; AST Letter; 

ASF Letter. 
678 15 U.S.C. 78a et seq. 
679 15 U.S.C. 78o–7. 
680 17 CFR 240.0–10(a). 
681 See 17 CFR 240.0–10(a). 

682 Id. 
683 Rule 17g–1. 
684 Id. 
685 Rule 17g–2. 

Flexibility Analysis (‘‘IRFA’’) was 
published in the proposing release. The 
Commission has prepared the following 
Final Regulatory Flexibility Analysis 
(FRFA), in accordance with the 
provisions of the Regulatory Flexibility 
Act,672 regarding Rules 17g–1, 17g–2, 
17g–3, 17g–4, 17g–5, and 17g–6 and 
Form NRSRO under Section 15E of the 
Exchange Act.673 

A. Need for and Objective of the Rules 
The rules implement specific 

provisions of the Credit Rating Agency 
Reform Act of 2006 (the ‘‘Rating Agency 
Act’’).674 The Rating Agency Act defines 
the term ‘‘nationally recognized 
statistical rating organization’’ as a 
credit rating agency registered with the 
Commission, provides authority for the 
Commission to implement registration, 
recordkeeping, financial reporting, and 
oversight rules with respect to registered 
credit rating agencies, and directs the 
Commission to issue final implementing 
rules no later than 270 days after its 
enactment. 

The objectives of the Rating Agency 
Act are ‘‘to improve ratings quality for 
the protection of investors and in the 
public interest by fostering 
accountability, transparency, and 
competition in the credit rating 
industry.’’ 675 The rules are designed to 
further these objectives and to: Assist 
the Commission in determining whether 
an entity should be registered as an 
NRSRO; assist the Commission in 
reviewing whether an NRSRO complies 
with the provisions of the Rating 
Agency Act and rules thereunder; 
adhere to the Commission’s statutory 
mandate to adopt rules to implement 
the NRSRO regulatory program; and 
provide information regarding NRSROs 
to the public and to users of credit 
ratings. 

B. Significant Issues Raised by 
Commenters 

The Commission sought comment 
with respect to every aspect of the IRFA, 
including comments with respect to the 
number of small entities that may be 
affected by the proposed rules. 
Commenters were asked to specify the 
costs of compliance with the proposed 
rules and suggest alternatives that 
would accomplish the goals of the rules. 
The Commission did not receive any 
specific comments on the IRFA. The 

Commission did, however, receive a 
limited number of comments that 
discussed the effect the rules might have 
on smaller credit rating agencies, 
although these commenters did not 
address whether their comments 
pertained to entities that would be small 
businesses for purposes of Regulatory 
Flexibility Act analysis. For example, 
one commenter stated that the rules, as 
proposed, created an undue burden and 
would be a barrier to entry for new or 
smaller credit rating agencies.676 Several 
commenters stated that the prohibition 
in Rule 17g–5 from having a conflict 
with respect to a client that has 
provided 10% or more of the NRSRO’s 
annual revenues could prevent smaller 
credit rating agencies from registering as 
NRSROs.677 

C. Legal Basis 
The Commission is adopting the rules 

pursuant to the Exchange Act 678 and, 
particularly, Section 15E of the 
Exchange Act.679 

D. Small Entities Subject to the Rule 
Paragraph (a) of Rule 0–10 provides 

that for purposes of the Regulatory 
Flexibility Act, a small entity ‘‘[w]hen 
used with reference to an ‘issuer’ or a 
‘person’ other than an investment 
company’’ means ‘‘an ‘issuer’ or ‘person’ 
that, on the last day of its most recent 
fiscal year, had total assets of $5 million 
or less.’’ 680 The Commission believes 
that an NRSRO with total assets of $5 
million or less would qualify as a 
‘‘small’’ entity for purposes of the 
Regulatory Flexibility Act. 

As noted above, the Commission 
believes that approximately 30 credit 
rating agencies will be registered as 
NRSROs. Moreover, as also noted above, 
the Senate Report accompanying the 
Rating Agency Act states that the two 
largest credit rating agencies have about 
80% of the market share as measured by 
revenues. The Senate Report also states 
that these two firms rate more than 99% 
of the debt obligations and preferred 
stock issues publicly traded in the 
United States. Given these figures, the 
Commission believes that the majority 
of the credit rating agencies registered 
with the Commission will be ‘‘small’’ 
entities.681 Consequently, the 
Commission estimates that, of the 
approximately 30 credit rating agencies 
estimated to be registered with the 
Commission, approximately 20 would 

be ‘‘small’’ entities for purposes of the 
Regulatory Flexibility Act.682 

E. Reporting, Recordkeeping, and Other 
Compliance Requirements 

A credit rating agency seeking to 
apply to the Commission for registration 
as an NRSRO will apply using Form 
NRSRO.683 The Form elicits certain 
information and requires the credit 
rating agency to attach a number of 
documents as Exhibits (some of which 
would have to be made publicly 
available) and certifications from 
qualified institutional buyers. The 
public Exhibits consist of information 
about credit ratings performance data, 
the credit rating agency’s organizational 
structure, the methods used by the 
credit rating agency for issuing credit 
ratings, the policies used by the credit 
rating agency to manage activities that 
could potentially risk the impartiality of 
its credit ratings, and the credit rating 
agency’s credit analysts. To the extent 
permitted by law, the confidential 
Exhibits consist of information about 
the credit rating agency’s financial 
condition, revenues, and credit analyst 
compensation. 

After registration, the credit rating 
agency (now an NRSRO) generally will 
be required to promptly update the 
public information on its Form NRSRO 
whenever an Item or Exhibit becomes 
materially inaccurate. To update 
information, the NRSRO must furnish 
the Commission with an amendment 
using Form NRSRO. In addition, the 
NRSRO must furnish the Commission 
with an annual certification on Form 
NRSRO.684 In the annual certification, 
the NRSRO must represent that all 
information on the Form, as amended, 
continues to be accurate, list any 
material changes made during the 
previous year, and include an update to 
the public Exhibit relating to the 
performance statistics of its credit 
ratings. After its application for 
registration is approved, the NRSRO 
must make Form NRSRO and the public 
Exhibits submitted to the Commission, 
and all amendments, readily accessible 
to the public. 

NRSROs also are subject to a 
recordkeeping rule.685 This rule requires 
an NRSRO to make and retain certain 
records relating to the business of 
issuing credit ratings. These records will 
assist the Commission, through its 
examination process, in monitoring 
whether the NRSRO continues to 
maintain adequate financial and 

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33619 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

686 Rule 17g–3. 
687 Rule 17g–4. 
688 Rule 17g–5. 
689 Id. 
690 Rule 17g–6. 
691 5 U.S.C. 603(c). 

692 See AEI letter. 
693 Id. 
694 Id. 

695 The Commission intends to monitor how the 
prohibition operates in practice, particularly with 
respect to structured products. If the prohibition 
interferes with how NRSROs as a matter of course 
deal with structured product sponsors, the 
Commission will evaluate whether the rule should 
be modified to accommodate this business practice 
or whether an exemption would be appropriate. 

696 15 U.S.C. 78c(b), 78o–7, 78q, 78w, and 78mm. 

managerial resources to consistently 
produce credit ratings with integrity (as 
required under the Rating Agency Act) 
and whether the NRSRO is complying 
with the provisions of the Rating 
Agency Act, the rules adopted 
thereunder, and the NRSRO’s disclosed 
policies and procedures. 

On an annual fiscal year basis, an 
NRSRO must furnish the Commission 
with audited financial statements.686 
This requirement is designed to assist 
the Commission in monitoring whether 
the NRSRO continues to maintain 
adequate financial resources to 
consistently produce credit ratings with 
integrity. It also is designed to assist the 
Commission in monitoring whether the 
NRSRO is complying with provisions of 
the Rating Agency Act and the rules 
adopted thereunder regarding potential 
conflicts of interest arising from 
dealings with large customers in terms 
of revenues earned. 

Finally, all NRSROs will be subject to 
requirements designed to protect their 
impartiality with respect to issuing 
credit ratings. First, they must establish, 
maintain, and enforce specific written 
policies designed to prevent the misuse 
of material non-public information.687 
Second, an NRSRO is prohibited from 
having certain general conflicts unless 
it, as required under the Rating Agency 
Act, disclosed the conflict and adopted 
procedures to manage the conflict.688 
Further certain conflicts of interest—for 
example, rating a security owned by the 
NRSRO—are prohibited.689 Third, 
NRSROs are prohibited from engaging 
in certain practices that the Commission 
has found to be unfair, coercive, or 
abusive practices.690 

F. Duplicative, Overlapping, or 
Conflicting Federal Rules 

The Commission believes that there 
are no federal rules that duplicate, 
overlap, or conflict with the rules. 

G. Significant Alternatives 

Pursuant to section 3(a) of the RFA,691 
the Commission must consider certain 
types of alternatives, including: (1) The 
establishment of differing compliance or 
reporting requirements or timetables 
that take into account the resources 
available to small entities; (2) the 
clarification, consolidation, or 
simplification of compliance and 
reporting requirements under the rule 
for small entities; (3) the use of 

performance rather than design 
standards; and (4) an exemption from 
coverage of the rule, or any part of the 
rule, for small entities. 

The Commission does not believe it is 
appropriate to establish different 
compliance or reporting requirements or 
timetables; clarify, consolidate, or 
simplify compliance and reporting 
requirements under the rules for small 
entities; or exempt small entities from 
coverage of the rules, or any part of the 
rules. The Rating Agency Act and the 
rules establish a voluntary program of 
registration and supervision that allows 
all NRSROs the flexibility to develop 
procedures tailored to their specific 
organizational structures and business 
models. Further, many of the rules, as 
adopted, are due to a direct statutory 
mandate. The Commission also does not 
believe that it is necessary to consider 
whether small entities should be 
permitted to use performance rather 
than design standards to comply with 
the rules as the rules already propose 
performance standards and do not 
dictate for entities of any size any 
particular design standards that must be 
employed to achieve the objectives of 
the rules. 

As for the comment that the rules will 
be a barrier to entry for small entities, 
the Commission notes that the 
commenter did not specify how the 
rules would disproportionately burden 
small entities, nor did it provide cost 
estimates for small entities.692 The 
Commission believes the burden 
associated with the rules will impact all 
NRSROs in a proportionate manner 
based on their size and complexity. 
Therefore, the Commission does not 
believe it would be appropriate to 
prescribe lesser requirements for small 
entities, nor have any commenters 
suggested lesser requirements. 

