PRA_17g-3_Supporting_Statement_2018

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
Rule 17g-3: Annual Financial and Other Reports to be Filed or Furnished by Nationally
Recognized Statistical Rating Organizations
A.

JUSTIFICATION

1.

Necessity of Information Collection

The Credit Rating Agency Reform Act of 2006 1 (“Rating Agency Act”), enacted on
September 29, 2006, defined the term “nationally recognized statistical rating organization”
(“NRSRO”) and provided 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, established new self-executing
requirements applicable to NRSROs, required certain studies, and required 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. 5 On August 27, 2014, the
Commission adopted rules and rule amendments to implement certain of these provisions,
including amendments to Rule 17g-3, as discussed below. 6
Rule 17-3 under the Exchange Act (17 CFR 240.17g-3) contains reporting requirements
for NRSROs. 7 Exchange Act Section 15E(k), as added by the Rating Agency Act and amended
by the Dodd-Frank Act, requires an NRSRO to file with to the Commission, on a confidential
basis and at intervals determined by the Commission, such financial statements and information
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

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

7

The Office of Management and Budget (“OMB”) Control Number for Rule 17g-3 is 3235-0626.

concerning its financial condition that the Commission, by rule, may prescribe as necessary or
appropriate in the public interest or for the protection of investors. The Commission adopted
paragraphs (a)(1) through (a)(5) of Rule 17g-3 under Section 15E(k). 8 These paragraphs require
NRSROs to file annual reports to the Commission, including audited financial statements and
certain unaudited financial reports. Rule 17g-3(a)(6), which was adopted under Section 17(a)(1)
of the Exchange Act, requires NRSROs to furnish the Commission with an unaudited report of
certain rating transitions. 9 Paragraph (a)(7) of Rule 17g-3 requires an NRSRO to include an
unaudited report on the NRSRO’s internal control structure with its annual submission of reports
pursuant to Rule 17g-3 10 and paragraph (b) of Rule 17g-3 requires that the NRSRO’s chief
executive officer (“CEO”) or equivalent individual provide a signed statement that would be
attached to the report. 11
Section 15E(j)(5)(A) of the Exchange Act, added by the Dodd-Frank Act, requires the
designated compliance officer of an NRSRO to submit to the NRSRO a report on the compliance
of the NRSRO with the securities laws and the policies and procedures of the NRSRO, and
Section 15E(j)(5)(B) provides that the NRSRO “shall file” this report with the financial report
required to be submitted to the Commission under Section 15E of the Exchange Act (that is, the
Rule 17g-3 annual reports). Paragraph (a)(8) to Rule 17g-3 requires that this report be filed with
the other annual reports required under Rule 17g-3. 12 This requirement does not result in a
Commission collection of information requirement because the requirement to file the report
with the other annual reports required under Rule 17g-3 derives exclusively from Section
15E(j)(5)(B) of the Exchange Act (not from Commission rulemaking). 13
The Commission previously added paragraph (d) to Rule 17g-3 to require that all the
annual reports that are required to be provided to the Commission pursuant to Rule 17g-3 be
submitted through the Commission’s Electronic Data Gathering and Retrieval (“EDGAR”)
system. 14 Paragraph (d) provides that the reports required by the rule must be submitted
electronically with the Commission in the format required by the EDGAR Filer Manual, as
defined in Rule 11 of Regulation S-T.

8

See Oversight of Credit Rating Agencies Registered as Nationally Recognized Statistical
Rating Organizations, 72 FR 33564.

9

See Amendments to Rules for Nationally Recognized Statistical Rating Organizations, Exchange Act
Release No. 59342 (Feb. 2, 2009), 74 FR at 6464-65 (Feb. 9, 2009). Section 17(a)(1) of the Exchange Act
provides that any report an NRSRO “is required by Commission rules under this paragraph to make and
disseminate to the Commission shall be deemed furnished to the Commission.”

10

17 CFR 240.17g-3(a)(7).

11

17 CFR 240.17g-3(b)(2).

12

17 CFR 240.17g-3(a)(8).

13

See 15 U.S.C. 78o-7(j)(5)(B).
17 CFR 240.17g-3(d).

14

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The collection of information obligations imposed by Rule 17g-3 are mandatory. The
rule, however, applies only to credit rating agencies that are registered with the Commission as
NRSROs, and registration is voluntary.
2.

Purpose and Use of the Information Collection

The collection of information included in Rule 17g-3 is necessary for Commission
oversight of NRSROs registered with the Commission. This collection of information will aid
the Commission in determining whether the initiation of a de-registration proceeding under
Section 15E(d) of the Exchange Act would be appropriate. Further, the Commission can use the
reports to review whether the NRSRO is complying with the requirements in Section
15E(c)(3)(A) of the Exchange Act.
The requirement that NRSROs use the Commission’s EDGAR system to file the annual
reports as PDF documents will assist the Commission in performing its oversight function. For
example, Commission examiners will be able to more easily retrieve the reports of an NRSRO to
prepare for an examination. Moreover, having these reports submitted and stored through the
EDGAR system will assist the Commission from a records management perspective by
establishing a more automated storage process and reducing the volume of paper submissions
that must be manually processed and stored.
3.

Consideration Given to Information Technology

Paragraph (d) of Rule 17g-3 provides that the reports required by the rule must be
submitted electronically with the Commission in the format required by the EDGAR Filer
Manual, as defined in Rule 11 of Regulation S-T.
4.

Duplication

The Commission has not identified any duplication with respect to the information required
by Rule 17g-3.
5.

Effect on Small Entities

Small entities will be affected by Rule 17g-3 because all NRSROs, regardless of size,
will are required to submit the reports to the Commission on an annual basis. The Commission
previously solicited comment regarding the burden on small entities and considered potential
alternatives to minimize the burden of the collection of information requirements on those who
are required to respond.
6.

