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August 2014 Amendments to Existing Rules and New Rules That Apply to Nationally Recognized Statistical Rating Organizations, Providers of Due Diligence Services for Asset-Backed Securities, and Issuers and Underwriters of Asset-Backed Securities in Accord

July 14, 2017

A Small Entity Compliance Guide1

Introduction

In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and to enhance oversight, the Securities and Exchange Commission (“Commission”) adopted amendments to existing rules and new rules that apply to credit rating agencies registered with the Commission as nationally recognized statistical rating organizations (“NRSROs”); adopted a new rule and form that apply to providers of third-party due diligence services for asset-backed securities; and adopted amendments to existing rules and a new rule that implement a requirement added by the Dodd-Frank Act that issuers and underwriters of asset-backed securities make publicly available the findings and conclusions of any third-party due diligence report obtained by the issuer or underwriter. The Commission also adopted certain technical amendments to existing rules.

Background

The Dodd-Frank Act, among other things, established new self-executing requirements applicable to NRSROs and required that the Commission adopt rules applicable to NRSROs in a number of areas. It also required certain studies relating to NRSROs. The NRSRO provisions in the Dodd-Frank Act augment the Credit Rating Agency Reform Act of 2006 (the “Rating Agency Act of 2006”), which established a registration and oversight program for NRSROs through self-executing provisions added to the Securities Exchange Act of 1934 (“Exchange Act”) and implementing rules adopted by the Commission under the Exchange Act, as amended by the Rating Agency Act of 2006. The Dodd-Frank Act also required that the Commission prescribe the format of a certification that providers of third-party due diligence services must provide to each NRSRO producing a credit rating for an asset-backed security to which the due diligence services relate. Finally, the Dodd-Frank Act established a new requirement for issuers and underwriters of asset-backed securities to make publicly available the findings and conclusions of any third-party due diligence report obtained by the issuer or underwriter.

On August 27, 2014, the Commission voted to amend certain Exchange Act rules, including the following: Rule 17g-1, the instructions for Exhibit 1 to Form NRSRO, Rule 17g-2, Rule 17g-3, Rule 17g-5, Rule 17g-7, and Form ABS-15G. In addition, the Commission adopted the following new Exchange Act Rules: Rule 17g-8, Rule 17g-9, Rule 17g-10, Form ABS Due Diligence-15E, and Rule 15Ga-2.

What are the requirements of the rule amendments and new rules?

The amendments to Rule 17g-1 require an NRSRO to:

  • Make Form NRSRO and Exhibits 1 through 9 to Form NRSRO publicly and freely available on an easily accessible portion of its website (eliminating an option to make them available “through another comparable, readily accessible means”) and to make its most recent Exhibit 1 freely available in writing to any individual who requests a copy. The effective date of these amendments is November 14, 2014.
  • Use the Commission’s EDGAR system to electronically submit Form NRSRO to the Commission as a PDF document in the case of an update of registration, an annual certification, or a withdrawal from registration. The effective date of this amendment is November 14, 2014. However, Form NRSRO should continue to be submitted to the Commission in paper form until the Commission provides notice that the EDGAR system is ready to receive the forms and specifies a date on or after which the forms must be submitted through the EDGAR system. NRSROs will need to file a Form ID with the Commission in order to gain access to the Commission’s EDGAR system to make electronic submissions to the Commission.

The amendments to the instructions for Exhibit 1 to Form NRSRO:

  • Require the use of the single cohort approach to calculate the 1-year, 3-year, and 10-year transition and default statistics that an NRSRO must disclose in the Exhibit.
  • Require that the performance statistics be presented in a format specified in the instructions, which include a sample “Transition/Default Matrix.”
  • Enhance the information to be disclosed by, for example, requiring statistics to be produced and presented for subclasses of structured finance products and for credit ratings where the obligation was paid off or the credit rating was withdrawn for reasons other than a default or the obligation was paid off.
  • Have an effective date of January 1, 2015, so that the first annual certification on Form NRSRO that follows the amended instructions will be required for the annual certifications filed after the end of the 2015 calendar year.