Further, the Commission notes that 
the rules, as adopted, have been 
modified in ways designed to decrease 
burden. Some of these modifications 
address specific issues raised by the 
commenter.693 For example, the 
commenter stated that the requirements 
to provide background information on 
each credit analyst and for non-resident 
NRSROs to provide a special 
undertaking should be eliminated.694 
These requirements have been 
eliminated. As discussed above in the 
sections on each rule, the Commission 
believes that the requirements in the 
rules that have been retained are 
necessary and narrowly tailored. 

As for the comment that the 
prohibition on having a conflict with 
respect to a client that has provided 
10% or more of the NRSRO’s revenues, 
the Commission notes that the 
commenters did not provide any 
supporting data. In addition, no 
commenter specifically identifying itself 
as a small entity raised this prohibition 
as an issue.695 The Commission believes 
that it would be highly unusual for a 
small credit rating agency to derive 10% 
or more of its revenues from a single 
client and, if this was the case, that it 
would very difficult for the credit rating 
agency to issue an impartial rating 
requested by the client. The 
Commission notes that the smaller 
credit rating agencies tend to use a 
subscriber fee-based business model. 
Thus, they are not paid to determine 
specific credit ratings and, 
consequently, would not be impacted by 
this prohibition. 

IX. Statutory Authority 

The Commission is adopting Form 
NRSRO and Rules 17g–1, 17g–2, 17g–3, 
17g–4, 17g–5 and 17g–6 under the 
Exchange Act pursuant to the authority 
conferred by the Exchange Act, 
including Sections 3(b), 15E, 17, 23(a) 
and 36.696 

Text of Rules 

List of Subjects 

17 CFR Parts 240 and 249b 

Brokers, Reporting and recordkeeping 
requirements, Securities. 
� In accordance with the foregoing, the 
Commission hereby amends Title 17, 
Chapter II of the Code of Federal 
Regulation as follows. 

PART 240—GENERAL RULES AND 
REGULATIONS, SECURITIES 
EXCHANGE ACT OF 1934 

� 1. The authority for part 240 
continues to read in part as follows: 

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 
77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 
77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 
78j–l, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p, 
78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 80a– 
20, 80a–23, 80a–29, 80a–37, 80b–3, 80b–4, 
80b–11, and 7201 et seq.; and 18 U.S.C. 1350, 
unless otherwise noted. 

* * * * * 

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33620 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

� 2. An undesignated center heading 
and §§ 240.17g–1 through 240.17g–6 are 
added to read as follows: 

Nationally Recognized Statistical Rating 
Organizations 

Sec. 
240.17g–1 Application for registration as a 

nationally recognized statistical rating 
organization. 

240.17g–2 Records to be made and retained 
by nationally recognized statistical rating 
organizations. 

240.17g–3 Annual financial reports to be 
furnished by nationally recognized 
statistical rating organizations. 

240.17g–4 Prevention of misuse of material 
nonpublic information. 

240.17g–5 Conflicts of interest. 
240.17g–6 Prohibited acts and practices. 

Nationally Recognized Statistical 
Rating Organizations 

§ 240.17g–1 Application for registration as 
a nationally recognized statistical rating 
organization. 

(a) Initial application. A credit rating 
agency applying to the Commission to 
be registered under section 15E of the 
Act (15 U.S.C. 78o–7) as a nationally 
recognized statistical rating organization 
must furnish the Commission with an 
initial application on Form NRSRO 
(§ 249b.300 of this chapter) that follows 
all applicable instructions for the Form. 

(b) Application to register for an 
additional class of credit ratings. A 
nationally recognized statistical rating 
organization applying to register for an 
additional class of the credit ratings 
described in section 3(a)(62)(B) of the 
Act (15 U.S.C. 78c(a)(62)(B)) must 
furnish the Commission with an 
application to add a class of credit 
ratings on Form NRSRO that follows all 
applicable instructions for the Form. 
The application will be subject to the 
requirements of section 15E(a)(2) of the 
Act (15 U.S.C. 78o–7(a)(2)). 

(c) Supplementing an application 
prior to final action by the Commission. 
An applicant must promptly furnish the 
Commission with a written notice if 
information submitted to the 
Commission in an initial application to 
be registered as a nationally recognized 
statistical rating organization or in an 
application to register for an additional 
class of credit ratings is found to be or 
becomes materially inaccurate prior to 
the date of a Commission order granting 
or denying the application. The notice 
must identify the information that was 
found to be materially inaccurate. The 
applicant also must promptly furnish 
the Commission with an application 
supplement on Form NRSRO that 
follows all applicable instructions for 
the Form. 

(d) Withdrawing an application. An 
applicant may withdraw an initial 
application to be registered as a 
nationally recognized statistical rating 
organization or an application to register 
for an additional class of credit ratings 
prior to the date of a Commission order 
granting or denying the application. To 
withdraw the application, the applicant 
must furnish the Commission with a 
written notice of withdrawal executed 
by a duly authorized person. 

(e) Update of registration. A 
nationally recognized statistical rating 
organization amending materially 
inaccurate information in its application 
for registration pursuant to section 
15E(b)(1) of the Act (15 U.S.C. 78o– 
7(b)(1)) must promptly furnish the 
Commission with the update of its 
registration on Form NRSRO that 
follows all applicable instructions for 
the Form. 

(f) Annual certification. A nationally 
recognized statistical rating organization 
amending its application for registration 
pursuant to section 15E(b)(2) of the Act 
(15 U.S.C. 78o–7(b)(2)) must furnish the 
Commission with the annual 
certification on Form NRSRO that 
follows all applicable instructions for 
the Form not later than 90 days after the 
end of each calendar year. 

(g) Withdrawal from registration. A 
nationally recognized statistical rating 
organization withdrawing from 
registration pursuant to section 
15E(e)(1) of the Act (15 U.S.C. 78o– 
7(e)(1)) must furnish the Commission 
with a notice of withdrawal from 
registration on Form NRSRO that 
follows all applicable instructions for 
the Form. The withdrawal from 
registration will become effective 45 
calendar days after the notice is 
furnished to the Commission upon such 
terms and conditions as the Commission 
may establish as necessary in the public 
interest or for the protection of 
investors. 

(h) Furnishing Form NRSRO. A Form 
NRSRO submitted under any paragraph 
of this section will be considered 
furnished to the Commission on the 
date the Commission receives a 
complete and properly executed Form 
NRSRO that follows all applicable 
instructions for the Form. Information 
submitted on a confidential basis and 
for which confidential treatment has 
been requested pursuant to applicable 
Commission rules will be accorded 
confidential treatment to the extent 
permitted by law. 

(i) Public availability of Form NRSRO. 
A nationally recognized statistical rating 
organization must make its current 
Form NRSRO and information and 
documents submitted in Exhibits 1 

through 9 to Form NRSRO publicly 
available on its Web site, or through 
another comparable, readily accessible 
means within 10 business days after the 
date of the Commission order granting 
an initial application for registration as 
a nationally recognized statistical rating 
organization or an application to register 
for an additional class of credit ratings 
and within 10 business days after 
furnishing a Form NRSRO to the 
Commission under paragraphs (e), (f), or 
(g) of this section. 

§ 240.17g–2 Records to be made and 
retained by nationally recognized statistical 
rating organizations. 

(a) Records required to be made and 
retained. A nationally recognized 
statistical rating organization must make 
and retain the following books and 
records, which must be complete and 
current: 

(1) Records of original entry into the 
accounting system of the nationally 
recognized statistical rating organization 
and records reflecting entries to and 
balances in all general ledger accounts 
of the nationally recognized statistical 
rating organization for each fiscal year. 

(2) Records with respect to each 
current credit rating of the nationally 
recognized statistical rating organization 
indicating (as applicable): 

(i) The identity of any credit analyst(s) 
that participated in determining the 
credit rating; 

(ii) The identity of the person(s) that 
approved the credit rating before it was 
issued; 

(iii) Whether the credit rating was 
solicited or unsolicited; and 

(iv) The date the credit rating action 
was taken. 

(3) An account record for each person 
(for example, an obligor, issuer, 
underwriter, or other user) that has paid 
the nationally recognized statistical 
rating organization for the issuance or 
maintenance of a credit rating 
indicating: 

(i) The identity and address of the 
person; and 

(ii) The credit rating(s) determined or 
maintained for the person. 

(4) An account record for each 
subscriber to the credit ratings and/or 
credit analysis reports of the nationally 
recognized statistical rating organization 
indicating the identity and address of 
the subscriber. 

(5) A record listing the general types 
of services and products offered by the 
nationally recognized statistical rating 
organization. 

(6) A record documenting the 
established procedures and 
methodologies used by the nationally 
recognized statistical rating organization 
to determine credit ratings. 

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33621 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

(7) A record that lists each security 
and money market instrument and its 
corresponding credit rating issued by an 
asset pool or as part of any asset-backed 
or mortgage-backed securities 
transaction where the nationally 
recognized statistical rating 
organization, in determining the credit 
rating for the security or money market 
instrument, treats assets within such 
pool or as a part of such transaction that 
are not subject to a credit rating of the 
nationally recognized statistical rating 
organization by any or a combination of 
the following methods: 

(i) Determining credit ratings for the 
unrated assets; 

(ii) Performing credit assessments or 
determining private credit ratings for 
the unrated assets; 

(iii) Determining credit ratings or 
private credit ratings, or performing 
credit assessments for the unrated assets 
by taking into consideration the internal 
credit analysis of another person; or 

(iv) Determining credit ratings or 
private credit ratings, or performing 
credit assessments for the unrated assets 
by taking into consideration (but not 
necessarily adopting) the credit ratings 
of another nationally recognized 
statistical rating organization. 

(b) Records required to be retained. A 
nationally recognized statistical rating 
organization must retain the following 
books and records (excluding drafts of 
documents) that relate to its business as 
a credit rating agency: 

(1) Significant records (for example, 
bank statements, invoices, and trial 
balances) underlying the information 
included in the annual financial reports 
furnished by the nationally recognized 
statistical rating organization to the 
Commission pursuant to § 240.17g–3. 

(2) Internal records, including 
nonpublic information and work papers, 
used to form the basis of a credit rating 
issued by the nationally recognized 
statistical rating organization. 

(3) Credit analysis reports, credit 
assessment reports, and private credit 
rating reports of the nationally 
recognized statistical rating organization 
and internal records, including 
nonpublic information and work papers, 
used to form the basis for the opinions 
expressed in these reports. 

(4) Compliance reports and 
compliance exception reports. 

