Rule 17g-5: Conflicts of Interest
SUPPORTING STATEMENT
A. Justification
1. Need For Information Collection
The Credit Rating Agency Reform Act of 20061 (“Rating Agency Act”), enacted on September 29, 2006, defines the term “nationally recognized statistical rating organization,” or “NRSRO” and provides authority for the Securities and Exchange Commission (“Commission”) to implement registration, recordkeeping, financial reporting, and oversight rules with respect to registered credit rating agencies.
The Commission is proposing rule amendments that would impose additional requirements on NRSROs in order to address concerns about the integrity of their credit rating procedures and methodologies in light of the role they played in determining credit ratings for securities collateralized by or linked to subprime residential mortgages.2
The proposed amendments to Rule 17g-5 require NRSROs to disclose and manage certain conflicts of interest. The collection of information obligations imposed by the proposed rule amendments would be mandatory. The proposed amendments to Rule 17g-5, however, would apply only to credit rating agencies that are applying to register or are registered with the Commission as NRSROs, and registration is voluntary.
The Rating Agency Act added a new Section 15E, “Registration of Nationally Recognized Statistical Rating Organizations,”3 to the Securities Exchange Act of 1934 (“Exchange Act”). Exchange Act Section 15E(h)(2) provide the Commission with authority to prohibit, or require the management and disclosure of, any potential conflict of interest relating to the issuance of credit ratings by an NRSRO.4 The proposed amendments to Rule 17g-5 would require the disclosure and establishment of procedures to manage an additional conflict of interest.5
Specifically, the proposed amendments to Rule 17g-5 would prohibit an NRSRO from issuing a rating for a structured product unless information about the transaction and the assets underlying the rated security are disclosed to certain persons.6
2. Purpose of, and Consequences of Not Requiring, the Information Collection
The collection of information included in the proposed amendments to Rule 17g-5 is necessary for Commission oversight of registered NRSROs. Specifically, this collection of information would aid the Commission by addressing potential practices that could impair the objectivity and the quality of a credit rating.
3. Role of Improved Information Technology and Obstacles to Reducing Burden
The proposed amendments to Rule 17g-5 would allow NRSROs to disclose certain information in an electronic format. The Commission believes that improvements in telecommunications and data processing technology may reduce any burdens associated with the proposed amendments to Rule 17g-5.
4. Efforts To Identify Duplication
No duplication is apparent.
5. Effects on Small Entities
Small entities may be affected by the proposed rule because all NRSROs, regardless of size, would be subject to the additional conflict of interest in the proposed amendments to Rule 17g-5.
6. Consequences of Less Frequent Collection
If this information were not collected as frequently, the Commission would be unable to ascertain, on an ongoing basis, whether a credit rating agency registered as an NRSRO “fails to maintain adequate financial and managerial resources to consistently produce credit ratings with integrity.”7
7. Inconsistencies With Guidelines In 5 CFR 1320.5(d)(2)
The collection of information would not be inconsistent with 5 CFR 1320.5(d)(2).
8. Consultations Outside the Agency
All Commission rule proposals are published in the Federal Register for public comment. The comment period for the release that discusses the proposed amendments to Rule 17g-58 is 45 days. This comment period will afford the public an opportunity to respond to the proposal.
9. Payment or Gift to Respondents
Not applicable.
10. Assurance of Confidentiality
The information collection under the proposed amendments to Rule 17g-5 will not be confidential.
11. Sensitive Questions
Not applicable. Questions of a sensitive nature are not asked.