The amendments to Rule 17g-2 require an NRSRO to:

  • Make and retain a record of the policies and procedures with respect to look-back reviews an NRSRO is required to establish, maintain, and enforce under section 15E(h)(4)(A) of the Exchange Act and paragraph (c) of Rule 17g-8. The effective date of this amendment is June 15, 2015.
  • Retain a record of:
    • the internal control structure an NRSRO must establish, maintain, enforce, and document under section 15E(c)(3)(A) of the Exchange Act. The effective date of this amendment is November 14, 2014;
    • the policies and procedures with respect to the procedures and methodologies used to determine credit ratings an NRSRO is required to establish, maintain, enforce, and document under paragraph (a) of Rule 17g-8. The effective date of this amendment is June 15, 2015;
    • the policies and procedures with respect to credit rating symbols, numbers, or scores an NRSRO must establish, maintain, enforce, and document under paragraph (b) of Rule 17g-8. The effective date of this amendment is June 15, 2015; and
    • the standards of training, experience, and competence for credit analysts an NRSRO must establish, maintain, enforce, and document under Rule 17g-9. The effective date of this amendment is June 15, 2015.
  • Retain the required records until three years after the date the record is replaced with an updated record, instead of three years after the record is made or received, which is the retention period for other records identified in Rule 17g-2. The effective date of this amendment is November 14, 2014.

The Commission also repealed paragraph (d)(2) of Rule 17g-2 (the “10% Rule”), effective November 14, 2014, and, as discussed below, re-codified (with significant amendments) the requirements in paragraph (d)(3) of Rule 17g-2 (the “100% Rule”) in Rule 17g-7.

The amendments to Rule 17g-3 require an NRSRO to:

  • Include an additional unaudited report on the NRSRO’s internal control structure with its annual submission of reports to the Commission under Rule 17g-3. The NRSRO’s CEO or, if the firm does not have a CEO, an individual performing similar functions, must provide a signed statement attesting to information in the report that must be attached to the report. The effective date of this amendment is January 1, 2015, so that the first report required to be submitted by an NRSRO will cover the fiscal year that ends on or after January 1, 2015.
  • File the report of the NRSRO’s designated compliance officer that an NRSRO is required to file with the Commission under section 15E(j)(5)(B) of the Exchange Act with its annual submission of reports to the Commission under Rule 17g-3. The effective date of this amendment is November 14, 2014.
  • Submit the annual reports required to be submitted to the Commission under Rule 17g-3 electronically through the Commission’s EDGAR system as PDF documents. The effective date of this amendment is November 14, 2014. However, these reports should continue to be submitted to the Commission in paper form until the Commission provides notice that the EDGAR system is ready to receive the reports and specifies a date on or after which the reports must be submitted through the EDGAR system. NRSROs will need to file a Form ID with the Commission in order to gain access to the Commission’s EDGAR system to make electronic submissions to the Commission.

The amendments to Rule 17g-5:

  • Require an NRSRO to obtain an additional representation from the issuer, sponsor, or underwriter of an asset-backed security that the issuer, sponsor, or underwriter will post on a password-protected Internet website, promptly after receipt, any executed Form ABS Due Diligence-15E delivered by a person employed to provide third-party due diligence services with respect to the security or money market instrument. The effective date of this amendment is June 15, 2015.
  • Prohibit an NRSRO from issuing or maintaining a credit rating where a person within the NRSRO who participates in determining or monitoring the credit rating, or developing or approving procedures or methodologies used for determining the credit rating, including qualitative and quantitative models, also participates in sales or marketing of a product or service of the NRSRO or a product or service of an affiliate of the NRSRO or is influenced by sales or marketing considerations. The effective date of this amendment is June 15, 2015.
    • The rule provides that upon written application by an NRSRO, the Commission may exempt, either conditionally or unconditionally, the NRSRO from the prohibition if the Commission finds that due to the small size of the NRSRO it is not appropriate to require the separation within the NRSRO of the production of credit ratings from sales and marketing activities and such exemption is in the public interest. The effective date of this amendment is November 14, 2014.
  • Provide for the suspension or revocation of an NRSRO’s registration if the Commission makes a finding under certain specified sections of the Exchange Act that the NRSRO violated a conflicts of interest rule and the violation affected a credit rating. The effective date of this amendment is November 14, 2014.