(5) Internal audit plans, internal audit 
reports, documents relating to internal 
audit follow-up measures, and all 
records identified by the internal 
auditors of the nationally recognized 
statistical rating organization as 
necessary to perform the audit of an 
activity that relates to its business as a 
credit rating agency. 

(6) Marketing materials of the 
nationally recognized statistical rating 
organization that are published or 
otherwise made available to persons 
that are not associated with the 
nationally recognized statistical rating 
organization. 

(7) External and internal 
communications, including electronic 
communications, received and sent by 
the nationally recognized statistical 
rating organization and its employees 
that relate to initiating, determining, 
maintaining, changing, or withdrawing 
a credit rating. 

(8) Internal documents that contain 
information, analysis, or statistics that 
were used to develop a procedure or 
methodology to treat the credit ratings 
of another nationally recognized 
statistical rating organization for the 
purpose of determining a credit rating 
for a security or money market 
instrument issued by an asset pool or 
part of any asset-backed or mortgage- 
backed securities transaction. 

(9) For each security or money market 
instrument identified in the record 
required to be made and retained under 
paragraph (a)(7) of this section, any 
document that contains a description of 
how assets within such pool or as a part 
of such transaction not rated by the 
nationally recognized statistical rating 
organization but rated by another 
nationally recognized statistical rating 
organization were treated for the 
purpose of determining the credit rating 
of the security or money market 
instrument. 

(10) Form NRSROs (including 
Exhibits and accompanying information 
and documents) submitted to the 
Commission by the nationally 
recognized statistical rating 
organization. 

(c) Record retention periods. The 
records required to be retained pursuant 
to paragraphs (a) and (b) of this section 
must be retained for three years after the 
date the record is made or received. 

(d) Manner of retention. An original, 
or a true and complete copy of the 
original, of each record required to be 
retained pursuant to paragraphs (a) and 
(b) of this section must be maintained in 
a manner that, for the applicable 
retention period specified in paragraph 
(c) of this section, makes the original 
record or copy easily accessible to the 
principal office of the nationally 
recognized statistical rating organization 
and to any other office that conducted 
activities causing the record to be made 
or received. 

(e) Third-party record custodian. The 
records required to be retained pursuant 
to paragraphs (a) and (b) of this section 
may be made or retained by a third- 

party record custodian, provided the 
nationally recognized statistical rating 
organization furnishes the Commission 
at its principal office in Washington, DC 
with a written undertaking of the 
custodian executed by a duly authorized 
person. The undertaking must be in 
substantially the following form: 

The undersigned acknowledges that books 
and records it has made or is retaining for 
[the nationally recognized statistical rating 
organization] are the exclusive property of 
[the nationally recognized statistical rating 
organization]. The undersigned undertakes 
that upon the request of [the nationally 
recognized statistical rating organization] it 
will promptly provide the books and records 
to [the nationally recognized statistical rating 
organization] or the U.S. Securities and 
Exchange Commission (‘‘Commission’’) or its 
representatives and that upon the request of 
the Commission it will promptly permit 
examination by the Commission or its 
representatives of the records at any time or 
from time to time during business hours and 
promptly furnish to the Commission or its 
representatives a true and complete copy of 
any or all or any part of such books and 
records. 

A nationally recognized statistical rating 
organization that engages a third-party 
record custodian remains responsible 
for complying with every provision of 
this section. 

(f) A nationally recognized statistical 
rating organization must promptly 
furnish the Commission or its 
representatives with legible, complete, 
and current copies, and, if specifically 
requested, English translations of those 
records of the nationally recognized 
statistical rating organization required to 
be retained pursuant to paragraphs (a) 
and (b) this section, or any other records 
of the nationally recognized statistical 
rating organization subject to 
examination under section 17(b) of the 
Act (15 U.S.C. 78q(b)) that are requested 
by the Commission or its 
representatives. 

§ 240.17g–3 Annual financial reports to be 
furnished by nationally recognized 
statistical rating organizations. 

(a) A nationally recognized statistical 
rating organization must annually, not 
more than 90 calendar days after the 
end of its fiscal year (as indicated on its 
current Form NRSRO), furnish the 
Commission, at the Commission’s 
principal office in Washington, DC, with 
the following financial reports as of the 
end of its most recent fiscal year: 

(1) Audited financial statements of the 
nationally recognized statistical rating 
organization or audited consolidated 
financial statements of its parent if the 
nationally recognized statistical rating 
organization is a separately identifiable 

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33622 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

division or department of the parent. 
The audited financial statements must: 

(i) Include a balance sheet, an income 
statement and statement of cash flows, 
and a statement of changes in 
ownership equity; 

(ii) Be prepared in accordance with 
generally accepted accounting 
principles in the jurisdiction in which 
the nationally recognized statistical 
rating organization or its parent is 
incorporated, organized, or has its 
principal office; and 

(iii) Be certified by an accountant who 
is qualified and independent in 
accordance with paragraphs (a), (b), and 
(c)(1), (2), (3), (4), (5) and (8) of § 210.2– 
01 of this chapter. The accountant must 
give an opinion on the financial 
statements in accordance with 
paragraphs (a) through (d) of § 210.2–02 
of this chapter. 

(2) If applicable, unaudited 
consolidating financial statements of the 
parent of the nationally recognized 
statistical rating organization that 
include the nationally recognized 
statistical rating organization. 

Note to paragraph (a)(2): This financial 
report must be furnished only if the audited 
financial statements provided pursuant to 
paragraph (a)(1) of this section are 
consolidated financial statements of the 
parent of the nationally recognized statistical 
rating organization. 

(3) An unaudited financial report 
providing information concerning the 
revenue of the nationally recognized 
statistical rating organization in each of 
the following categories (as applicable) 
for the fiscal year: 

(i) Revenue from determining and 
maintaining credit ratings; 

(ii) Revenue from subscribers; 
(iii) Revenue from granting licenses or 

rights to publish credit ratings; and 
(iv) Revenue from all other services 

and products (include descriptions of 
any major sources of revenue). 

(4) An unaudited financial report 
providing the total aggregate and 
median annual compensation of the 
credit analysts of the nationally 
recognized statistical rating organization 
for the fiscal year. 

Note to paragraph (a)(4): In calculating 
total and median annual compensation, the 
nationally recognized statistical rating 
organization may exclude deferred 
compensation, provided such exclusion is 
noted in the report. 

(5) An unaudited financial report 
listing the 20 largest issuers and 
subscribers that used credit rating 
services provided by the nationally 
recognized statistical rating organization 
by amount of net revenue attributable to 
the issuer or subscriber during the fiscal 

year. Additionally, include on the list 
any obligor or underwriter that used the 
credit rating services provided by the 
nationally recognized statistical rating 
organization if the net revenue 
attributable to the obligor or underwriter 
during the fiscal year equaled or 
exceeded the net revenue attributable to 
the 20th largest issuer or subscriber. 
Include the net revenue amount for each 
person on the list. 

Note to paragraph (a)(5): A person is 
deemed to have ‘‘used the credit rating 
services’’ of the nationally recognized 
statistical rating organization if the person is 
any of the following: an obligor that is rated 
by the nationally recognized statistical rating 
organization (regardless of whether the 
obligor paid for the credit rating); an issuer 
that has securities or money market 
instruments subject to a credit rating of the 
nationally recognized statistical rating 
organization (regardless of whether the issuer 
paid for the credit rating); any other person 
that has paid the nationally recognized 
statistical rating organization to determine a 
credit rating with respect to a specific 
obligor, security, or money market 
instrument; or a subscriber to the credit 
ratings, credit ratings data, or credit analysis 
of the nationally recognized statistical rating 
organization. In calculating net revenue 
attributable to a person, the nationally 
recognized statistical rating organization 
should include all revenue earned by the 
nationally recognized statistical rating 
organization for any type of service or 
product, regardless of whether related to 
credit rating services, and net of any rebates 
and allowances paid or owed to the person 
by the nationally recognized statistical rating 
organization. 

(b) The nationally recognized 
statistical rating organization must 
attach to each financial report furnished 
pursuant to paragraph (a) of this section 
a signed statement by a duly authorized 
person associated with the nationally 
recognized statistical rating organization 
that the person has responsibility for the 
report and, to the best knowledge of the 
person, the financial report fairly 
presents, in all material respects, the 
financial condition, results of 
operations, cash flows, revenues, and 
analyst compensation, as applicable, of 
the nationally recognized statistical 
rating organization for the period 
presented. 

(c) The Commission may grant an 
extension of time or an exemption with 
respect to any requirements in this 
section either unconditionally or on 
specified terms and conditions on the 
written request of a nationally 
recognized statistical rating organization 
if the Commission finds that such 
extension or exemption is necessary or 
appropriate in the public interest and 
consistent with the protection of 
investors. 

§ 240.17g–4 Prevention of misuse of 
material nonpublic information. 

(a) The written policies and 
procedures a nationally recognized 
statistical rating organization 
establishes, maintains, and enforces to 
prevent the misuse of material, 
nonpublic information pursuant to 
section 15E(g)(1) of the Act (15 U.S.C. 
78o–7(g)(1)) must include policies and 
procedures reasonably designed to 
prevent: 

(1) The inappropriate dissemination 
within and outside the nationally 
recognized statistical rating organization 
of material nonpublic information 
obtained in connection with the 
performance of credit rating services; 

(2) A person within the nationally 
recognized statistical rating organization 
from purchasing, selling, or otherwise 
benefiting from any transaction in 
securities or money market instruments 
when the person is aware of material 
nonpublic information obtained in 
connection with the performance of 
credit rating services that affects the 
securities or money market instruments; 
and 

(3) The inappropriate dissemination 
within and outside the nationally 
recognized statistical rating organization 
of a pending credit rating action before 
issuing the credit rating on the Internet 
or through another readily accessible 
means. 

(b) For the purposes of this section, 
the term person within a nationally 
recognized statistical rating 
organization means a nationally 
recognized statistical rating 
organization, its credit rating affiliates 
identified on Form NRSRO, and any 
partner, officer, director, branch 
manager, and employee of the 
nationally recognized statistical rating 
organization or its credit rating affiliates 
(or any person occupying a similar 
status or performing similar functions). 

