Rule 17g-2 Supporting Statement Version A (with technical edits)

SUPPORTING STATEMENT
for the Paperwork Reduction Act Revised Information Collection Submission
“Rule 17g-2: Records to be made and retained by nationally
recognized statistical rating organizations”
A.

JUSTIFICATION

1.

Necessity of 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.
Title IX, Subtitle C of the Dodd-Frank Act,2 “Improvements to the Regulation of Credit
Rating Agencies,” among other things, establishes new self-executing requirements applicable to
NRSROs, requires certain studies,3 and requires that the Commission adopt rules applicable to
NRSROs in a number of areas.4 The NRSRO provisions in the Dodd-Frank Act augment the
Rating Agency Act, which established a registration and oversight program for NRSROs through
self-executing provisions added to the Exchange Act and implementing rules adopted by the
Commission under the Exchange Act as amended by the Rating Agency Act.5 Title IX, Subtitle
C of the Dodd-Frank Act also provides that the Commission shall prescribe the format of a
certification that providers of third-party due diligence services would need to provide to each
NRSRO producing a credit rating for an asset-backed security to which the due diligence
services relate.6 Finally, Title IX, Subtitle C of the Dodd-Frank Act establishes a new
requirement for issuers and underwriters of asset-backed securities to make publicly available the
findings and conclusions of any third-party due diligence report obtained by the issuer or
underwriter.7
Rule 17g-2 contains recordkeeping and disclosure requirements. The collection of
information obligations imposed by the rule is mandatory. The requirements of Rule 17g-2,
however, 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 amended Section 17(a)(1) of the Securities Exchange Act of
1934 (“Exchange Act”) to add NRSROs to the list of entities required to make and keep such
records, and make and disseminate such reports, as the Commission prescribes by rule as
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2
3
4
5
6

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Pub. L. No. 109-291.
Pub. L. No. 111-203, 124 Stat. 1376, H.R. 4173 (July 21, 2010).
See Pub. L. No. 111-203 §§ 939, 939D - 939F.
See Pub. L. No. 111-203 §§ 931-939H; see also Pub. L. No. 111-203 § 943.
See Pub. L. No. 109-291 (2006).
See Pub. L. No. 111-203 § 932(a)(8) adding new paragraph (s)(4)(C) to Section 15E of the Exchange Act.
15 U.S.C. 78o-7(s)(4)(C).
See Pub. L. No. 111-203 § 932(a)(8) adding new paragraph (s)(4)(A) to Section 15E of the Exchange Act.
15 U.S.C. 78o-7(s)(4)(A).

necessary or appropriate in the public interest, for the protection of investors, or otherwise in
furtherance of the Exchange Act.8 The inclusion of NRSROs on the list also provides the
Commission with authority under Section 17(b)(1) of the Exchange Act to examine all the
records of an NRSRO.9
Rule 17g-2, “Records to be made and retained by nationally recognized statistical rating
organizations,” implements the Commission’s recordkeeping rulemaking authority under Section
17(a) of the Exchange Act.10 The rule requires an NRSRO to make and retain certain records
relating to its business and to retain certain other business records, if such records are made. The
rule also prescribes the time periods and manner in which all these records must be retained.
The requirements of Rule 17g-2 are designed to ensure that an NRSRO makes and retains
records that assist the Commission in monitoring, through its examination authority, whether an
NRSRO continues to meet the requirements for registration as an NRSRO and whether the
NRSRO is complying with applicable laws and regulations.
Change in number of respondents
The proposed amendments to Rule 17g-2 require the Commission to update the burden
estimate for the instant collection. The Commission is taking this opportunity to update the PRA
burden estimates to reflect what the Commission believes is a more accurate estimate of the
number of credit rating agencies that have registered as NRSROs: 10 NRSROs. The reason for
this change is explained fully in A.12 below.
Proposed Amendments to Rule 17g-2
The Commission is proposing to repeal paragraph (d)(2) of Rule 17g-2 and re-codify and
enhance the requirements in paragraph (d)(3) of Rule 17g-2 in new Rule 17g-7. The
Commission estimates that these changes will result in a reduction of the PRA burden associated
with Rule 17g-2, as is discussed more fully below in Section A.12.
The Commission is proposing to add paragraph (a)(9) to Rule 17g-2 to identify the
policies and procedures an NRSRO is required to establish, maintain, and enforce pursuant to
Section 15E(h)(4)(A) of the Exchange Act and proposed paragraph (c) of Rule 17g-8 as a record
that must be maintained and retained. In addition, the Commission is proposing to add the
following new paragraphs to Rule 17g-2 to identify records that must be retained:
(1) paragraph (b)(12) would identify the internal control structure an NRSRO must
establish, maintain, enforce, and document pursuant to Exchange Act Section 15E(c)(3)(A);

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9
10

See Section 5 of the Act and 15 U.S.C 78q(a)(1).
See 15 U.S.C 78q(b)(1).
15 U.S.C 78q.