The amendments to Rule 17g-7, which have an effective date of June 15, 2015, require an NRSRO to:

  • Publish a form when taking certain rating actions containing information about the credit rating resulting from or subject to the rating action as well as any certification of a provider of third-party due diligence services received by the NRSRO that relates to the credit rating. The amendments prescribe:
    • the types of rating actions that trigger the requirement to publish the form and, if applicable, any due diligence certifications (the rule provides an exemption for certain non-U.S. rating actions);
    • the format of the form;
    • the content of the form (which must include certain qualitative and quantitative information relating to the credit rating, including the disclosure requirement in Rule 17g-7 before the amendments relating to representations, warranties, and enforcement mechanisms available to investors in asset-backed securities); and
    • an attestation for the form.
  • Disclose rating histories that were required to be disclosed under paragraph (d)(3) of Rule 17g-2 before the amendments (the “100% Rule”). The amendments to Rule 17g-7 also expand the scope of the credit ratings that must be included in the histories and add data that must be disclosed in the rating history for a particular credit rating.

New Rule 17g-8, which has an effective date of June 15, 2015, requires:

  • That an NRSRO establish, maintain, enforce, and document policies and procedures with respect to the procedures and methodologies, including qualitative and quantitative data and models, the NRSRO uses to determine credit ratings. The required policies and procedures include policies and procedures relating to:
    • board approval of the procedures and methodologies;
    • the development and modification of the procedures and methodologies;
    • applying material changes to the procedures and methodologies;
    • publishing material changes to and notices of significant errors in the procedures and methodologies; and
    • disclosing the version of a credit rating procedure or methodology used with respect to a particular credit rating.
  • That an NRSRO establish, maintain, enforce, and document policies and procedures with respect to the symbols, numbers, or scores it uses to denote credit ratings. The required policies and procedures include policies and procedures relating to:
    • assessing the probability that an issuer of a security or money market instrument will default, fail to make timely payments, or otherwise not make payments in accordance with the terms of the security or money market instrument;
    • clearly defining each symbol, number, or score in the rating scale used by the NRSRO and including the definitions in Exhibit 1 to Form NRSRO; and
    • applying any symbol, number, or score in the rating scale used by the NRSRO in a manner that is consistent for all types of obligors, securities, and money market instruments for which the symbol, number, or score is used.
  • That the policies and procedures an NRSRO must establish, maintain, and enforce under section 15E(h)(4)(A) of the Exchange Act with respect to look-back reviews address instances in which a look-back review determines that a conflict of interest influenced a credit rating by including, at a minimum, procedures that are reasonably designed to ensure that the NRSRO will:
    • promptly determine whether the credit rating must be revised; and
    • promptly publish either a revised credit rating or an affirmation of the credit rating. If no such action is taken within 15 calendar days of the discovery that the credit rating was influenced by a conflict, the NRSRO must place the credit rating on watch or review.
  • That an NRSRO consider factors listed in the rule when establishing, maintaining, enforcing, and documenting an effective internal structure governing the implementation of and adherence to its policies, procedures, and methodologies for determining credit ratings.

New Rule 17g-9, which has an effective date of June 15, 2015, requires an NRSRO to:

  • Establish, maintain, enforce, and document standards of training, experience, and competence for its credit analysts that are reasonably designed to achieve the objective that the NRSRO produce accurate credit ratings in the classes of credit ratings for which the NRSRO is registered.
  • Consider factors listed in the rule when designing the standards.
  • Include in the standards:
    • a requirement for periodic testing of the credit analysts on their knowledge of the NRSRO’s procedures and methodologies to determine credit ratings in the classes of credit rating the analyst rates; and
    • a requirement that at least one individual with an “appropriate level of experience in performing credit analysis, but not less than three years” participate in the determination of a credit rating.