§ 240.17g–5 Conflicts of interest. 
(a) A person within a nationally 

recognized statistical rating organization 
is prohibited from having a conflict of 
interest relating to the issuance or 
maintenance of a credit rating identified 
in paragraph (b) of this section, unless: 

(1) The nationally recognized 
statistical rating organization has 
disclosed the type of conflict of interest 
in Exhibit 6 to Form NRSRO in 
accordance with section 15E(a)(1)(B)(vi) 
of the Act (15 U.S.C. 78o–7(a)(1)(B)(vi)) 
and § 240.17g–1; and 

(2) The nationally recognized 
statistical rating organization has 
established and is maintaining and 
enforcing written policies and 
procedures to address and manage 

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conflicts of interest in accordance with 
section 15E(h) of the Act (15 U.S.C. 
78o–7(h)). 

(b) Conflicts of interest. For purposes 
of this section, each of the following is 
a conflict of interest: 

(1) Being paid by issuers or 
underwriters to determine credit ratings 
with respect to securities or money 
market instruments they issue or 
underwrite. 

(2) Being paid by obligors to 
determine credit ratings with respect to 
the obligors. 

(3) Being paid for services in addition 
to determining credit ratings by issuers, 
underwriters, or obligors that have paid 
the nationally recognized statistical 
rating organization to determine a credit 
rating. 

(4) Being paid by persons for 
subscriptions to receive or access the 
credit ratings of the nationally 
recognized statistical rating organization 
and/or for other services offered by the 
nationally recognized statistical rating 
organization where such persons may 
use the credit ratings of the nationally 
recognized statistical rating organization 
to comply with, and obtain benefits or 
relief under, statutes and regulations 
using the term nationally recognized 
statistical rating organization. 

(5) Being paid by persons for 
subscriptions to receive or access the 
credit ratings of the nationally 
recognized statistical rating organization 
and/or for other services offered by the 
nationally recognized statistical rating 
organization where such persons also 
may own investments or have entered 
into transactions that could be favorably 
or adversely impacted by a credit rating 
issued by the nationally recognized 
statistical rating organization. 

(6) Allowing persons within the 
nationally recognized statistical rating 
organization to directly own securities 
or money market instruments of, or 
having other direct ownership interests 
in, issuers or obligors subject to a credit 
rating determined by the nationally 
recognized statistical rating 
organization. 

(7) Allowing persons within the 
nationally recognized statistical rating 
organization to have a business 
relationship that is more than an arms 
length ordinary course of business 
relationship with issuers or obligors 
subject to a credit rating determined by 
the nationally recognized statistical 
rating organization. 

(8) Having a person associated with 
the nationally recognized statistical 
rating organization that is a broker or 
dealer engaged in the business of 
underwriting securities or money 
market instruments. 

(9) Any other type of conflict of 
interest relating to the issuance of credit 
ratings by the nationally recognized 
statistical rating organization that is 
material to the nationally recognized 
statistical rating organization and that is 
identified by the nationally recognized 
statistical rating organization in Exhibit 
6 to Form NRSRO in accordance with 
section 15E(a)(1)(B)(vi) of the Act (15 
U.S.C. 78o–7(a)(1)(B)(vi)) and § 240.17g– 
1. 

(c) Prohibited conflicts. A nationally 
recognized statistical rating organization 
is prohibited from having the following 
conflicts of interest relating to the 
issuance or maintenance of a credit 
rating as a credit rating agency: 

(1) The nationally recognized 
statistical rating organization issues or 
maintains a credit rating solicited by a 
person that, in the most recently ended 
fiscal year, provided the nationally 
recognized statistical rating organization 
with net revenue (as reported under 
§ 240.17g–3) equaling or exceeding 10% 
of the total net revenue of the nationally 
recognized statistical rating organization 
for the fiscal year; 

(2) The nationally recognized 
statistical rating organization issues or 
maintains a credit rating with respect to 
a person (excluding a sovereign nation 
or an agency of a sovereign nation) 
where the nationally recognized 
statistical rating organization, a credit 
analyst that participated in determining 
the credit rating, or a person responsible 
for approving the credit rating, directly 
owns securities of, or has any other 
direct ownership interest in, the person 
that is subject to the credit rating; 

(3) The nationally recognized 
statistical rating organization issues or 
maintains a credit rating with respect to 
a person associated with the nationally 
recognized statistical rating 
organization; or 

(4) The nationally recognized 
statistical rating organization issues or 
maintains a credit rating where a credit 
analyst who participated in determining 
the credit rating, or a person responsible 
for approving the credit rating, is an 
officer or director of the person that is 
subject to the credit rating. 

(d) For the purposes of this section, 
the term person within a nationally 
recognized statistical rating 
organization means a nationally 
recognized statistical rating 
organization, its credit rating affiliates 
identified on Form NRSRO, and any 
partner, officer, director, branch 
manager, and employee of the 
nationally recognized statistical rating 
organization or its credit rating affiliates 
(or any person occupying a similar 
status or performing similar functions). 

§ 240.17g–6 Prohibited acts and practices. 

(a) Prohibitions. A nationally 
recognized statistical rating organization 
is prohibited from engaging in any of 
the following unfair, coercive, or 
abusive practices: 

(1) Conditioning or threatening to 
condition the issuance of a credit rating 
on the purchase by an obligor or issuer, 
or an affiliate of the obligor or issuer, of 
any other services or products, 
including pre-credit rating assessment 
products, of the nationally recognized 
statistical rating organization or any 
person associated with the nationally 
recognized statistical rating 
organization. 

(2) Issuing, or offering or threatening 
to issue, a credit rating that is not 
determined in accordance with the 
nationally recognized statistical rating 
organization’s established procedures 
and methodologies for determining 
credit ratings, based on whether the 
rated person, or an affiliate of the rated 
person, purchases or will purchase the 
credit rating or any other service or 
product of the nationally recognized 
statistical rating organization or any 
person associated with the nationally 
recognized statistical rating 
organization. 

(3) Modifying, or offering or 
threatening to modify, a credit rating in 
a manner that is contrary to the 
nationally recognized statistical rating 
organization’s established procedures 
and methodologies for modifying credit 
ratings based on whether the rated 
person, or an affiliate of the rated 
person, purchases or will purchase the 
credit rating or any other service or 
product of the nationally recognized 
statistical rating organization or any 
person associated with the nationally 
recognized statistical rating 
organization. 

(4) Issuing or threatening to issue a 
lower credit rating, lowering or 
threatening to lower an existing credit 
rating, refusing to issue a credit rating, 
or withdrawing or threatening to 
withdraw a credit rating, with respect to 
securities or money market instruments 
issued by an asset pool or as part of any 
asset-backed or mortgage-backed 
securities transaction, unless all or a 
portion of the assets within such pool or 
part of such transaction also are rated by 
the nationally recognized statistical 
rating organization, where such practice 
is engaged in by the nationally 
recognized statistical rating organization 
for an anticompetitive purpose. 

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33624 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

PART 249b—FURTHER FORMS, 
SECURITIES EXCHANGE ACT OF 1934 

� 3. The authority citation for part 249b 
continues to read in part as follows. 

Authority: 15 U.S.C. 78a et seq., unless 
otherwise noted. 

* * * * * 
� 4. Section 249b.300 and Form NRSRO 
are added to read as follows: 

§ 249b.300 FORM NRSRO, application for 
registration as a nationally recognized 
statistical rating organization pursuant to 
section 15E of the Securities Exchange Act 
of 1934 and § 240.17g–1 of this chapter. 

This Form shall be used for an initial 
application for and an application to 

add a class of credit ratings to, a 
supplement to an initial application for 
and an application to add a class of 
credit ratings to, an update and 
amendment to an application for, and a 
withdrawal from a registration as a 
nationally recognized statistical rating 
organization pursuant to section 15E of 
the Securities Exchange Act of 1934 (15 
U.S.C. 78o–7) and § 240.17g–1 of this 
chapter. 

Note: The text of Form NRSRO will not 
appear in the Code of Federal Regulations. 

Form NRSRO—Application for 
Registration as a Nationally Recognized 
Statistical Rating Organization 
(NRSRO) 

OMB Approval 

OMB Number: 3235–0625. 
Expires: May 31, 2010. 
Estimated average burden hours per 

response: 300. 
Persons who respond to the collection 

of information contained in this form 
are not required to respond unless the 
form displays a currently valid OMB 
control number. 

SEC 1541 (2–07) 

BILLING CODE 8010–01–P 

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33625 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

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33626 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

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33627 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

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33628 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

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33629 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

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33630 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

BILLING CODE 8010–01–C 

Form NRSRO Instructions 

A. General Instructions 
1. Form NRSRO is the Application for 

Registration as a Nationally Recognized 
Statistical Rating Organization 
(‘‘NRSRO’’) under Section 15E of the 
Securities Exchange Act of 1934 
(‘‘Exchange Act’’) and Exchange Act 
Rule 17g–1. Exchange Act Rule 17g–1 
requires an Applicant/NRSRO to use 
Form NRSRO to furnish the U.S. 
Securities and Exchange Commission 
(‘‘Commission’’) with: 

• An initial application to be 
registered as an NRSRO; 

• An application to register for an 
additional class of credit ratings; 

• An application supplement; 
• An update of registration pursuant 

to Section 15E(b)(1) of the Exchange 
Act; 

• An annual certification pursuant to 
Section 15E(b)(2) of the Exchange Act; 
and 

• A withdrawal of registration 
pursuant to Section 15E(e) of the 
Exchange Act. 

2. Exchange Act Rule 17g–1(c) 
requires that an Applicant/NRSRO 
promptly provide the Commission with 
a written notice if information 
submitted to the Commission in an 
initial application for registration or in 
an application to register for an 
additional class of credit ratings is 
found to be or becomes materially 
inaccurate before the Commission has 
granted or denied the application. The 
notice must identify the information 
found to be materially inaccurate. The 
Applicant/NRSRO must also promptly 

furnish the Commission with accurate 
and complete information as an 
application supplement on Form 
NRSRO. 

3. Pursuant to Exchange Act Rule 
17g–1(i), an NRSRO must make its 
current Form NRSRO and information 
and documents furnished in Exhibits 1 
through 9 to Form NRSRO publicly 
available on its Web site, or through 
another comparable, readily accessible 
means within 10 business days after the 
date of the Commission Order granting 
an initial application for registration as 
an NRSRO or an application to register 
for an additional class of credit ratings 
and within 10 business days after 
submitting an update of registration, 
annual certification, or withdrawal from 
registration to the Commission on Form 
NRSRO. The certifications from 
qualified institutional buyers, disclosure 
reporting pages, and Exhibits 10 through 
13 are not required to be made publicly 
available by the NRSRO pursuant to 
Rule 17g–1(i). An Applicant/NRSRO 
may request that the Commission keep 
confidential the certifications from 
qualified institutional buyers, the 
disclosure reporting pages, and the 
information and documents in Exhibits 
10–13 submitted to the Commission. An 
Applicant/NRSRO seeking confidential 
treatment for these submissions should 
mark each page ‘‘Confidential 
Treatment’’ and comply with 
Commission rules governing 
confidential treatment (See 17 CFR 
200.80 and 17 CFR 200.83). The 
Commission will keep this information 
confidential to the extent permitted by 
law. 

