Small Entity Compliance Guide:1
November 2009 Amendments to the Rules Relating to the Oversight of Nationally Recognized Statistical Rating Organizations
The Securities and Exchange Commission (“Commission”) amended its rules relating to the oversight of nationally recognized statistical rating organizations (“NRSROs”). The amendments were adopted to improve ratings quality for the protection of investors and in the public interest by fostering accountability, transparency, and competition in the credit rating agency industry. The newly adopted rules require the provision of additional information concerning ratings histories and are designed to enable competing credit rating agencies to offer credit ratings generated on an unsolicited basis for structured finance products, by requiring they receive access to the necessary underlying data for structured products.
The Credit Rating Agency Reform Act of 2006 requires a credit rating agency seeking to be treated as an NRSRO to apply for registration with the Commission, to make public certain information and to implement procedures to manage the handling of material nonpublic information and conflicts of interest. An NRSRO must also supply an annual certification to the Commission each year, providing the Commission with current information. Both the registration and the annual certification are done on Form NRSRO, which can be found on the Commission’s website at http://www.sec.gov/about/forms/formnrsro.pdf.
What are the requirements of the new rule amendments?
The Commission amended Rule 17g-2 to require NRSROs to disclose their history of rating actions, including upgrades, downgrades, affirmations, and withdrawals. The requirement applies to any rating that the NRSRO initially determined on or after June 26, 2007.
- The new requirement applies to all types of credit ratings regardless of whether they are issuer-paid credit ratings, credit ratings made available only to subscribers, or credit ratings generated on an unsolicited basis and made publicly available.
- In the case of issuer-paid credit ratings, each new ratings action will be required to be reflected in such publicly disclosed histories no later than twelve months after the action is taken.
- In the case of ratings actions that are not issuer-paid, each new ratings action will be required to be reflected no later than twenty-four months after the action is taken.
- The information must be made publicly available in a machine-readable format. Any machine-readable format may be used until 60 days after the date on which the Commission publishes a List of XBRL Tags for NRSROs on its Internet Web site, at which point the NRSRO will be required to make the information available in the XBRL format using the Commission’s List of XBRL Tags for NRSROs.
The Commission amended Rule 17g-5 to require any NRSRO that is paid by an arranger to rate a structured finance product, to disclose to other NRSROs that it is in the process of determining such a credit rating. The amendment requires that the NRSRO obtain a representation from the arranger that the arranger will provide the same information to other NRSROs seeking to rate the product.
- An NRSRO that wants to access information provided by an arranger is only allowed to access that information for the purpose of determining a credit rating and only if it rates a certain percentage of products based on the information it accesses.
- An NRSRO seeking to access information provided by an arranger to a hired NRSRO and made available to other NRSROs pursuant to the amended rule, is required to furnish the Commission with an annual certification that the NRSRO is accessing the information solely to determine credit ratings and will determine a minimum number of credit ratings using that information. The required language for the certification is in paragraph (e) of Rule 17g-5, which is available at http://www.sec.gov/rules/final/2009/34-61050.pdf.
The first small entity compliance guide relating to NRSROs, for rules adopted in June 2007, which contains information on the registration and annual filing requirements, among other things, can be found on the Commission’s website at http://www.sec.gov/divisions/marketreg/tmcompliance/nrsro-secg.htm.
The small entity compliance guide describing the amendments adopted in February 2009 can be found on the Commission’s website at http://www.sec.gov/rules/final/2009/34-59342-secg.htm.
The adopting release for the November 2009 amendments to the NRSRO rules can be found on the Commission’s website at http://www.sec.gov/rules/final/2009/34-61050.pdf.
Form NRSRO and instructions to Form NRSRO can be found on the Commission’s website at http://www.sec.gov/about/forms/formnrsro.pdf.
Additional materials regarding NRSROs generally are available on the Commission’s website at http://www.sec.gov/divisions/marketreg/ratingagency.htm.
Contacting Commission Staff
The Division of Trading and Markets is happy to assist small companies with questions regarding Form NRSRO or the new rule amendments. The Division’s Office of Interpretation and Guidance answers questions submitted by email and telephone. You can submit a question by email to firstname.lastname@example.org or you can contact the Office of Interpretation and Guidance at (202) 551-5777.
1 This guide was prepared by the staff of the U.S. Securities and Exchange Commission as a “small entity compliance guide” under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. The guide summarizes and explains rules adopted by the SEC, but is not a substitute for any rule itself. Only the rule itself can provide complete and definitive information regarding its requirements.