SEC Votes to Adopt Final Rules to Implement the Credit Rating Agency Reform Act of 2006
FOR IMMEDIATE RELEASE
Washington, D.C., May 23, 2007 - The Securities and Exchange Commission today voted to adopt final rules to implement provisions of the Credit Rating Agency Reform Act of 2006 (Public Law No. 109-291), which was enacted on Sept. 29, 2006. The Credit Rating Agency Reform Act defines the term "nationally recognized statistical rating organization" (NRSRO), 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 rules no later than 270 days after its enactment (or by June 26, 2007).
"The goal of this new law is to improve credit ratings quality by fostering competition, accountability, and transparency in the credit rating industry," said SEC Chairman Christopher Cox. "The heart of the Act calls on the Commission to replace the barriers to entry that had previously existed. The replacement is a transparent and voluntary Commission registration system that favors no particular business model."
- Rule 17g-1 will require a credit rating agency to apply to the Commission for registration as an NRSRO and, if approved, to provide updated information (when certain information provided becomes materially inaccurate) and an annual certification on Form NRSRO. The credit rating agency will be required to provide information on Form NRSRO such as the classes of credit ratings for which it is applying to be registered; credit ratings performance measurement statistics; a general description of its procedures and methodologies for determining credit ratings; organizational structure; procedures to prevent the misuse of material nonpublic information; conflicts of interest; procedures to address and manage conflicts of interest; a description of the minimum qualifications of its credit analysts and credit analyst supervisors; and information regarding the designated compliance officer.
The credit rating agency also will be required to provide certifications from qualified institutional buyers; a list of its largest customers; audited financial statements; and certain summary financial information. An applicant may request that the Commission keep this information confidential. The Commission will keep this information confidential to the extent permitted by law.
- Rule 17g-2 will require an NRSRO to make and retain certain records relating to its business as a credit rating agency. The rule also will prescribe the time periods and manner in which the records must be maintained.
- Rule 17g-3 will require NRSROs to furnish the Commission, on a confidential basis, certain financial reports, on an annual basis, including audited financial statements. In addition to the audited financial statements, the rule also will require NRSROs to furnish separate unaudited financial reports that will assist the Commission in carrying out its statutory responsibilities under the Credit Rating Agency Reform Act.
- Rule 17g-4 will require an NRSRO to have written policies and procedures reasonably designed to prevent: (1) the inappropriate dissemination within and outside the NRSRO of material nonpublic information obtained in connection with the performance of credit rating services; (2) a person within the NRSRO from purchasing, selling, or otherwise benefiting from any transaction in securities or money market instruments when the person is in possession 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 NRSRO of a pending credit rating action before issuing the credit rating.
- Rule 17g-5 will require an NRSRO to disclose and manage those conflicts of interest that arise in the normal course of engaging in the business of issuing credit ratings. For example, one conflict of interest for NRSROs will include being paid by issuers or underwriters to determine credit ratings with respect to securities or money market instruments they issue or underwrite.
- Rule 17g-6 will prohibit the NRSRO from engaging in certain unfair, coercive, or abusive practices. For example, an NRSRO could not threaten to issue a credit rating that is not determined in accordance with the NRSRO's established procedures and methodologies for determining credit ratings, based on whether the rated person will purchase or purchases another product of the NRSRO.
Rule 17g-6 also will prohibit 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 NRSRO, where such practice is engaged in by the NRSRO for an anticompetitive purpose.
Rule 17g-1 and Form NRSRO will be immediately effective upon publication in the Federal Register. Rules 17g-2, 17g-3, 17g-4, 17g-5, and 17g-6 will be effective on June 26, 2007.
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The full text of the detailed releases concerning these items will be posted to the SEC Web site as soon as possible.
Additional materials: Video of Chairman's Statement
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