4. Section 15E(a)(2) of the Exchange 
Act prescribes time periods and 
requirements for the Commission to 
grant or deny an initial application for 
registration as an NRSRO. These time 
periods also apply to an application to 
register for an additional class of credit 
ratings. 

5. Type or clearly print all 
information. Use only the current 
version of Form NRSRO or a 
reproduction of it. 

6. Section 15E of the Exchange Act 
(15 U.S.C. 78o–7) authorizes the 
Commission to collect the Information 
on Form NRSRO from an Applicant/ 
NRSRO. The principal purposes of Form 
NRSRO are to determine whether an 
Applicant should be granted registration 
as an NRSRO, whether an NRSRO 
should be granted registration in an 
additional class of credit ratings, 
whether an NRSRO continues to meet 
the criteria for registration as an 
NRSRO, to withdraw a registration, and 
to provide information about an NRSRO 
to users of credit ratings. Intentional 
misstatements or omissions may 
constitute federal criminal violations 
under 18 U.S.C. 1001. 

The information collection is in 
accordance with the clearance 
requirements of Section 3507 of the 
Paperwork Reduction Act of 1995 (44 
U.S.C. 3507). The Commission may not 
conduct or sponsor, and you are not 
required to respond to, a collection of 
information unless it displays a valid 
Office of Management and Budget 
(OMB) control number. The time 
required to complete and furnish this 
form will vary depending on individual 

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33631 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

circumstances. The estimated average 
time to complete an initial application 
is displayed on the facing page of this 
Form. Send comments regarding this 
burden estimate or suggestions for 
reducing the burden to Director, Office 
of Information Technology, Securities 
and Exchange Commission, 100 F 
Street, NE, Washington, DC 20549. 

7. Under Exchange Act Rule 17g– 
2(b)(10), an NRSRO must retain copies 
of all Form NRSROs (including Exhibits, 
accompanying information, and 
documents) submitted to the 
Commission. Exchange Act Rule 17g– 
2(c) requires that these records be 
retained for three years after the date the 
record is made. 

8. ADDRESS—The mailing address 
for Form NRSRO is: U.S. Securities and 
Exchange Commission, 100 F Street, 
NE., Washington, DC 20549. 

9. A Form NRSRO will be considered 
furnished to the Commission on the 
date the Commission receives a 
complete and properly executed Form 
NRSRO that follows all applicable 
instructions for the Form. 

B. Instructions for an Initial Application 

An Applicant applying to be 
registered with the Commission as an 
NRSRO must furnish the Commission 
with an initial application on Form 
NRSRO. To complete an initial 
application: 

• Check the ‘‘INITIAL 
APPLICATION’’ box at the top of Form 
NRSRO. 

• Complete Items 1, 2, 3, 4, 5, 6, and 
8. (See Instructions below for each 
Item). Enter ‘‘None’’ or ‘‘N/A’’ where 
appropriate. 

• Unless exempt from the 
requirement, attach certifications from 
qualified institutional buyers, marked 
‘‘Certification from Qualified 
Institutional Buyer’’ (See Instructions 
below for Item 6C). 

• Attach Exhibits 1 through 13 (See 
Instructions below for each Exhibit). 

• Execute the Form. 
The Applicant must promptly furnish 

the Commission with a written notice if 
information submitted to the 
Commission in an initial application is 
found to be or becomes materially 
inaccurate prior to the date of a 
Commission order granting or denying 
the application. The notice must 
identify the information found to be 
materially inaccurate. The Applicant 
also must promptly furnish the 
Commission with an application 
supplement on Form NRSRO (See 
instructions below for an application 
supplement). 

C. Instructions for an Application to 
Add a Class of Credit Ratings 

An NRSRO applying to register for an 
additional class of credit ratings must 
furnish the Commission with an 
application on Form NRSRO. To 
complete an application to register for 
an additional class of credit ratings: 

• Check the ‘‘APPLICATION TO ADD 
CLASS OF CREDIT RATINGS’’ box at 
the top of Form NRSRO. 

• Complete Items 1, 2, 3, 4, 5, 6, 7, 
and 8 on the Form following all 
applicable instructions for each Item 
(See Instructions below for each Item). 
If any information in an Item on the 
previously furnished Form NRSRO is 
materially inaccurate, update that 
information. Enter ‘‘None’’ or ‘‘N/A’’ 
where appropriate. Complete each Item 
even if the Item is not being updated. 

• Unless exempt from the 
requirement, attach certifications from 
qualified institutional buyers for the 
additional class of credit ratings marked 
‘‘Certification from Qualified 
Institutional Buyer’’ (See Instructions 
below for Item 6C). 

• If any information in an Exhibit 
previously furnished is materially 
inaccurate, update that information. 

• Execute the Form. 
The Applicant must promptly furnish 

the Commission with a written notice if 
information submitted to the 
Commission in an application to add a 
class of credit ratings is found to be or 
becomes materially inaccurate prior to 
the date of a Commission order granting 
or denying the application. The notice 
must identify the information found to 
be materially inaccurate. The Applicant 
also must promptly furnish the 
Commission with an application 
supplement on Form NRSRO (See 
instructions below for an application 
supplement). 

D. Instructions for an Application 
Supplement 

An Applicant must furnish an 
application supplement to the 
Commission on Form NRSRO if 
information submitted to the 
Commission in a pending initial 
application for registration as an NRSRO 
or a pending application to register for 
an additional class of credit ratings is 
found to be or becomes materially 
inaccurate. To complete an application 
supplement: 

• Check the ‘‘APPLICATION 
SUPPLEMENT’’ box at the top of Form 
NRSRO. 

• Indicate on the line provided under 
the box the Item(s) or Exhibit(s) being 
supplemented. 

• Complete Items 1, 2, 3, 4, 5 and 8 
on the Form following all applicable 

instructions for each Item (See 
Instructions below for each Item). If 
supplementing an initial application, 
also complete Item 6. If supplementing 
an application for registration in an 
additional class of credit ratings, also 
complete Items 6 and 7. If any 
information in an Item on the 
previously furnished Form NRSRO is 
materially inaccurate, update that 
information. Enter ‘‘None’’ or ‘‘N/A’’ 
where appropriate. Complete each Item 
even if the Item is not being updated. 

• If a certification from a qualified 
institutional buyer is being updated or 
a new certification is being added, 
attach the updated or new certification. 

• If an Exhibit is being updated, 
attach the updated Exhibit. 

• Execute the Form. 

E. Instructions for an Update of 
Registration 

After registration is granted, Section 
15E(b)(1) of the Exchange Act requires 
that an NRSRO must promptly amend 
its application for registration if 
information or documents provided in 
the previously furnished Form NRSRO 
become materially inaccurate. This 
requirement does not apply to Item 7 
and Exhibit 1, which only are required 
to be updated annually with the annual 
certification. It also does not apply to 
Exhibits 10–13 and the certifications 
from qualified institutional buyers, 
which are not required to be updated on 
Form NRSRO after registration. An 
NRSRO amending its application for 
registration must furnish the 
Commission with an update of its 
registration on Form NRSRO. To 
complete an update of registration: 

• Check the ‘‘UPDATE OF 
REGISTRATION’’ box at the top of Form 
NRSRO. 

• Indicate on the line provided under 
the box the Item(s) or Exhibit(s) being 
updated. 

• Complete Items 1, 2, 3, 4, 5, 7, and 
8 on the Form following all applicable 
instructions for each Item (See 
Instructions below for each Item). If any 
information in an Item on the 
previously furnished Form NRSRO is 
materially inaccurate, update that 
information. Enter ‘‘None’’ or ‘‘N/A’’ 
where appropriate. Complete each Item 
even if the Item is not being updated. 

• If an Exhibit is being updated, 
attach the updated Exhibit. 

• Execute the Form. 

F. Instructions for Annual Certifications 

After registration is granted, Section 
15E(b)(2) of the Exchange Act requires 
that an NRSRO furnish the Commission 
with an annual certification not later 
than 90 days after the end of each 

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33632 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

calendar year. The annual certification 
must be furnished to the Commission on 
Form NRSRO and must include an 
update of the information in Item 7 and 
the credit ratings performance 
measurement statistics furnished in 
Exhibit 1, a certification that the 
information and documents furnished 
on or with Form NRSRO continue to be 
accurate (use the certification on the 
Form), and a list of material changes to 
the application for registration that 
occurred during the previous calendar 
year. To complete an annual 
certification: 

• Check the ‘‘ANNUAL 
CERTIFICATION’’ box at the top of 
Form NRSRO. 

• Complete Items 1, 2, 3, 4, 5, 7, and 
8 on the Form following all applicable 
instructions for each Item (See 
Instructions below for each Item). If any 
information in an Item on the 
previously furnished Form NRSRO is 
materially inaccurate, update that 
information. Enter ‘‘None’’ or ‘‘N/A’’ 
where appropriate. Complete each Item 
even if the Item is not being updated. 

• If any information in an Exhibit 
previously furnished is materially 
inaccurate, update that information. 

• Attach a list of all material changes 
made to the information or documents 
in the application for registration of the 
NRSRO that occurred during the 
previous calendar year. 

• Execute the Form. 

G. Instructions for a Withdrawal From 
Registration 

Section 15E(e)(1) of the Exchange Act 
provides that an NRSRO may 
voluntarily withdraw its registration 
with the Commission. To withdraw 
from registration, an NRSRO must 
furnish the Commission with a notice of 
withdrawal from registration on Form 
NRSRO. The withdrawal from 
registration will become effective 45 
calendar days after the withdrawal from 
registration is furnished to the 
Commission upon such terms and 
conditions as the Commission may 
establish as necessary in the public 
interest or for the protection of 
investors. To complete a withdrawal 
from registration: 

• Check the ‘‘WITHDRAWAL FROM 
REGISTRATION’’ box at the top of Form 
NRSRO. 

• Complete Items 1, 2, 3, 4, 5, 7, and 
8 on the Form following all applicable 
instructions for each Item (See 
Instructions below for each Item). If any 
information on the previously furnished 
Form NRSRO is materially inaccurate, 
update that information. Enter ‘‘None’’ 
or ‘‘N/A’’ where appropriate. Complete 

each Item even if the Item is not being 
updated. 