Consequences of Not Conducting 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

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maintain adequate financial and managerial resources to consistently produce credit ratings with
integrity.” 15
7.

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

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

Consultations Outside the Agency

The required notice with a 60-day comment period soliciting comments on this collection
of information was published in the Federal Register on February 5, 2018. 16 The Commission
did not receive comments on its estimates of the paperwork burden associated with Rule 17g-3.
9.
Payment or Gift
The Commission did not provide any payment or gift to respondents in connection with
the amendments to Rule 17g-3.
10.

Confidentiality

Section 15E(k) of the Exchange Act provides that NRSROs “shall, on a confidential
basis” file such statements of financial condition with the Commission as the Commission may
prescribe. Therefore, the reports filed under paragraphs (a)(1) through (a)(5) of Rule 17g-3 are
filed on a confidential basis. The reports submitted under paragraph (a)(6) of Rule 17g-3 and
paragraphs (a)(7) and (a)(8) of Rule 17g-3 will be protected only to the extent permitted by
FOIA.
11.

Sensitive Questions

Not applicable. No inquiries of a sensitive nature were made. The information collection
does not collect any Personally Identifiable Information (PII). The Systems of Record Notice
may be reviewed at the following site, http://www.sec.gov/about/privacy/sorn/secsorn6.pdf. The
Privacy Impact Assessment document for EDGAR is attached as a supplemental document.
12.

Burden of Information Collection

The Commission previously estimated that each NRSRO registered with the Commission
will take, on average, approximately 200 hours to prepare for and submit annual audited
financial statements for a total of 2,000 hours (200 hours x 10 NRSROs) reporting burden for the
industry per year. The Commission also previously estimated that each NRSRO would spend
15

See 15 U.S.C. 78o-7(d)(1)(E). Under 15 U.S.C. 78o-7(d), “Censure, Denial, or Suspension or Registration;
Notice and Hearing,” the Commission shall impose sanctions on an NRSRO, which may include revoking
its registration, if, among other things, it fails to maintain adequate financial and managerial resources to
consistently produce credit ratings with integrity.

16

See 83 FR 5156 (Feb. 5, 2018).

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on average approximately 150 hours preparing the internal controls report, 17 and an average of
approximately fifteen extra hours per year documenting material weaknesses identified during
the fiscal year and how they were remediated, resulting in an annual total internal burden of
approximately 165 hours per NRSRO per year for preparing the internal controls report, resulting
in a total industry-wide annual reporting burden of approximately 1,650 hours. 18
As discussed above, Rule 17g-3 requires that the annual reports be submitted
electronically on the Commission’s EDGAR system. The Commission estimates there will be
burdens to submit the Rule 17g-3 annual reports electronically through EDGAR, however, the
Commission is allocating these burdens to Rule 17g-1 and Form ID. For purposes of this PRA
submission, the Commission therefore estimates that the annual industry-wide reporting burden
would be 3,650 hours per year (2,000 annual hours plus 1,650 annual hours).
13.

Costs to Respondents

Rule 17g-3 requires that an NRSRO provide audited financial statements that are certified
by an independent public accountant. 19 The cost of an audit by an independent public accountant
varies substantially with the size and complexity of the NRSRO. The current OMB estimate is
that, on average, an NRSRO will pay an independent public accountant approximately $15,000
per year to perform an audit or audit procedures that are required by Rule 17g-3. 20 Therefore,
the annual external reporting cost to the industry is estimated to be approximately $150,000. 21
The Commission previously stated that an NRSRO likely would engage outside counsel
to assist in preparing the reports required under Rule 17g-3 and that the time outside counsel
would spend assisting in the preparation of subsequent reports would be less than the time spent
on preparing the first report, since the counsel’s work will not need to include an initial analysis
of the new requirements. Consequently, the Commission estimated that an attorney would spend
an average of approximately fifty hours assisting an NRSRO and its CEO or other qualified
individual in drafting and reviewing the report, resulting in an industry-wide annual hour burden
of approximately 500 hours. 22 As stated above, the Commission estimated that the cost of
outside counsel would be approximately $400 per hour. For these reasons, the Commission

17

See id. (10 NRSROs x 150 hours = 1,500 hours).

18

150 hours + 15 hours = 165 hours; 165 hours x 10 NRSROs = 1,650 hours.

19

17 CFR 240.17g-3(a)(1)(iii).

20

Based on staff experience, it is estimated that the cost of the annual audit for a small NRSRO will range
from $3,000 - $5,000 while the cost of the annual audit for a large NRSRO would be substantially greater.

21

$15,000 x 10 NRSROs = $150,000.

22

See id. (10 NRSROs x 50 hours = 500 hours). The Commission adopted paragraph (a)(7) of Rule 17g-3 as
proposed. Accordingly, this estimate remains unchanged from the Commission’s preliminary estimate in
the proposing release.

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estimated that the average annual cost to an NRSRO to comply with this requirement would be
approximately $20,000 23, resulting in an industry-wide annual cost of approximately $200,000. 24
14.

Cost to Federal Government

The Commission does not anticipate any costs to the Federal Government associated with
the information collections related to the Rule.
15.

Changes in Burden
There are no changes in the burden for Rule 17g-3(a)(7).

16.

Information Collection Planned for Statistical Purposes
Not applicable. The information collection is not used 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 this 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 Certifications for Paperwork Reduction Act Submissions
This collection complies with the requirements in 5 CFR 1320.9.

B.

Collections of Information Employing Statistical Methods

The collection of information does not employ statistical methods, or analyze the
information for the Commission.

23

See id. (50 hours x $400 = $20,000).

24

See id. (10 NRSROs x $20,000 = $200,000).

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