SEC Approves Rule Proposal for Nationally Recognized Statistical Ratings Organizations

Published on: 20 May 2011

On May 18, after a unanimous vote, the SEC issued a proposed new rule and rule amendments that would apply to (1) third-party providers of due diligence services related to asset-backed securities (ABSs), (2) issuers and underwriters of ABSs, and (3) nationally recognized statistical ratings organizations (NRSROs) registered with the SEC. The proposed rule and rule amendments were issued in response to the requirements of Title IX, Subtitle C, of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which calls for “improvements to the regulation of credit rating agencies.”

The key provisions that address third-party due diligence providers for ABSs, as well as both issuers and underwriters of ABSs, are as follows:

  • With respect to an ABS as defined by the Exchange Act, a third party providing due diligence services to an NRSRO, an issuer, or an underwriter would be required to provide a written certification in a specified format to any NRSRO to which the due diligence services relate. The NRSRO that receives certification would be required to disclose the certification to the public in a way that allows the public to determine the adequacy and level of services provided by the third party.
  • The issuer or underwriter is also required to make the findings and conclusions of any third-party due diligence report publicly available.

The key provisions of the proposed rule that address NRSROs are as follows:

  • NRSROs would be required to “establish, maintain, enforce, and document” an effective internal control structure for the credit rating process.
  • NRSROs would be required to document the internal control structure in their records and in the filings of their annual internal control reports1 with the SEC.
  • A person within an NRSRO (or the NRSRO itself) would be prohibited from having any of the conflicts of interest related to the issuance of a credit rating; however, there would be an exemption from this requirement for small NRSROs. Violation of this requirement could result in the suspension or revocation of the NRSRO’s registration with the Commission.
  • NRSROs would be required to conduct a review to determine whether any conflicts of interest of the employee influenced an assigned credit rating (i.e., a “look-back review”). For any conflict of interest identified, NRSROs would need to immediately place the credit rating on “credit watch” and determine whether the rating must be revised.
  • NRSROs would have to publicly disclose information about initial credit ratings for each type of obligor, security, and money market instrument, as well as any subsequent changes to such credit ratings. This information must be made freely available and must be disclosed on the NRSRO’s Web site and in writing upon request.
  • An NRSRO would be required to publish the following when issuing a credit rating: (1) a form containing information about the credit rating and (2) any certification of a provider of third-party due diligence services received by the NRSRO.
  • Any person employed by an NRSRO to perform credit ratings would be required to meet standards of training, experience, and competence necessary to produce accurate ratings of securities and would be tested for knowledge of the credit rating process.
  • Each NRSRO would be required to establish, maintain, and enforce written policies and procedures that (1) assess the probability of default or credit risk for a rated security, (2) clearly define and disclose the meaning of any symbol used as a credit rating, and (3) consistently apply any symbol described in item (2) to all types of securities and money market instruments.
  • NRSROs would be required to (1) disclose the rating method used in assigning ratings to securities and (2) report material changes and significant errors in rating methods, including changes to “surveillance” procedures that NRSROs use to monitor changes and errors, in a timely manner.

Comments on the proposed rule are due 60 days after its date of publication in the Federal Register.


[1] The proposal would require the first report, the NRSRO’s financial statements, to be audited.

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