• Execute the Form. 

H. Instructions for Specific Line Items 

Item 1A. Provide the name of the 
person (e.g., XYZ Corporation) that is 
furnishing the Form NRSRO to the 
Commission. This means the name of 
the person that is applying for 
registration as an NRSRO or is registered 
as an NRSRO and not the name of the 
individual that is executing the Form. 

Item 1E. The individual listed as the 
contact person must be authorized to 
receive all communications and papers 
from the Commission and must be 
responsible for their dissemination 
within the Applicant/NRSRO. 

Certification. The certification must 
be executed by the Chief Executive 
Officer or the President of the person 
that is furnishing the Form NRSRO to 
the Commission or an individual with 
similar responsibilities. 

Item 3. Identify credit rating affiliates 
that issue credit ratings on behalf of the 
person furnishing the Form NRSRO to 
the Commission in one or more of the 
classes of credit ratings identified in 
Item 6 or Item 7. A ‘‘credit rating 
affiliate’’ is a separate legal entity or a 
separately identifiable department or 
division thereof that determines credit 
ratings that are credit ratings of the 
person furnishing the Form NRSRO to 
the Commission. The information in 
Items 4–8 and all the Exhibits must 
incorporate information about the credit 
ratings, methodologies, procedures, 
policies, financial condition, results of 
operations, personnel, and 
organizational structure of each credit 
rating affiliate identified in Item 3, as 
applicable. Any credit rating 
determined by a credit rating affiliate 
identified in Item 3 will be treated as a 
credit rating issued by the person 
furnishing the Form NRSRO to the 
Commission for purposes of Section 15E 
of the Exchange Act and the 
Commission’s rules thereunder. The 
terms ‘‘Applicant’’ and ‘‘NRSRO’’ as 
used on Form NRSRO and the 
Instructions for the Form mean the 
person furnishing the Form NRSRO to 
the Commission and any credit rating 
affiliate identified in Item 3. 

Item 4. Section 15E(j) of the Exchange 
Act requires an NRSRO to designate a 
compliance officer responsible for 
administering the policies and 
procedures of the NRSRO established 
pursuant to Sections 15E(g) and (h) of 
the Exchange Act (respectively, to 
prevent the misuse of material 
nonpublic information and address and 
manage conflicts of interest) and for 

ensuring compliance with applicable 
securities laws, rules, and regulations. 

Item 5. Section 15E(a)(3) of the 
Exchange Act and Exchange Act Rule 
17g–1(i) require an NRSRO to make 
Form NRSRO and Exhibits 1–9 to Form 
NRSRO furnished to the Commission 
publicly available on the NRSRO’s Web 
site, or through another comparable, 
readily accessible means within 10 
business days after the date of the 
Commission order granting an initial 
application for registration as an NRSRO 
or an application to register for an 
additional class of credit ratings and 
within 10 business days after furnishing 
the Commission with an amendment, 
annual certification, or withdrawal of 
registration on Form NRSRO. The 
certifications from qualified 
institutional investors, Disclosure 
Reporting Pages, and Exhibits 10 
through 13 are not required to be made 
publicly available on the NRSRO’s Web 
site, or through another comparable, 
readily accessible means. Describe how 
the current Form NRSRO and Exhibits 
1–9 will be made publicly available. If 
they will be posted on a Web site, for 
example, give the Internet address and 
link to the Form and Exhibits. 

Item 6. Complete Item 6 only if 
furnishing an initial application for 
registration, an application to be 
registered in an additional class of 
credit ratings, or an application 
supplement. 

Item 6A. Pursuant to Section 
15E(a)(1)(B)(vii) of the Exchange Act, an 
Applicant applying for registration as an 
NRSRO must disclose in the application 
the classes of credit ratings for which 
the Applicant/NRSRO is applying to be 
registered. Indicate these classes by 
checking the appropriate box or boxes. 
For each class of credit ratings, provide 
in the appropriate box the approximate 
number of credit ratings the Applicant/ 
NRSRO presently has outstanding as of 
the date of the application. Pursuant to 
the definition of ‘‘nationally recognized 
statistical rating organization’’ in 
Section 3(a)(62) of the Exchange Act, an 
Applicant/NRSRO must have been in 
business as a ‘‘credit rating agency’’ for 
at least the 3 consecutive years 
immediately preceding the date of its 
application for registration as an 
NRSRO. For each class of credit ratings, 
also provide in the appropriate box the 
approximate date the Applicant/NRSRO 
began issuing and making readily 
accessible credit ratings in the class on 
a continuous basis through the present 
as a ‘‘credit rating agency,’’ as that term 
is defined in Section 3(a)(61) of the 
Exchange Act. If there was a period 
when the Applicant/NRSRO stopped 
issuing credit ratings in a particular 

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33633 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

class or stopped operating as a credit 
rating agency, provide the approximate 
date the Applicant/NRSRO resumed 
issuing and making readily accessible 
credit ratings in that class as a credit 
rating agency. Refer to the definition of 
‘‘credit rating agency’’ in the 
instructions below (also at 15 U.S.C. 
78c(a)(61)) to determine when the 
Applicant/NRSRO began operating as a 
‘‘credit rating agency.’’ 

Item 6B. To meet the definition of 
‘‘credit rating agency’’ pursuant to 
Section 3(a)(61)(A) of the Exchange Act, 
the Applicant must, among other things, 
issue ‘‘credit ratings on the Internet or 
through another readily accessible 
means, for free or for a reasonable fee.’’ 
Briefly describe how the Applicant/ 
NRSRO makes the credit ratings in the 
classes indicated in Item 6A readily 
accessible for free or for a reasonable 
fee. If a person must pay a fee to obtain 
a credit rating made readily accessible 
by the Applicant/NRSRO, provide a fee 
schedule or describe the price(s) 
charged. 

Item 6C. If the Applicant/NRSRO is 
required to furnish qualified 
institutional buyer certifications, under 
Section 15E(a)(1)(C) of the Exchange 
Act, submit a minimum of 10 
certifications from qualified 
institutional buyers, none of which is 
affiliated with the Applicant/NRSRO. 
Each certification may address more 
than one class of credit ratings. To be 
registered as an NRSRO for a class of 
credit ratings identified in Item 6A 
under ‘‘Applying for Registration,’’ the 
Applicant/NRSRO must submit at least 
two certifications that address the class 
of credit ratings. If this is an application 
of an NRSRO to be registered in one or 
more additional classes of credit ratings, 
furnish at least two certifications that 
address each additional class of credit 
ratings. The required certifications must 
be signed by a person duly authorized 
by the certifying entity, must be 
notarized, must be marked 
‘‘Certification from Qualified 
Institutional Buyer,’’ and must be in 
substantially the following form: 

‘‘I, [Executing official], am authorized by 
[Certifying entity] to execute this certification 
on behalf of [Certifying entity]. I certify that 
all actions by stockholders, directors, general 
partners, and other bodies necessary to 
authorize me to execute this certification 
have been taken and that [Certifying entity]: 

(i) Meets the definition of a ’qualified 
institutional buyer’ as set forth in section 
3(a)(64) of the Securities Exchange Act of 
1934 (15 U.S.C. 78c(a)(64)) pursuant to the 
following subsection(s) of 17 CFR 
230.144A(a)(1) [insert applicable citations]; 

(ii) Has seriously considered the credit 
ratings of [the Applicant/NRSRO] in the 
course of making some of its investment 

decisions for at least the three years 
immediately preceding the date of this 
certification, in the following classes of credit 
ratings: [Insert applicable classes of credit 
ratings]; and 

(iii) Has not received compensation either 
directly or indirectly from [the Applicant/ 
NRSRO] for executing this certification. 

[Signature] 
Print Name and Title 

You are not required to make a 
Certification from a Qualified 
Institutional Buyer submitted with this 
Form NRSRO publicly available on your 
Web site, or through another 
comparable, readily accessible means 
pursuant to Exchange Act Rule 17g–1(i). 
You may request that the Commission 
keep these certifications confidential by 
marking each page ‘‘Confidential 
Treatment’’ and complying with 
Commission rules governing 
confidential treatment (See 17 CFR 
200.80 and 17 CFR 200.83). The 
Commission will keep the certifications 
confidential upon request to the extent 
permitted by law. 

Item 7. An Applicant furnishing Form 
NRSRO to apply for registration as an 
NRSRO should not complete Item 7. An 
NRSRO furnishing Form NRSRO for any 
other reason must complete Item 7. The 
information in Item 7 must be updated 
on an annual basis with the furnishing 
of the annual certification. 

Item 7A. Indicate the classes of credit 
ratings for which the NRSRO is 
currently registered by checking the 
appropriate box or boxes. For each class 
of credit ratings, provide in the 
appropriate box the approximate 
number of credit ratings the NRSRO had 
outstanding as of the end of the most 
recently ended calendar year. For each 
class of credit ratings, also provide in 
the appropriate box the approximate 
date the NRSRO began issuing and 
making readily accessible credit ratings 
in the class on a continuous basis 
through the present as a ‘‘credit rating 
agency,’’ as that term is defined in 
Section 3(a)(61) of the Exchange Act. If 
there was a period when the NRSRO 
stopped issuing credit ratings in a 
particular class or stopped operating as 
a credit rating agency, provide the 
approximate date the NRSRO resumed 
issuing and making readily accessible 
credit ratings in that class as a credit 
rating agency. Refer to the definition of 
‘‘credit rating agency’’ in the 
instructions below (also at 15 U.S.C. 
78c(a)(61)) to determine when the 
NRSRO began operating as a ‘‘credit 
rating agency.’’ 

Item 7B. Briefly describe how the 
NRSRO makes the credit ratings in the 
classes indicated in Item 7A readily 
accessible for free or for a reasonable 

fee. If a person must pay a fee to obtain 
a credit rating made readily accessible 
by the NRSRO, provide a fee schedule 
or describe the price(s) charged. 

