Rule 17g-1 and Form NRSO Supporting Statement_final

SUPPORTING STATEMENT
for the Paperwork Reduction Act Revised Information Collection Submission for
Rule 17g-1 and Form NRSRO

A.

JUSTIFICATION

1.

Necessity of Information Collection

The Credit Rating Agency Reform Act of 2006 1 (“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
credit rating agencies registered with the Commission as NRSROs. The Rating Agency Act
added new Section 15E, “Registration of Nationally Recognized Statistical Rating
Organizations,” 2 to the Securities Exchange Act of 1934 (“Exchange Act”). In 2007, the
Commission adopted rules to implement specific provisions of the Rating Agency Act, as well as
other registration, recordkeeping, financial reporting and oversight rules. 3
The Dodd-Frank Wall Street Reform and Consumer Protection Act 4 (“Dodd-Frank Act”)
was enacted on July 21, 2010. Title IX, Subtitle C of the Dodd-Frank Act, “Improvements to the
Regulation of Credit Rating Agencies,” among other things, establishes new self-executing
requirements applicable to NRSROs, requires certain studies, 5 and requires that the Commission
adopt rules applicable to NRSROs, providers of due diligence services, and issuers and
underwriters of asset-backed securities in a number of areas. 6 On August 27, 2014, the
Commission adopted rules and rule amendments to implement certain of these provisions,
including amendments to Rule 17g-1 and the instructions for Exhibit 1 of Form NRSRO, as
discussed below. 7 The 2014 amendments to Rule 17g-1 and Form NRSRO instructions required
the Commission to update the collection of information burden estimates related to compliance
with the amendments.

1

Pub. L. No. 109-291 (2006).

2

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

3

Oversight of Credit Rating Agencies Registered as Nationally Recognized Statistical Rating Organizations,
Exchange Act Release No. 55857 (June 5, 2007), 72 FR 33564 (June 18, 2007).

4

Pub. L. No. 111-203, 124 Stat. 1376, H.R. 4173 (2010).

5

See Pub. L. No. 111-203 §§ 939, 939D-939F.

6

See Pub. L. No. 111-203 §§ 931-939H; see also Pub. L. No. 111-203 § 943.

7

Nationally Recognized Statistical Rating Organizations, Exchange Act Release No. 72936 (August 27,
2014).

Rule 17g-1 (17 CFR 240.17g-1) and Form NRSRO (17 CFR 249b.300) contain
recordkeeping and disclosure requirements. 8 The collection of information obligation imposed
by Rule 17g-1 and Form NRSRO is mandatory. Rule 17g-1 and Form NRSRO, however, apply
only to credit rating agencies that are applying to register or are registered with the Commission
as NRSROs, and registration is voluntary.
Rule 17g-1 requires a credit rating agency to furnish an initial application on Form
NRSRO. 9 The rule also provides that if the information contained in the application becomes
materially inaccurate before the Commission has granted or denied the application, the credit
rating agency must promptly notify the Commission and amend the application with accurate
and complete information by submitting an amended initial application on Form NRSRO. Rule
17g-1 also provides that a credit rating agency could withdraw its application before the
Commission takes final action on it by furnishing the Commission with a written notice of
withdrawal executed by a duly authorized person. Once the application has been approved,
section 15E(b)(1) of the Exchange Act requires an NRSRO to promptly amend the application if
any information or document provided as part of the application becomes materially
inaccurate. 10 Rule 17g-1 provides that an NRSRO is required to furnish the amendment to the
Commission on Form NRSRO.
A credit rating agency may apply to be registered for fewer than all five categories of
credit ratings described in section 3(a)(62)(B) of the Exchange Act. 11 Rule 17g-1 provides that
an NRSRO registered for fewer than the five categories may apply to be registered with respect
to an additional category by furnishing an amended Form NRSRO and indicating where
appropriate on the Form the additional category for which it is applying to be registered.
Section 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 in
a form prescribed by Commission rule (the “annual certification”). 12 This section further
provides that the amendment must (1) certify that the information and documents provided in the
application for registration (except the Qualified Institutional Buyer certifications) continue to be
accurate and (2) list any material change to the information and documents that occurred during

8

The Office of Management and Budget (“OMB”) control number for Rule 17g-1 is 3235-0625.

9

This provision was implemented under the Commission’s authority in section 15E(a)(1)(A) of the
Exchange Act to prescribe the form of the application (15 U.S.C. 78o-7(a)(1)(A)); see also Oversight of
Credit Rating Agencies Registered as Nationally Recognized Statistical Rating Organizations, 72 FR 33564
(June 18, 2007).

10

15 U.S.C. 78o-7(b)(1).

11

Section 15E(a)(1)(B)(vii) of the Exchange Act (15 U.S.C. 78o-7(a)(1)(B)(vii)) provides that a credit rating
agency must submit information with its application regarding the categories of credit ratings described in
section 3(a)(62)(B) of the Exchange Act (15 U.S.C. 78c(a)(62)(B)) for which it “intends to apply for
registration.”

