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Small Entity Compliance Guide:1
Amendments to the Rules Relating to the Oversight of Nationally Recognized Statistical Rating Organizations
Introduction
The Securities and Exchange Commission ("Commission") amended its rules relating to the oversight of nationally recognized statistical rating organizations ("NRSROs"). The amendments were adopted to improve ratings quality for the protection of investors and in the public interest by fostering accountability, transparency, and competition in the credit rating agency industry.
Background
The Credit Rating Agency Reform Act of 2006 ("Rating Agency Act") requires a credit rating agency seeking to be treated as an NRSRO to apply for registration with the Commission, to make public certain information and to implement procedures to manage the handling of material nonpublic information and conflicts of interest. An NRSRO must also supply an annual certification to the Commission each year, providing the Commission with current information. Both the registration and the annual certification use Form NRSRO, which can be found on the Commission's website at http://www.sec.gov/about/forms/formnrsro.pdf.
What are the requirements of the rule amendments?
The Commission amended Exhibits 1 and 2 to Form NRSRO, Rule 17g-2, Rule 17g-3, and Rule 17g-5. The amendments to Rule 17g-5 prohibit three additional conflicts of interest relating to the operations of an NRSRO. Specifically, these amendments:
Prohibit an NRSRO from issuing a credit rating with respect to an obligor or security where the NRSRO or an affiliate of the NRSRO made recommendations to the obligor or the issuer, underwriter, or sponsor of the security about the corporate or legal structure, assets, liabilities, or activities of the obligor or issuer of the security. Prohibit a person within an NRSRO who has responsibility for participating in determining credit ratings or for developing or approving procedures or methodologies used for determining credit ratings from participating in any fee discussions, negotiations, or arrangements. Prohibit an NRSRO from allowing a credit analyst who participated in determining or monitoring the credit rating to receive gifts, including entertainment, from the obligor being rated or from the issuer, underwriter, or sponsor of the securities being rated, other than items provided in the context of normal business activities, such as meetings, that have an aggregate value of no more than $25.
The amendments to the instructions to Form NRSRO require that an applicant seeking to become an NRSRO provide the following information to the Commission as part of its original application to register as an NRSRO, and an existing NRSRO provide such information as part of its annual certification.
Transition statistics for each asset class of credit ratings for which it is registered or is seeking registration, broken out over 1, 3, and 10 year periods. The disclosure of (1) whether and, if so, how much, verification performed on assets underlying or referenced by the structured finance transaction is relied on in determining credit ratings; (2) whether and, if so, how assessments of the quality of originators of structured finance transactions play a part in the determination of the credit ratings; and (3) more detailed information on the surveillance process, including whether different models or criteria are used for ratings surveillance than for determining initial ratings.
The amendments to Rule 17g-2 require an NRSRO to:
Make publicly available a random sample of 10% of its issuer-paid credit ratings and their histories documented for each class of issuer-paid credit rating for which the NRSRO is registered and has issued 500 or more ratings and to disclose where in its website these ratings histories would be made available. Make and retain records of all rating actions related to a current rating from the initial rating to the current rating. If a quantitative model is a substantial component of the credit rating process for a structured finance product keep a record of the rationale for any material difference between the credit rating implied by the model and the final credit rating issued. Retain records of any complaints regarding the performance of a credit analyst in determining, maintaining, monitoring, changing, or withdrawing a credit rating.
The amendment to Rule 17g-3 requires an NRSRO to:
Other Resources
The first small entity compliance guide relating to NRSROs, which contains information on the registration and annual filing requirements, among other things, can be found on the Commission's website at http://www.sec.gov/
divisions/marketreg/tmcompliance/nrsro-secg.htm.
The adopting release for these amendments to the NRSRO rules can be found on the Commission's website at http://www.sec.gov/rules/final/
2009/34-59342.pdf.
Form NRSRO and instructions to Form NRSRO can be found on the Commission's website at http://www.sec.gov/about/forms/formnrsro.pdf.
Additional materials regarding NRSROs generally are available on the Commission's website at http://www.sec.gov/divisions/marketreg/
ratingagency.htm.
Contacting Commission Staff
The Division of Trading and Markets is happy to assist small companies with questions regarding Form NRSRO or the new rule amendments. The Division's Office of Interpretation and Guidance answers questions submitted by email and telephone. You can submit a question by email to tradingandmarkets@sec.gov or you can contact the Office of Interpretation and Guidance at (202) 551-5777.
Endnotes
http://www.sec.gov/rules/final/2009/34-59342-secg.htm
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