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(2) paragraph (b)(13) would identify the policies and procedures an NRSRO is required
to establish, maintain, enforce, and document pursuant to proposed paragraph (a) of new Rule
17g-8;
(3) paragraph (b)(14) would identify the policies and procedures an NRSRO must
establish, maintain, enforce, and document pursuant to proposed paragraph (b) of new Rule 17g8; and
(4) paragraph (b)(15) would identify the standards of training, experience, and
competence for credit analysts an NRSRO must establish, maintain, enforce, and document
pursuant to proposed new Rule 17g-9.
2.

Purpose and Use of the Information Collection
Rule 17g-2 in general

The collections of information in Rule 17g-2 are designed to allow the Commission to
determine whether an NRSRO continues to meet the requirements for registration and is
complying with applicable laws and regulations. In particular, the collections of information in
Rule 17g-2 will assist the Commission in effectively monitoring, through its examination
function, whether an NRSRO is conducting its activities in accordance with Section 15E of the
Exchange Act,11 and applicable Exchange Act rules under the Rating Agency Act.
Proposed Amendments to Rule 17g-2
The proposed requirement that a record of the policies and procedures identified in new
paragraph (a)(9) of Rule 17g-2 be made (i.e., documented) would promote better understanding
of them among the individuals within the organization and, therefore, promote compliance with
such policies and procedures. The requirement that the policies and procedures identified in
proposed new paragraphs (a)(9), (b)(12), (b)(13), (b)(14), and (b)(15) be retained would subject
these records to the various retention and production requirements of paragraphs (c), (d), (e), and
(f) of Rule 17g-2. The Commission staff would use these records to review whether an NRSRO
was complying with the provisions of the securities laws requiring the NRSRO to establish,
maintain, enforce, and document these policies, procedures, and standards.
3.

Consideration Given to Information Technology

The records that the amendments to Rule 17g-2 require NRSROs to make and retain
could be made and retained electronically. The Commission believes that improvements in
telecommunications and data processing technology may reduce any burdens associated with
the amendments to Rule 17g-2. NRSROs are not prevented by Rule 17g-2 from using
computers or other mechanical devices to generate the records required under the rule.

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15 U.S.C. 78o-7.

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4.

Duplication

The Commission has not identified any duplication with respect to the information
required by Rule 17g-2.
5.

Effects on Small Entities

Small entities may be affected by the rule amendments because all credit rating agencies,
regardless of size, that are registered as NRSROs will be required to make and retain records in
accordance with Rule 17g-2. The Commission solicited comment on whether there are ways to
minimize the burden of the collection of information requirements on those who are to respond.
6.

Consequences of Less Frequent Collection

Up to date records are essential for the Commission to monitor whether an NRSRO
continues to meet the requirements for registration as an NRSRO. If an NRSRO did not make
these records, or if it made these records less frequently, the goals of the Rating Agency Act-including enhancing the information used by investors to make investment decisions--will be
diminished.
7.

Inconsistencies With Guidelines in 5 CFR 1320.8(d)

The Commission has reviewed its collection responsibilities and does not believe there
are any inconsistencies with the guidelines set forth in 5 CFR 1320.8(d).
8.

Consultations Outside the Agency

The Commission has issued a proposing release soliciting comment on the new
“collection of information” requirements and associated paperwork burdens. A copy of the
release is attached. Comments on Commission releases are generally received from registrants,
investors, and other market participants. In addition, the Commission and staff participate in
ongoing dialogue with representatives of various market participants through public conferences,
meetings, and informal exchanges. Any comments received on this proposed rulemaking will be
posted on the Commission’s public website, and made available through
http://www.sec.gov/rules/proposed.shtml. The Commission will consider all comments received
prior to publishing the final rule, and will explain in any adopting release how the final rule
responds to such comments, in accordance with 5 C.F.R. 1320.11(f).
9.