Item 8. Answer each question by 
checking the appropriate box. Refer to 
the definition of ‘‘person within an 
Applicant/NRSRO’’ set forth below to 
determine the persons to which the 
questions apply. Information that relates 
to an affirmative answer must be 
provided on a Disclosure Reporting Page 
(NRSRO) and furnished with Form 
NRSRO. Submit a separate Disclosure 
Reporting Page (NRSRO) for each person 
that: (a) has committed or omitted any 
act, or has been subject to an order or 
finding, enumerated in subparagraphs 
(A), (D), (E), (G), or (H) of section 
15(b)(4) of the Securities Exchange Act 
of 1934, has been convicted of any 
offense specified in section 15(b)(4)(B) 
of the Securities Exchange Act of 1934, 
or has been enjoined from any action, 
conduct, or practice specified in section 
15(b)(4)(C) of the Securities Exchange 
Act of 1934; (b) has been convicted of 
any crime that is punishable by 
imprisonment for 1 or more years, and 
that is not described in section 15(b)(4) 
of the Securities Exchange Act of 1934, 
or has been convicted of a substantially 
equivalent crime by a foreign court of 
competent jurisdiction; or (c) is subject 
to any order of the Commission barring 
or suspending the right of the person to 
be associated with an NRSRO. The 
Disclosure Reporting Page (NRSRO) is 
attached to these instructions. Note: the 
definition of ‘‘person within an 
Applicant/NRSRO’’ is narrower than the 
definition of ‘‘person associated with a 
nationally recognized statistical rating 
organization’’ in Section 3(a)(63) of the 
Exchange Act. 

You are not required to make any 
disclosure reporting pages submitted 
with this Form NRSRO publicly 
available on your Web site, or through 
another comparable, readily accessible 
means pursuant to Exchange Act Rule 
17g–1(i). You may request that the 
Commission keep any disclosure 
reporting pages confidential by marking 
each page ‘‘Confidential Treatment’’ and 
complying with Commission rules 
governing confidential treatment. The 
Commission will keep the disclosure 
reporting pages confidential upon 
request to the extent permitted by law. 

Item 9. Exhibits. Section 15E(a)(1)(B) 
of the Exchange Act requires a credit 
rating agency’s application for 
registration as an NRSRO to contain 
certain specific information and 
documents and, pursuant to Section 
15E(a)(1)(B)(x), any other information 
and documents concerning the 
applicant and any person associated 

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33634 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

with the applicant that the Commission 
requires as necessary or appropriate in 
the public interest or for the protection 
of investors. If any information or 
document required to be included with 
any Exhibit is maintained in a language 
other than English, provide a copy of 
the original document and a version of 
the document translated into English. 
Attach a certification by an authorized 
person that the translated version is a 
true, accurate, and complete English 
translation of the information or 
document. Attach the Exhibits to Form 
NRSRO in numerical order. Bind each 
Exhibit separately, and mark each 
Exhibit or bound volume of the Exhibit 
with the appropriate Exhibit number. 
The information provided in the 
Exhibits must be sufficiently detailed to 
allow for verification. The information 
and documents provided in Exhibits 1 
through 9 must be made publicly 
available on the NRSRO’s Web site, or 
through another comparable, readily 
accessible means pursuant to Exchange 
Act Rule 17g–1(i). The information and 
documents required to be provided in 
Exhibits 10 through 13 are not required 
to be made publicly available on the 
NRSRO’s Web site, or through another 
comparable, readily accessible means 
pursuant to Exchange Act Rule 17g–1(i). 
An NRSRO may request that the 
Commission keep these Exhibits 
confidential by marking each page of 
them ‘‘Confidential Treatment’’ and 
complying with Commission rules 
governing confidential treatment (See 17 
CFR 200.80 and 17 CFR 200.83). The 
Commission will keep the information 
and documents in these Exhibits 
confidential upon request to the extent 
permitted by law. 

Exhibit 1. Provide in this Exhibit 
performance measurement statistics of 
the credit ratings of the Applicant/ 
NRSRO over short-term, mid-term, and 
long-term periods (as applicable) 
through the most recent calendar year- 
end, including, as applicable: historical 
down-grade and default rates within 
each of the credit rating categories, 
notches, grades, or rankings used by the 
Applicant/NRSRO as an indicator of the 
assessment of the creditworthiness of an 
obligor, security, or money market 
instrument. As part of this Exhibit, 
define the credit rating categories, 
notches, grades, and rankings used by 
the Applicant/NRSRO and explain the 
performance measurement statistics, 
including the inputs, time horizons, and 
metrics used to determine the statistics. 

Exhibit 2. Provide in this Exhibit a 
general description of the procedures 
and methodologies used by the 
Applicant/NRSRO to determine credit 
ratings, including unsolicited credit 

ratings within the classes of credit 
ratings for which the Applicant/NRSRO 
is seeking registration or is registered. 
The description must be sufficiently 
detailed to provide users of credit 
ratings with an understanding of the 
processes employed by the Applicant/ 
NRSRO in determining credit ratings, 
including, as applicable, descriptions of: 
policies for determining whether to 
initiate a credit rating; a description of 
the public and non-public sources of 
information used in determining credit 
ratings, including information and 
analysis provided by third-party 
vendors; the quantitative and qualitative 
models and metrics used to determine 
credit ratings; the methodologies by 
which credit ratings of other credit 
rating agencies are treated to determine 
credit ratings for securities or money 
market instruments issued by an asset 
pool or as part of any asset-backed or 
mortgaged-backed securities transaction; 
the procedures for interacting with the 
management of a rated obligor or issuer 
of rated securities or money market 
instruments; the structure and voting 
process of committees that review or 
approve credit ratings; procedures for 
informing rated obligors or issuers of 
rated securities or money market 
instruments about credit rating 
decisions and for appeals of final or 
pending credit rating decisions; 
procedures for monitoring, reviewing, 
and updating credit ratings; and 
procedures to withdraw, or suspend the 
maintenance of, a credit rating. An 
Applicant/NRSRO may provide in 
Exhibit 2 the location on its Web site 
where additional information about the 
procedures and methodologies is 
located. 

Exhibit 3. Provide in this Exhibit a 
copy of the written policies and 
procedures established, maintained, and 
enforced by the Applicant/NRSRO to 
prevent the misuse of material, 
nonpublic information pursuant to 
Section 15E(g) of the Exchange Act and 
17 CFR 240.17g–4. Do not include any 
information that is proprietary or that 
would diminish the effectiveness of a 
specific policy or procedure if made 
publicly available. 

Exhibit 4. Provide in this Exhibit 
information about the organizational 
structure of the Applicant/NRSRO, 
including, as applicable, an 
organizational chart that identifies, as 
applicable, the ultimate and sub-holding 
companies, subsidiaries, and material 
affiliates of the Applicant/NRSRO; an 
organizational chart showing the 
divisions, departments, and business 
units of the Applicant/NRSRO; and an 
organizational chart showing the 
managerial structure of the Applicant/ 

NRSRO, including the designated 
compliance officer identified in Item 4. 

Exhibit 5. Provide in this Exhibit a 
copy of the written code of ethics the 
Applicant/NRSRO has in effect or a 
statement of the reasons why the 
Applicant/NRSRO does not have a 
written code of ethics in effect. 

Exhibit 6. Identify in this Exhibit the 
types of conflicts of interest relating to 
the issuance of credit ratings by the 
Applicant/NRSRO that are material to 
the Applicant/NRSRO. First, identify 
the conflicts described in the list below 
that apply to the Applicant/NRSRO. The 
Applicant/NRSRO may use the 
descriptions below to identify an 
applicable conflict of interest and is not 
required to provide any further details. 
Second, briefly describe any other type 
of conflict of interest relating to the 
issuance of credit ratings by the 
Applicant/NRSRO that is not covered in 
the descriptions below that is material 
to the Applicant/NRSRO (for example, 
one the Applicant/NRSRO has 
established specific policies and 
procedures to address): 

• The Applicant/NRSRO is paid by 
issuers or underwriters to determine 
credit ratings with respect to securities 
or money market instruments they issue 
or underwrite. 

• The Applicant/NRSRO is paid by 
obligors to determine credit ratings of 
the obligors. 

• The Applicant/NRSRO is paid for 
services in addition to determining 
credit ratings by issuers, underwriters, 
or obligors that have paid the 
Applicant/NRSRO to determine a credit 
rating. 

• The Applicant/NRSRO is paid by 
persons for subscriptions to receive or 
access the credit ratings of the 
Applicant/NRSRO and/or for other 
services offered by the Applicant/ 
NRSRO where such persons may use the 
credit ratings of the Applicant/NRSRO 
to comply with, and obtain benefits or 
relief under, statutes and regulations 
using the term ‘‘nationally recognized 
statistical rating organization.’’ 

• The Applicant/NRSRO is paid by 
persons for subscriptions to receive or 
access the credit ratings of the 
Applicant/NRSRO and/or for other 
services offered by the Applicant/ 
NRSRO where such persons also may 
own investments or have entered into 
transactions that could be favorably or 
adversely impacted by a credit rating 
issued by the Applicant/NRSRO. 

• The Applicant/NRSRO allows 
persons within the Applicant/NRSRO 
to: 
Æ Directly own securities or money 

market instruments of, or have other 
direct ownership interests in, obligors or 

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33635 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

issuers subject to a credit rating 
determined by the Applicant/NRSRO. 
Æ Have business relationships that are 

more than arms length ordinary course 
business relationships with obligors or 
issuers subject to a credit rating 
determined by the Applicant/NRSRO. 

• A person associated with the 
Applicant/NRSRO is a broker or dealer 
engaged in the business of underwriting 
securities or money market instruments 
(identify the person). 

• The Applicant/NRSRO has any 
other material conflict of interest that 
arises from the issuances of credit 
ratings (briefly describe). 

Exhibit 7. Provide in this Exhibit a 
copy of the written policies and 
procedures established, maintained, and 
enforced by the Applicant/NRSRO to 
address and manage conflicts of interest 
pursuant to Section 15E(h) of the 
Exchange Act. Do not include any 
information that is proprietary or that 
would diminish the effectiveness of a 
specific policy or procedure if made 
publicly available. 

Exhibit 8. Provide in this Exhibit the 
following information about the 
Applicant/NRSRO’s credit analysts (See 
definition below) and the persons who 
supervise the credit analysts: 

• The total number of credit analysts. 
• The total number of credit analyst 

supervisors. 
• A general description of the 

minimum qualifications required of the 
credit analysts, including education 
level and work experience (if 
applicable, distinguish between junior, 
mid, and senior level credit analysts). 

• A general description of the 
minimum qualifications required of the 
credit analyst supervisors, including 
education level and work experience. 

Exhibit 9. Provide in this Exhibit the 
following information about the 
designated compliance officer 
(identified in Item 4) of the Applicant/ 
NRSRO: 

• Name. 
• Employment history. 
• Post secondary education. 
• Whether employed by the 

Applicant/NRSRO full-time or part- 
time. 