12

15 U.S.C. 78o-7(b)(2).

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the previous calendar year. Rule 17g-1 implements these statutory provisions by requiring an
NRSRO to furnish the annual certification on Form NRSRO.
Finally, section 15E(e)(1) of the Exchange Act provides that an NRSRO may withdraw
from registration, subject to 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. 13 Rule 17g-1 provides that an NRSRO must furnish the Commission with
a withdrawal of registration on Form NRSRO.
2.

Purpose and Use of the Information Collection

Rule 17g-1, Form NRSRO, and the Instructions for Form NRSRO create a registration
program for NRSROs. The collections of information in Rule 17g-1 and Form NRSRO are
designed to allow the Commission to determine whether an entity should be registered as an
NRSRO. Further, they 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 and Exchange Act rules.
Rule 17g-1, which, among other things, requires an NRSRO to use the Electronic Data
Gathering, Analysis and Retrieval System (“EDGAR”) system to file Form NRSRO and Exhibits
1 through 9 and to make the form and exhibits freely available on an easily accessible portion of
the NRSRO’s corporate Internet website, is designed to make the information disclosed in the
form and exhibits more readily accessible to investors and other users of credit ratings. In
addition, the filing of the Forms NRSRO and the exhibits on the EDGAR system will allow
Commission examiners to more easily retrieve the submissions of a specific NRSRO to prepare
for an examination. Furthermore, having the forms filed and stored through the EDGAR system
will assist the Commission from a records management perspective by establishing a more
automated storage process and creating efficiencies in terms of reducing the volume of paper
filings that must be manually processed and stored.
These rules also are designed to assist users of credit ratings by requiring the disclosure
of information with respect to an NRSRO that could be used to compare the credit ratings quality
of different NRSROs. The information may include: methods for determining credit ratings;
organizational structure; policies for managing material, non-public information; information
regarding conflicts of interest; policies for managing conflicts of interest; credit analyst
experience; and management experience. As noted in the Senate Report accompanying the
Rating Agency Act, the information that NRSROs are required to make public “will facilitate
informed decisions by giving investors the opportunity to compare ratings quality of different
firms.” 14
3.

Consideration Given to Information Technology

13

15 U.S.C. 78o-7(e)(1).

14

See Report of the Senate Committee on Banking, Housing, and Urban Affairs to Accompany S. 3850,
Rating Agency Act, S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6, 2006).

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Form NRSRO is designed to be downloadable from the Commission website, and
information could be entered on the Form and stored electronically. Rule 17g-1 requires an
NRSRO to make Form NRSRO and Exhibits 1 through 9 freely available on an easily accessible
portion of its corporate Internet website (and in writing when requested), and requires NRSROs
to use the Commission’s EDGAR system to electronically file Form NRSRO and Exhibits 1
through 9 as a PDF document in the format required by the EDGAR Filer Manual. Thus, this
rule makes use of technology to facilitate access to and maintain information. With respect to
the enhanced performance statistics required under Rule 17g-1, the relevant paragraphs in the
instructions to Form NRSRO contain specific instructions with respect to, among other things,
how required information should be presented in Exhibit 1 (including the order of presentation)
and how transition and default rates should be produced using a single cohort approach. The
Commission anticipates that information technology can be used to produce these enhanced
performance statistics.
4.

Duplication

The Commission has not identified any duplication with respect to the information
required by Rule 17g-1 and Form NRSRO.
5.

Effect on Small Entities

Small entities are affected by Rule 17g-1 and Form NRSRO because all applicants for
registration and NRSROs, regardless of size, are required to submit Form NRSRO to the
Commission. Currently, there are 10 NRSROs and, based on their most recently filed annual
reports pursuant to Rule 17g-3, two NRSROs are small entities, as defined under Section 601(3)
of the Regulatory Flexibility Act. 15
6.

Consequences of Not Conducting Collection or Conducting it Less Frequently

If the information collection were not conducted, or not conducted as frequently, the
Commission would be unable to determine whether an entity should be registered or remain
registered as an NRSRO under section 15E of the Exchange Act. Further, the Commission
would be unable to effectively monitor whether NRSROs are conducting their activities in
accordance with section 15E of the Exchange Act and Exchange Act rules. In addition, users of
credit ratings would have less data available to evaluate the accuracy of credit ratings and
compare the performance of credit ratings by different NRSROs.
7.

Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)

There are no special circumstances. This collection is consistent with the guidelines set forth
in 5 CFR 1320.5(d)(2).
8.

Consultations Outside the Agency

15

Release No. 34-72936 (Aug. 27, 2014), 79 FR 55078, 55256 (Sept. 15, 2014).