Payment or Gift to Respondents

The Commission did not provide any payment or gift to respondents in connection with
the proposed rulemaking.

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10.

Confidentiality

The confidentiality of the information submitted to the Commission under the proposed
rule will be protected only to the extent permitted by FOIA.
11.

Sensitive Questions

The Commission’s proposal should not result in the Commission receiving sensitive
information. To the extent that the Commission receives information that is sensitive to an
NRSRO, the Commission will protect the confidentiality of such information to the extent
permitted by FOIA.
12.

Estimate of Respondent Reporting Burden
Change in the number of respondents:

In adopting the first rules under the Rating Agency Act, the Commission estimated that
approximately 30 credit rating agencies ultimately would be registered as NRSROs.12 There are
currently nine NRSROs registered with the Commission.13 Based on staff experience, the
Commission believes that there will likely be at least one additional credit rating agency that
successfully registers as an NRSRO during the collection period. Therefore, the Commission
estimates that there are ten NRSROs that would be impacted by this information collection.
Because the Commission is changing the number of respondents from 30 to 10, the Commission
is also adjusting the other burden estimates to reflect 10 instead of 30 NRSROs. Because the
Commission is changing the number of respondents from 30 to 10, the Commission is also
adjusting the other burden estimates to reflect 10 instead of 30 NRSROs.
The Commission has estimated that the average one-time burden of implementing a
recordkeeping system to comply with Rule 17g-2 approximately 345 hours.14 Thus, across 10
NRSROs, the total one-time burden is 3,450 hours.15 Additionally, the Commission estimates
that an NRSRO will spend an average of 279 hours per year16 to make and retain records under
Rule 17g-2 as amended, for a total ongoing hour burden under Rule 17g-2 of 2,790 hours.17 The
Commission considers both of these burdens to be record-keeping burdens.
Rule 17g-2 also requires that an NRSRO that uses a third-party record custodian furnish
the Commission with an undertaking from the custodian. Based on staff experience, the
Commission estimates that approximately five NRSROs will file this undertaking on a one-time
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17

See Oversight of Credit Rating Agencies Registered as Nationally Recognized Statistical Rating
Organizations, 72 FR at 33607 (June 18, 2007).
A.M. Best Company, Inc., DBRS Ltd., Egan-Jones Rating Company, Fitch, Inc., Japan Credit Rating
Agency, Ltd., Kroll Bond Rating Agency, Inc. (formerly LACE Financial Corp.); Moody's Investors
Service, Inc., Realpoint LLC, and Standard & Poor's Ratings Services.
See Securities Exchange Act Release No. 59342 (Feb. 2, 2009), 74 FR 6456 (Feb. 9, 2009) (“Release No.
59342”).
345 hours x 10 respondents = 3,450 hours.
See Release 59342, supra note 14.
279 hours x 10 respondents = 2,790 hours.

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basis. The Commission estimates, based on staff experience, that it will take an NRSRO
approximately 10 hours to complete an undertaking prior to furnishing it to the Commission.18
Therefore, the Commission estimates that the total one-time hour burden for this undertaking
will be 50 hours.19 The Commission considers this a reporting burden.
Proposed Amendments to Rule 17g-2
The Commission is proposing to repeal paragraph (d)(2) of Rule 17g-2 and re-codify and
enhance the requirements in paragraph (d)(3) of Rule 17g-2 in new Rule 17g-7. The
Commission estimates that the actual repeal and re-codification will result in de minimis onetime hour burdens to each NRSRO. (The one time and ongoing hour burden resulting from the
proposed enhancements to the requirements currently codified in Rule 17g-2(d)(3) that the
Commission proposed be codified in new Rule 17g-7 are addressed in the PRA analysis for Rule
17g-7.)
The Commission had estimated that an NRSRO subject to these requirements would
spend approximately 30 hours to publicly disclose the required information in an XBRL format
and, thereafter, 10 hours per year to update this information.20 Further, the Commission
estimated that seven of the ten currently registered NRSROs issue 500 or more issuer-paid credit
ratings in at least one of the classes of credit ratings for which they are registered, and that even
if the number of NRSROs were to expand, the number of NRSROs (seven) that issue 500 or
more issuer-paid credit ratings in at least one of the classes of credit ratings for which they are
registered would remain relatively constant.21 Accordingly, the Commission estimated that the
total aggregate one-time burden to the industry to make the history of rating actions publicly
available in an XBRL format was 210 hours,22 and the total aggregate ongoing burden hours was
70 hours.23 Since the Commission has proposed to eliminate Rule 17g-2(d)(2), and Rule 17g2(d)(3) is being codified in new Rule 17g-7, the aggregate ongoing hours burden associated with
Rule 17g-2 is being reduced by 70 hours.
The Commission is also proposing to add paragraph (a)(9) to Rule 17g-2 to identify the
policies and procedures an NRSRO is required to establish, maintain, and enforce pursuant to
Section 15E(h)(4)(A) of the Exchange Act and proposed paragraph (c) of Rule 17g-8 as a record
that must be made and retained. In addition, the Commission is proposing to add the following
new paragraphs to Rule 17g-2 to identify records that must be retained: (1) paragraph (b)(12)
would identify the internal control structure an NRSRO must establish, maintain, enforce, and
document pursuant to Section 15E(c)(3)(A); (2) paragraph (b)(13) would identify the policies
and procedures an NRSRO is required to establish, maintain, enforce, and document pursuant to
18