12. Estimate of Respondent Reporting Burden
Under the proposed amendments to Rule 17g-5, an NRSRO would be prohibited from issuing a credit rating for a structured finance product unless certain information about the transaction and the assets underlying the structured finance product are disclosed. The Commission believes that this information would likely be disclosed by NRSROs. The Commission estimates that it would take approximately 300 hours to develop a system, as well as the policies and procedures, for the disclosures required by the proposed amendment. This would result in a total one-time hour burden of 9,000 hours for 30 NRSROs.9
Disclosures would also be required on a transaction by transaction basis. The Commission estimates that the total number of structured finance ratings issued by all NRSROs in a given year would be 14,880 and that it would take 1 hour per transaction to make the information publicly available. Therefore the Commission estimates that the total aggregate annual hour burden to the industry would be 14,880 hours.10
The proposed amendments would also required arrangers to disclose certain information. The Commission believes that there would be approximately 200 arrangers subject to the proposed amendments. The Commission estimates that it would take approximately 300 hours to develop a system, as well as the policies and procedures, for the disclosures required by the proposed amendment. This would result in a total one-time hour burden of 60,000 hours for 200 respondents.11
Disclosures would also be required for arrangers on a transaction by transaction basis. The Commission estimates that each respondent would arrange approximately 20 new transactions per year and that it would take 1 hour per transaction to make the information publicly available. Therefore the Commission estimates that it would take a respondent approximately 20 hours12 to disclose this information under the proposed rule for a total aggregate annual hour burden of 4,000 hours.13
The proposed amendment to Rule 17g-5 would also require disclosure of information on an ongoing basis that is used by an NRSRO to undertake credit rating surveillance on the structured finance product. The Commission estimates that this disclosure would be required with respect to approximately 125 transactions per month, and that it would take each respondent approximately 0.5 hours per transaction to disclose the information. Therefore, the Commission estimates that it would take each respondent approximately 750 hours14 on an annual basis to disclose such information, for a total aggregate annual burden of 150,000 hours.15
Finally the proposed amendment would require NRSROs to submit an annual certification to the Commission. The Commission estimates that it would take each NRSRO approximately 2 hours to complete the certification for a total aggregate annual hour burden of 60 hours.16
The Commission therefore estimates that the burden associated with Rule 17g-5 as a result of the proposed amendments is 69,000 hours on a one-time basis (9,000 + 60,000 = 69,000) and 168,940 hours on an annual basis (14,880 + 150,000 + 4,000 + 60 = 168,940). (For purposes of the 83-I only, the annual time burden response is shown as 734.52 hours, 168,940/230.)
13. Estimate of Total Annualized Cost Burden
The Commission believes that there would be no additional reporting costs associated with the proposed rule amendments, other than the costs described in Item 12 above.
14. Estimate of Cost to Federal Government
There would be no additional costs to the Federal Government.
15. Explanation of Changes in Burden
Not applicable.
16. Information Collection Planned for Statistical Purposes
Not applicable. There is no intention to publish the information for any purpose.
17. Explanation as to Why Expiration Date Will Not Be Displayed
Not applicable.
18. Exceptions to Certification
Not applicable.
B. Collection of Information Employing Statistical Methods
The collection of information does not employ statistical methods, nor would the implementation of such methods reduce the burden or improve the accuracy of results.
1 Pub. L. No. 109-291.
2 Release No. 59343 (February 2, 2009), 74 FR 6485 (February 9, 2009).
3 15 U.S.C. 78o-7.
4 15 U.S.C. 78o-7(h)(2).
5 See proposed amendments to Rule 17g-5.
6 See proposed amendments to Rule 17g-5.
7 15 U.S.C. 15E(d).
8 Release No. 34-59343 (February 2, 2009), 74 FR 6485 (February 9, 2009).
9 300 hours x 30 NRSROs = 9,000 hours.
10 14,880 ratings x 1 hour = 14,880 hours.
11 300 hours x 30 NRSROs = 9,000 hours.
12 20 transactions x 1 hour = 20 hours.
13 200 respondents x 20 hours = 4,000 hours.
14 125 transactions x 30 minutes x 12 months = 45,000 minutes/60 minutes = 750 hours.
15 750 hours x 200 respondents = 150,000 hours.
16 30 NRSROs x 2 hours = 60 hours.
| File Type | application/msword |
| File Title | Rule 17g-1: Application for registration as a nationally recognized statistical rating organization |
| Author | wellsr |
| Last Modified By | o'brienc |
| File Modified | 2009-02-18 |
| File Created | 2009-01-14 |