4

The required notice with a 60-day comment period soliciting comments on this collection
of information was published in the Federal Register on June 2, 2017. 16
The Commission received one comment letter in response to the notice. The commenter
asserted, among other things, that the Commission underestimated the burden associated with
Rule 17g-1 and Form NRSRO in that Form NRSRO preparation time does not necessarily
decrease incrementally with each filing because of the information and data gathering and
verification process required for each filing. 17 The comment letter also noted that some
NRSROs have elected to utilize the services of an external counsel and/or an external filing
service(s) to assist with the Form NRSRO filing process and provided an estimate of the costs to
an NRSRO for outsourcing such services. However, the commenter did not specify what
portion of the estimated burden should be allocated to such external sources. In response to the
comment, the Commission is increasing its estimated burden from 252.7 annual hours to 275
annual hours, for an ongoing industry burden of 2,750 annual hours. 18
9.

Payment or Gift

The Commission did not provide any payment or gift to respondents in connection with
the proposed rulemaking.
10.

Confidentiality

The confidentiality of the information submitted to the Commission in the reports
required under the rule is protected only to the extent permitted by FOIA.
11.

Sensitive Questions

No information of a sensitive nature, including social security numbers, will be required
under this collection of information.
The information collection collects basic Personally Identifiable Information (PII) that
may include name, job title, or work address. However, the agency has determined that the
information collection does not constitute a system of record for purposes of the Privacy Act.
Information is not retrieved by a personal identifier.
In accordance with Section 208 of the E-Government Act of 2002, the agency has
conducted a Privacy Impact Assessment (PIA) of the EDGAR system, in connection with this
collection of information. The EDGAR System PIA, published on January 29, 2016, is provided
as a supplemental document and is also available at https://www.sec.gov/privacy.
16
17

18

See 82 FR 25648 (June 2, 2017).
See letter from Financial Information Services Association of Software & Information Industry Association
dated Aug. 1, 2017. The comment letter also provided ideas for broader reform proposals that were not
directly related to the Commission’s burden estimates and went beyond the scope of this collection.
Specifically, the commenter suggested the Commission consider a staggered approach to the timing of
annual NRSRO examinations and that the Commission seek EDGAR filer feedback on the Form NRSRO
filing experience.
275 hours x 10 NRSRO = 2,750.

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12.

Burden of Information Collection

There are 10 credit rating agencies registered with the Commission as NRSROs. The
Commission expects that these entities have already established the record keeping and
disclosure policies and procedures required by Rule 17g-1 and Form NRSRO.
Based on staff experience, and in response to the comment received, the Commission
estimates that NRSROs will spend approximately 275 annual hours to make and retain the
appropriate records, resulting in an industry-wide ongoing burden of 2,750 annual hours. This
estimate includes the annual hour burdens to submit Form NRSRO and the Rule 17g-3 annual
reports to the Commission electronically on EDGAR as PDF documents.
13.

Costs to Respondents

The Commission anticipates that an NRSRO likely will engage outside counsel to assist
it in the process of completing and submitting an initial Form NRSRO. The amount of time an
outside attorney will spend on this work will depend on the size and complexity of the NRSRO.
The Commission previously estimated that, on average, an outside counsel will spend
approximately 40 hours assisting an NRSRO in preparing its initial application for registration,
for a one-time aggregate burden to the industry of 400 hours. The Commission further estimated
that this work will be split between a partner and an associate, with an associate performing a
majority of the work. The Commission estimates that the average hourly cost for an outside
counsel will be approximately $400 per hour. The Commission therefore estimates that the
average one-time cost to an NRSRO will be $16,000 19 for an initial application. 20
In addition, the Commission previously estimated an ongoing industry wide annual cost
of approximately $4,000 to cover postage and handling fees for NRSROs responding to
individuals that requested copies of Exhibit 1 of Form NRSRO. 21 Based on staff experience, the
Commission estimates an ongoing industry cost resulting from compliance with Rule 17g-1 of
$4,000 annually.
14.

Costs to Federal Government

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

Changes in Burden

The estimated burden on respondents is calculated based on the 10 credit rating agencies
currently registered as NRSROs under Section 15E of the Exchange Act. In response to the
comment received, the Commission has adjusted the total estimated industry-wide ongoing
burden from 2,527 hours to 2,750 hours. The Commission expects that these 10 entities have
19
20
21

$400 per hour x 40 hours = $16,000.
Release No. 34-55857 (June 5, 2007), 72 FR 33564 (June 18, 2007).
Release No. 34-72936 (Aug. 27, 2014), 79 FR 55078, 55235 (Sept. 15, 2014).

6

already established the recordkeeping and disclosure policies and procedures required by Rule
17g-1 and Form NRSRO. The one-time burden that is associated with the previous amendments
to the rule were removed.
16.

Information Collection Planned for Statistical Purposes
Not applicable. The information collection is not for statistical purposes.

17.

Approval to Omit OMB Expiration Date

We request authorization to omit the expiration date on the electronic version of the form,
although the OMB control number will be displayed. Including the expiration date on the
electronic version of the form will result in increased costs, because the need to make changes to
the form may not follow the application’s scheduled version release dates.
18.

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

B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
This collection does not involve statistical methods or analyze the information for the

agency.

7