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20

21
22
23

The estimated 10 hours includes drafting, legal review, and receiving corporate authorization to file the
undertaking with the Commission.
10 hours x 5 NRSROs = 50 hours. This estimate is the same as the previous hours estimate to use a thirdparty record custodian.
The Commission also bases this estimate on the current one-time and ongoing burden hours for an NRSRO
to publicly disclose its Form NRSRO. No alternatives to these estimates as proposed were suggested by
commenters. See June 5, 2007 Adopting Release, 72 FR at 33609.
See Release No. 59342, supra note 14.
30 hours x 7 NRSROs = 210 hours.
10 hours x 7 NRSROs = 70 hours.

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proposed paragraph (a) of new Rule 17g-8; (3) paragraph (b)(14) would identify the policies and
procedures an NRSRO must establish, maintain, enforce, and document pursuant to proposed
paragraph (b) of new Rule 17g-8; and (4) paragraph (b)(15) would identify the standards of
training, experience, and competence for credit analysts an NRSRO must establish, maintain,
enforce, and document pursuant to proposed new Rule 17g-9. The Commission considers all of
these proposed rules to consist of record-keeping burdens.
Because the requirement to document the policies and procedures required by Exchange
Act Section 15E(h)(4)(A) and proposed paragraph (c) of Rule 17g-8 would be the same as the
requirement in proposed paragraph (a)(9) of Rule 17g-2 to make this record, the PRA burdens
associated with that aspect of the making of the record are addressed in the PRA analysis for
Rule 17g-8. Consequently, for the purposes of Rule 17g-2, the Commission is providing
preliminary estimates of the one-time and ongoing hour burdens resulting from the requirement
to retain the records that would be identified in new paragraphs (a)(9), (b)(12), (b)(13), (b)(14),
and (b)(15) of Rule 17g-2. The Commission preliminarily estimates that the one-time hour
burden would result from the NRSRO needing to update its record retention policies and
procedures to incorporate these new records that would need to be retained. Based on staff
experience, the Commission preliminarily estimates that each NRSRO would spend an average
of approximately 20 hours updating its record retention policies and procedures, resulting in an
industry-wide one-time hour burden of approximately 200 hours.
In terms of ongoing hour burden, the Commission notes that the adjusted industry-wide
ongoing hour burden attributable to Rule 17g-2 is 4,000 hours, resulting in an average ongoing
burden of 400 hours per NRSRO. This burden amount is attributable to 8 different types of
records that must be made and retained by the NRSRO, 11 types of records that must be retained
if made or received, and to the disclosure requirements in paragraphs (d)(2) and (d)(3) of Rule
17g-2. The Commission preliminarily believes that most of the hour burden is attributable to
making the records identified in paragraph (a) of the Rule 17g-2 and making the disclosures
required in paragraph (d) of Rule 17g-2 as this work is substantially more labor intensive than
retaining a record. Consequently, the Commission preliminarily estimates that the burden
associated with retaining the 5 new records that would be identified in new paragraphs (a)(9),
(b)(12), (b)(13), (b)(14), and (b)(15) of Rule 17g-2 would be minimal because NRSROs already
should have well-established procedures with respect to the records they must make and retain
pursuant to Rule 17g-2. In addition, the Commission does not expect the new records would
change frequently given that they would be the NRSRO’s internal control structure required
pursuant to Section 15E(c)(3)(A) of the Exchange Act, various types of policies and procedures,
and the standards of training, experience, and competence for credit analysts an NRSRO must
establish, maintain, enforce, and document pursuant to proposed new Rule 17g-9. Accordingly,
once the original record is retained, the need to expend resources to retain updated versions of
the original record would be infrequent. Therefore, the Commission preliminarily estimates that
it would take approximately one hour per record each year to retain updated versions of these
records. For these reasons, the Commission preliminarily estimates that the ongoing hour burden
for each NRSRO attributable to these proposals would be approximately 5 hours,24 resulting in
an industry-wide ongoing hour burden of approximately 50 hours.25
24
25