Exhibit 10. Provide in this Exhibit a 
list of the largest users of credit rating 
services of the Applicant by the amount 
of net revenue earned by the Applicant 
attributable to the person during the 
fiscal year ending immediately before 
the date of the initial application. First, 
determine and list the 20 largest issuers 
and subscribers in terms of net revenue. 
Next, add to the list any obligor or 
underwriter that, in terms of net revenue 
during the fiscal year, equaled or 
exceeded the 20th largest issuer or 

subscriber. In making the list, rank the 
persons in terms of net revenue from 
largest to smallest and include the net 
revenue amount for each person. For 
purposes of this Exhibit: 

Net revenue means revenue earned by 
the Applicant for any type of service or 
product provided to the person, 
regardless of whether related to credit 
rating services, and net of any rebates 
and allowances the Applicant paid or 
owes to the person; and 

Credit rating services means any of 
the following: rating an obligor 
(regardless of whether the obligor or any 
other person paid for the credit rating); 
rating an issuer’s securities or money 
market instruments (regardless of 
whether the issuer, underwriter, or any 
other person paid for the credit rating); 
and providing credit ratings, credit 
ratings data, or credit ratings analysis to 
a subscriber. 

An NRSRO is not required to make 
this Exhibit publicly available on its 
Web site, or through another 
comparable, readily accessible means 
pursuant to Exchange Act Rule 17g–1(i). 
An NRSRO may request that the 
Commission keep this Exhibit 
confidential by marking each page 
‘‘Confidential Treatment’’ and 
complying with Commission rules 
governing confidential treatment (See 17 
CFR 200.80 and 17 CFR 200.83). The 
Commission will keep the information 
and documents in the Exhibit 
confidential upon request to the extent 
permitted by law. 

Exhibit 11. Provide in this Exhibit the 
financial statements of the Applicant, 
which must include a balance sheet, an 
income statement and statement of cash 
flows, and a statement of changes in 
ownership equity, audited by an 
independent public accountant, for each 
of the three fiscal or calendar years 
ending immediately before the date of 
the Applicant’s initial application to the 
Commission, subject to the following: 

If the Applicant is a division, unit, or 
subsidiary of a parent company, the 
Applicant may provide audited 
consolidated financial statements of its 
parent company. 

If the Applicant does not have audited 
financial statements for one or more of 
the three fiscal or calendar years ending 
immediately before the date of the 
initial application, the Applicant can 
provide unaudited financial statements 
for the applicable year or years, but 
must provide audited financial 
statements for the fiscal or calendar year 
ending immediately before the date of 
the initial application. Attach to the 
unaudited financial statements a 
certification by a person duly 
authorized by the Applicant to make the 

certification that the person has 
responsibility for the financial 
statements and that to the best 
knowledge of the person making the 
certification the financial statements 
fairly present, in all material respects, 
the Applicant’s financial condition, 
results of operations, and cash flows for 
the period presented. 

An NRSRO is not required to make 
this Exhibit publicly available on its 
Web site, or through another 
comparable, readily accessible means 
pursuant to Exchange Act Rule 17g–1(i). 
An NRSRO may request that the 
Commission keep this Exhibit 
confidential by marking each page 
‘‘Confidential Treatment’’ and 
complying with Commission rules 
governing confidential treatment (See 17 
CFR 200.80 and 17 CFR 200.83). The 
Commission will keep the information 
and documents in the Exhibit 
confidential upon request to the extent 
permitted by law. 

Exhibit 12. Provide in this Exhibit the 
following information, as applicable, 
and which is not required to be audited, 
regarding the Applicant’s aggregate 
revenues for the fiscal or calendar year 
ending immediately before the date of 
the initial application: 

• Revenue from determining and 
maintaining credit ratings; 

• Revenue from subscribers; 
• Revenue from granting licenses or 

rights to publish credit ratings; and 
• Revenue from all other services and 

products offered by your credit rating 
organization (include descriptions of 
any major sources of revenue). 

An NRSRO is not required to make 
this Exhibit publicly available on its 
Web site or, through another 
comparable, readily accessible means 
pursuant to Exchange Act Rule 17g–1(i). 
An NRSRO may request that the 
Commission keep this Exhibit 
confidential by marking each page 
‘‘Confidential Treatment’’ and 
complying with Commission rules 
governing confidential treatment (See 17 
CFR 200.80 and 17 CFR 200.83). The 
Commission will keep the information 
and documents in the Exhibit 
confidential upon request to the extent 
permitted by law. 

Exhibit 13. Provide in this Exhibit the 
approximate total and median annual 
compensation of the Applicant’s credit 
analysts for the fiscal or calendar year 
ending immediately before the date of 
this initial application. In calculating 
total and median annual compensation, 
the Applicant may exclude deferred 
compensation, provided such exclusion 
is noted in the Exhibit. 

An NRSRO is not required to make 
this Exhibit publicly available on its 

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33636 Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules and Regulations 

Web site, or through another 
comparable, readily accessible means 
pursuant to Exchange Act Rule 17g–1(i). 
An NRSRO may request that the 
Commission keep this Exhibit 
confidential by marking each page 
‘‘Confidential Treatment’’ and 
complying with Commission rules 
governing confidential treatment (See 17 
CFR 200.80 and 17 CFR 200.83). The 
Commission will keep the information 
and documents in the Exhibit 
confidential upon request to the extent 
permitted by law. 

F. Explanation of Terms 

1. COMMISSION—The U. S. 
Securities and Exchange Commission. 

2. CREDIT RATING [Section 3(a)(60) 
of the Exchange Act]—An assessment of 
the creditworthiness of an obligor as an 
entity or with respect to specific 
securities or money market instruments. 

3. CREDIT RATING AGENCY [Section 
3(a)(61) of the Exchange Act]—Any 
person: 

• Engaged in the business of issuing 
credit ratings on the Internet or through 
another readily accessible means, for 
free or for a reasonable fee, but does not 
include a commercial credit reporting 
company; 

• Employing either a quantitative or 
qualitative model, or both to determine 
credit ratings; and 

• Receiving fees from either issuers, 
investors, other market participants, or 
a combination thereof. 

4. NATIONALLY RECOGNIZED 
STATISTICAL RATING 
ORGANIZATION [Section 3(a)(62) of 
the Exchange Act]—A credit rating 
agency that: 

• Has been in business as a credit 
rating agency for at least the 3 
consecutive years immediately 
preceding the date of its application for 
registration as an NRSRO; 

• Issues credit ratings certified by 
qualified institutional buyers in 
accordance with section 15(a)(1)(B)(ix) 
of the Exchange Act with respect to: 
Æ Financial institutions, brokers, or 

dealers; 
Æ Insurance companies; 
Æ Corporate issuers; 
Æ Issuers of asset-backed securities; 

Æ Issuers of government securities, 
municipal securities, or securities 
issued by a foreign government; or 
Æ A combination of one or more of 

the above; and 
• Is registered as an NRSRO. 
6. PERSON—An individual, 

partnership, corporation, trust, 
company, limited liability company, or 
other organization (including a 
separately identifiable department or 
division). 

7. PERSON WITHIN AN APPLICANT/ 
NRSRO—The person furnishing Form 
NRSRO identified in Item 1, any credit 
rating affiliates identified in Item 3, and 
any partner, officer, director, branch 
manager, or employee of the person or 
the credit rating affiliates (or any person 
occupying a similar status or performing 
similar functions). 

8. SEPARATELY IDENTIFIABLE 
DEPARTMENT OR DIVISION—A unit 
of a corporation or company: 

• That is under the direct supervision 
of an officer or officers designated by 
the board of directors of the corporation 
as responsible for the day-to-day 
conduct of the corporation’s credit 
rating activities for one or more 
affiliates, including the supervision of 
all employees engaged in the 
performance of such activities; and 

• For which all of the records relating 
to its credit rating activities are 
separately created or maintained in or 
extractable from such unit’s own 
facilities or the facilities of the 
corporation, and such records are so 
maintained or otherwise accessible as to 
permit independent examination and 
enforcement by the Commission of the 
Exchange Act and rules and regulations 
promulgated thereunder. 

8. QUALIFIED INSTITUTIONAL 
BUYER [Section 3(a)(64) of the 
Exchange Act]—An entity listed in 17 
CFR 230.144A(a) that is not affiliated 
with the credit rating agency. 

Disclosure Reporting Page (NRSRO) 
This Disclosure Reporting Page (DRP) 

is to be used to provide information 
concerning affirmative responses to Item 
8 of Form NRSRO. 

Submit a separate DRP for each 
person that: (a) Has committed or 
omitted any act, or been subject to an 
order or finding, enumerated in 

subparagraphs (A), (D), (E), (G), or (H) of 
section 15(b)(4) of the Securities 
Exchange Act of 1934, has been 
convicted of any offense specified in 
section 15(b)(4)(B) of the Securities 
Exchange Act of 1934, or has been 
enjoined from any action, conduct, or 
practice specified in section 15(b)(4)(C) 
of the Securities Exchange Act of 1934; 
(b) has been convicted of any crime that 
is punishable by imprisonment for 1 or 
more years, and that is not described in 
section 15(b)(4) of the Securities 
Exchange Act of 1934, or has been 
convicted of a substantially equivalent 
crime by a foreign court of competent 
jurisdiction; or (c) is subject to any order 
of the Commission barring or 
suspending the right of the person to be 
associated with an NRSRO. 
Name of Applicant/NRSRO 
lllllllllllllllllll

Date 
lllllllllllllllllll

Check Item being responded to: 
b Item 8A 
b Item 8B 
b Item 8C 

Full name of the person for whom this 
DRP is being submitted: 
lllllllllllllllllll

If this DRP provides information 
relating to a ‘‘Yes’’ answer to Item 8A, 
describe the act(s) that was (were) 
committed or omitted; or the order(s) or 
finding(s); or the injunction(s) (provide 
the relevant statute(s) or regulation(s)) 
and provide jurisdiction(s) and date(s): 
lllllllllllllllllll

If this DRP provides information 
relating to a ‘‘Yes’’ answer to Item 8B, 
describe the crime(s) and provide 
jurisdiction(s) and date(s): 
lllllllllllllllllll

If this DRP provides information 
relating to a ‘‘Yes’’ answer to Item 8C, 
attach the relevant Commission order(s) 
and provide the date(s): 
lllllllllllllllllll

By the Commission. 
Dated: June 5, 2007. 

Florence E. Harmon, 
Deputy Secretary. 
[FR Doc. E7–11166 Filed 6–15–07; 8:45 am] 
BILLING CODE 8010–01–P 

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