Oversight of Nationally Recognized Statistical Rating Organizations: A Small Entity Compliance Guide
Oct. 12, 2016
The Securities and Exchange Commission ("Commission") recently adopted new rules relating to the oversight of nationally recognized statistical rating organizations ("NRSROs"). The rules were in response to the requirements of the Credit Rating Agency Reform Act of 2006 ("Rating Agency Act") and were enacted 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. The 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 to help persons assess its creditability, and to implement procedures to manage the handling of material nonpublic information and conflicts of interest.
What is the definition of a Credit Rating Agency?
Generally, a credit rating agency is defined in the Rating Agency Act to be a person (a) 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; (b) employing either a quantitative or qualitative model, or both, to determine credit ratings; and (c) receiving fees from either issuers, investors, or other market participants, or a combination thereof.
How does a Credit Rating Agency become registered as an NRSRO with the Commission?
To become registered with the Commission, a credit rating agency must fill out Form NRSRO and provide the following information. Unless otherwise noted below, this information must also be made publicly available on the website of the credit rating agency or through another comparable, readily accessible means.
- List of credit rating affiliates.
- Name and address of designated compliance officer.
- Classes of credit ratings for which the NRSRO is applying to become registered.
- Explanation of how the credit ratings will be accessible for free or for a reasonable fee.
- Certifications from qualified institutional buyers, if applicable.
- Credit ratings performance measurement statistics.
- A description of the procedures and methodologies used in determining credit ratings.
- Policies or procedures adopted and implemented to prevent the misuse of material, nonpublic information.
- The organizational structure of the credit rating agency.
- A code of ethics or a statement of the reasons why a code of ethics is not in effect.
- Identification of conflicts of interests relating to the issuance of credit ratings.
- Policies and procedures to address and manage conflicts of interest.
- Certain information regarding the credit rating agency's credit analysts and credit analyst supervisors.
- Certain information regarding the credit ratings agency's designated compliance officer.
- A list of the largest users of credit rating services by the amount of net revenue earned from the user during the fiscal year ending immediately before the date of the initial application. (This item is not required to be placed on the NRSRO's website.)
- Financial statements for each of the three fiscal or calendar years ending immediately before the date of the initial application. (This item is not required to be placed on the NRSRO's website.)
- Information regarding revenues for the fiscal or calendar year ending immediately before the date of the initial application. (This item is not required to be placed on the NRSRO's website.)
- The total and median annual compensation of credit analysts. (This item is not required to be placed on the NRSRO's website.)
Once a Credit Rating Agency is registered as an NRSRO, what is required?
Once registered as an NRSRO, the rules require an entity to undertake certain actions. First, the entity must post the specified portions of its Form NRSRO on its website within 10 days after the Commission granted the entity's registration as an NRSRO. Further, as required by Rule 17g-2 certain records must be maintained for three years. The rule requires an NRSRO to make and keep specific records and to keep certain other records related to its business as a credit rating agency. An NRSRO must also, under Rule 17g-3, annually furnish certain financial reports, including audited financial statements and an annual certification, to the Commission within 90 days of the end of the NRSRO's fiscal year.
New Rule 17g-4 requires an NRSRO to establish, maintain, and enforce written policies and procedures to prevent the misuse of material, nonpublic information. In addition, Rule 17g-5 requires an NRSRO to establish, maintain and enforce policies and procedures designed to address and manage conflicts of interest. The Commission included two types of conflicts in Rule 17g-5: those conflicts that are prohibited for an NRSRO and those conflicts that must be disclosed and managed by an NRSRO. Finally, Rule 17g-6 prohibits an NRSRO from engaging in certain unfair, coercive, or abusive practices to the extent they are practiced with an anti-competitive effect.
For specific examples of these requirements, please refer to the adopting release at http://www.sec.gov/rules/final/2007/34-55857.pdf.
The adopting release for the rules relating to the oversight of NRSROs can be found on the Commission's website at http://www.sec.gov/rules/final/2007/34-55857.pdf.
Form NRSRO, including Form NRSRO Instructions, 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 the Commission
The Division of Trading and Markets is happy to assist small companies with questions regarding Form NRSRO or the new rules. The Office of Interpretation and Guidance answers questions submitted by email and telephone. You can submit a question by email to firstname.lastname@example.org or you can contact the Office of Interpretation and Guidance at (202) 551-5777.
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 rules adopted by the SEC, but is not a substitute for any rule itself. Only the rule itself can provide complete and definitive information regarding its requirements.