File No. S7-04-07 RIN 3235-AJ78

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

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 the 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 Act³⁴ 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-1provides 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 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-1provides 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-1provides that an NRSRO updating its application for registration pursuant to Section 15E(b)(1) of the Exchange Act³⁸ 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.⁴⁵Another 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-1provides that an NRSRO updating its application for registration pursuant to Section 15E(b)(2) of the Exchange Act⁴⁹ (the annual certification) must furnish the amendment to the Commission on Form NRSRO.⁵⁰Section 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 NRSROs 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-1provides that an NRSRO withdrawing its registration pursuant to Section 15E(e)(1) of the Exchange Act⁵⁴ must furnish the Commission with a notice of withdrawal on Form NRSRO. The rule further provides that the withdrawal becomes effective 45 calendar days after the furnishing of the form. Section 15E(e)(1) of the Exchange Act⁵⁵ 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-1without 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 Act⁵⁸ and Rule 17g-1(i) discussed below. The Commission also agrees with the commenter that in the normal course an NRSROs 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 Commissions regulatory program. It also will be consistent with withdrawal requests by certain other regulated entities. For example, a broker-dealers 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 NRSROs intent to withdraw its application. This will give them notice that they will no longer be able to rely on the entitys 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 Commissions 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 NRSROs 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 NRSROs 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 Act⁶⁰ 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 Act⁶² 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-1provides 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 Act⁶⁶ 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 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.⁶⁹Some 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-1requires 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.⁷²The 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 Act⁷⁶ 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 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 Act⁸⁴ and the Commissions 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 corporations 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 divisions 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 Act⁸⁹ 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 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 companys 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 Act⁹² 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 Act⁹⁴ and Rule 17g-1(i) thereunder. As discussed above, Paragraph (i) of Rule 17g-1is 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 NRSROs 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 NRSROs 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 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 NRSROs 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 NRSROs 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 Act¹⁰³ 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 Act¹⁰⁶ 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 agencys] ratings in the course of making investment decisions would have used them under the meaning of the bill.¹⁰⁹The 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 QIBs 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 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 Act¹¹¹ directs the Commission to deny a credit rating agencys 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 Act¹¹³ 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 Act¹¹⁷ 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 Act¹²⁰ 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 applicants 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.¹²⁸The Commission believes it has reduced this concern, in part, by narrowing the disclosure item to persons within the credit rating agency and by providing that the disclosure reporting pages are not required to be made publicly available pursuant to Section 15E(a)(3) of the Exchange Act¹²⁹ 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 NRSROs 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 NRSROs 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 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 17g2 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 Commissions 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 NRSROs established procedures and methodologies. The Commissions ability to enforce this prohibition will depend on the Commission staff being able to access an NRSROs documented procedures and methodologies.¹⁴⁸

Two commenters also suggested changes to the Commissions 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 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 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 Act¹⁵⁰ 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 NRSROs policies and procedures established pursuant to Section 15E(g)(1) of the Exchange Act¹⁵³ to include certain specific types of procedures.

Section 15E(a)(1)(B)(iii) of the Exchange Act¹⁵⁴ 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 Act¹⁵⁵ 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 Act¹⁵⁶ 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 NRSROs Web site without further elaboration.¹⁵⁹The Commission notes that Section 15E(a)(3) of the Exchange Act¹⁶⁰ 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 agencys 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 Commissions 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 agencys 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 agencys 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 officers independence from the business managers.¹⁶⁸ The compliance officers 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 agencys policies and procedures required by Sections 15E(g) and (h) of the Exchange Act¹⁶⁹ and for ensuring the NRSROs compliance with the securities laws and rules and regulations thereunder.¹⁷⁰ In carrying 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 NRSROs 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 NRSROs 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 NRSROs 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 NRSROs 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.¹⁸¹The 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 Commissions identification as a potential conflict the fact that a subscriber may use the entitys credit ratings for regulatory purposes.¹⁸² They 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 NRSROs 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 1933.¹⁸⁶The 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.¹⁸⁷Requiring 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.¹⁹⁰Third, their disclosure will allow users of credit ratings to compare an NRSROs 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. 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 entitys 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 NRSROs 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 NRSROs 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 entitys 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.¹⁹⁵The ability of the compliance officer to carry out these statutorily mandated responsibilities will depend, in part, on the officers 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.¹⁹⁷After 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 Act²⁰⁰and 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.

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 20^th 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 Act²⁰² 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 Act²⁰⁶ 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 issuers 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 issuers 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 Act²⁰⁹ 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 Act²¹⁰ 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 agencys 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 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 Act²¹⁶ 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 agencys 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 applicants 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 applicants 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