New Rule 17g-10, which has an effective date of June 15, 2015, requires a provider of third-party due diligence services to:

  • Make the written certification it must provide to NRSROs under section 15E(s)(4)(B) of the Exchange Act on new Form ABS Due Diligence-15E.
    • The written certification must be signed by an individual who is duly authorized by the person providing the third-party due diligence services to make such a certification.
    • Rule 17g-10 provides for a “safe harbor” for a provider of third-party due diligence services to meet its obligation under section 15E(s)(4)(B). The rule also contains definitions of due diligence services, issuer, originator, and securitizer, to be used for the purposes of section 15E(s)(4)(B) and Rule 17g-10.

New Form ABS Due Diligence-15E, which has an effective date of June 15, 2015, identifies the following information the provider of third-party due diligence services must provide, in addition to a signature line with a corresponding representation:

  • the identity and address of the provider of third-party due diligence services;
  • the identity and address of the issuer, underwriter, or NRSRO that paid the provider to provide the services;
  • the identity of each NRSRO whose published criteria for performing due diligence the provider of third-party due diligence services intended to satisfy in performing the due diligence review;
  • a description of the scope and manner of the due diligence performed; and
  • a description of the findings and conclusions resulting from the review.

New Rule 15Ga-2, which has an effective date of June 15, 2015, requires an issuer or underwriter of certain asset-backed securities that are to be rated by an NRSRO to:

  • Furnish a Form ABS-15G on the Commission’s EDGAR system containing the findings and conclusions of any third-party due diligence report obtained by the issuer or underwriter at least five business days prior to the first sale in the offering.
    • The rule defines due diligence report as any report containing findings and conclusions relating to due diligence services as defined in Rule 17g-10.
    • The disclosure must be furnished using Form ABS-15G for both registered and unregistered offerings. However, if the disclosure required by Rule 15Ga-2 has been made in the applicable prospectus, the issuer or underwriter may refer to that section of the prospectus in Form ABS-15G rather than providing the findings and conclusions directly on the form.
    • Rule 15Ga-2 provides an exemption for certain offshore issuances of asset-backed securities.
    • The rule does not apply to municipal securities, but section 15E(s)(4)(A) of the Exchange Act requires an issuer or underwriter of these securities to make publicly available the findings and conclusions of any third-party due diligence report obtained by the issuer or underwriter.

Other Resources

The small entity compliance guide relating to NRSROs for rules adopted in June 2007 can be found on the Commission’s website at http://www.sec.gov/divisions/marketreg/tmcompliance/nrsro-secg.htm.

The small entity compliance guide relating to NRSROs for amendments adopted in February 2009 can be found on the Commission’s website at http://www.sec.gov/rules/final/2009/34-59342-secg.htm.

The small entity compliance guide relating to NRSROs for amendments adopted in November 2009 can be found on the Commission’s website at http://www.sec.gov/rules/final/2009/34-61050-secg-nrsro.htm.

Information regarding the disclosure of credit rating histories pursuant to Rule 17g-7(b) can be found on the Commission's website at http://www.sec.gov/ocr/disclosure-of-credit-rating-histories.html.

The August 2014 adopting release can be found on the Commission’s website at http://www.sec.gov/rules/final/2014/34-72936.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 are available on the Commission’s website at http://www.sec.gov/ocr/ratingagency.html and http://www.sec.gov/ocr#forms-nrsro.

Contacting Commission Staff

The Office of Credit Ratings is happy to assist small companies with questions regarding the rule amendments and new rules. You can call the Office of Credit Ratings at (212) 336-9080.


1 This guide was prepared by the staff of the U.S. Securities and Exchange Commission as a "small entity compliance guide" under section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. The guide summarizes and explains rule amendments and rules adopted by the Commission, but is not a substitute for any rule. Only the rule itself can provide complete and definitive information regarding its requirements.

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