5 records x 1 hour = 5 hours.
10 NRSROs x 5 hours = 50 hours.

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The Commission therefore estimates that the total one-time burden for Rule 17g-2 is 375
hours per NRSRO and 3,700 hours on an industry-wide basis;26 and the ongoing burden is 284
hours per NRSRO and 2,840 hours on an industry-wide basis.27 For purposes of the PRA
submission, the one-time hour and cost burden are amortized over the three-year approval
period. This produces an ongoing hour burden of 4,073 hours (3,700 / 3 plus 2,840) and an
ongoing cost of $3,333 ($10,000 / 3).
13.

Costs to Respondents

Under the currently approved PRA collection for Rule 17g-2, the Commission estimated
that an NRSRO may need to purchase recordkeeping system software to establish a
recordkeeping system in conformance with Rule 17g-2. The Commission estimated that the cost
of the software would vary based on the size and complexity of the NRSRO. Also, the
Commission estimated that some NRSROs would not need such software because they already
have adequate recordkeeping systems or, given their small size, such software would not be
necessary. Therefore, the Commission estimates that the average cost for recordkeeping
software across all NRSROs would be approximately $1,000 per firm, with an aggregate
maximum one-time cost to the industry of $10,000.
Under the currently approved PRA collection for Rule 17g-2, the Commission also
estimated that the requirement to publicly disclose certain ratings action histories in an XBRL
format would cost approximately $800 per firm. Because the Commission has proposed to
eliminate Rule 17g-2(d)(2), and proposed to codify Rule 17g-2(d)(3) in new Rule 17g-7, the
Commission is now subtracting these one-time costs from its prior burden estimate. Thus, the
Commission believes the approximate one-time cost per NRSRO is approximately $1,000 and
the one-time industry-wise cost is approximately $10,000. For purposes of the PRA submission,
the one-time hour and cost burden are amortized over the three-year approval period. This
produces an ongoing cost of $3,333 ($10,000 / 3).
14.

Costs to Federal Government

The Commission does not anticipate any costs to the Federal Government that result from the
proposed rule.
15.

Explanation of Changes in Burden

The new burden associated with Rule 17g-2 as a result of the proposed rule amendments
is 3,700 hours on a one-time basis, a decrease of 6,910 hours; 2,840 hours on an ongoing basis, a
decrease of 5,600 hours; and a one-time cost of $10,000, a decrease of $15,600. As described
more fully in paragraph 12, there are two reasons for the change in burden: (1) the
26

27

3,450 hours (implement recordkeeping system at 345 hours per NRSRO times 10 NRSROs) + 50 hours
(estimate that third party record custodian would be used by 5 NRSROs) + 200 hours (update of record
retention requirements at 20 hours per NRSRO times 10 NRSROs) = 3,700 hours.
2,790 hours (retain recordkeeping system at 279 hours per NRSRO times 10 NRSROs) + 50 hours (five
new records at one hour per record times 10 NRSROs)

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Commission’s adjustment of the estimated number of NRSROs from 30 to 10; and (2) the
proposal to eliminate paragraph (d)(2) of Rule 17g-2 and move paragraph (d)(3) to Rule 17g-7
(with certain enhancements).
16.

Information Collection Planned for Statistical Purposes
Not applicable. There is no intention to publish the information for any purpose.

17.

OMB Expiration Date Display
The Commission is not seeking approval to not display the OMB expiration date.

18.

Exceptions to Certification for Paperwork Reduction Act Submissions
Not applicable because no exceptions to certification are contained in the proposed rule.

B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS

The collection of information does not involve statistical methods or analyze the
information for the agency.

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