PRA Rule 17g-8 and 9 Supporting Statement_2024_renewal

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission

“Rule 17g-8: Policies, procedures, and internal controls”,

and

“Rule 17g-9: Standards of training, experience, and competence for credit analysts”

A. JUSTIFICATION

1. Necessity of Information Collection

Section 15E of the Securities Exchange Act of 1934 (“Exchange Act”),¹ added to the Exchange Act by the Credit Rating Agency Reform Act of 2006 (“Rating Agency Act”)² and amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) enacted in 2010,³ sets forth the regulatory framework for credit rating agencies that register as nationally recognized statistical rating organizations (“NRSROs”). Section 15E imposes self-executing requirements and authorizes the Commission to adopt implementing rules, including rules requiring the establishment of policies and procedures governing NRSRO’s credit rating activities.

Rule 17g-8(a), implementing Section 15E(r) of the Exchange Act,⁴ sets forth certain requirements for an NRSRO’s policies and procedures with respect to the procedures and methodologies used to determine credit ratings.⁵ Per the rule, an NRSRO is required to establish, maintain, enforce, and document policies and procedures that are reasonably designed to meet the objectives identified in paragraphs (a)(1-5).⁶ Rule 17g-8(c) implements Section 15E(h)(4)(A) of the Exchange Act,⁷ requiring that the policies and procedures an NRSRO is required to establish, maintain, and enforce with respect to look-back reviews must address instances in which a look-back review determines that a conflict of interest influenced a credit rating by including, at a minimum, procedures that are reasonably designed to ensure that the credit rating is no longer influenced by the conflict and that the conflict is disclosed in the form required by Rule 17g-7(a).

Rule 17g-8(b) implements Section 938(a) of the Dodd-Frank Act⁸ by requiring NRSROs to establish, maintain, enforce, and document policies and procedures with respect to credit rating symbols, numbers, or scores.⁹ Per the rule, such policies and procedures must be reasonably designed to assess the probability of default or failure to make payments by an issuer on a security or money market instrument;¹⁰ to clearly define each symbol, number, or score used to denote a credit rating category, or notches within a category, for each class of credit ratings for which the NRSROs are registered and to include such definitions in Exhibit 1 to Form NRSRO;¹¹ and to apply each such symbol, number, or score in a manner that is consistent for all types of obligors, securities, and money market instruments for which it is used.¹²

Rule 17g-9, adopted pursuant to Section 936 of the Dodd-Frank,¹³ requires NRSROs to establish, maintain, enforce, and document standards of training, experience, and competence for individuals employed to participate in the determination of credit ratings.¹⁴ Per the rule, standards must be reasonably designed to achieve the objective that NRSROs produce accurate credit ratings in the classes of credit ratings for which each NRSRO is registered.¹⁵

Rules 17g-8 and 17g-9 contain “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995.¹⁶ The collection of information is mandatory for credit rating agencies that register as NRSROs and is necessary to advance the objectives of the authorizing statutes. The collection of information has been approved and extended by the Office of the Management and Budget (“OMB”) under control number OMB 3235-0693 (expiring September 30, 2024).

2. Purpose and Use of the Information Collection

The information collection with respect to Rule 17g-8(a) promotes the integrity and transparency of the procedures and methodologies NRSROs use to determine credit ratings. For example, policies and procedures adopted pursuant to Rule 17g-8(a) that require the approval by the NRSRO board, or an equivalent body, of the NRSRO’s procedures and methodologies for determining credit ratings may improve the quality and consistency of the credit rating process.¹⁷ Additionally, policies and procedures adopted pursuant to Rule 17g-8(a) can increase visibility into the credit ratings activities of NRSROs by requiring that changes to procedures and methodologies for determining credit ratings be consistently applied to current and future credit ratings and providing for the publication of material changes on NRSROs’ corporate websites.¹⁸

Policies and procedures adopted pursuant to Rule 17g-8(b), which are reasonably designed to assess the probability of default or the inability to meet obligations under a rated instrument, clearly define its rating symbols, and apply such symbols consistently, may promote greater consistency in the assignment of credit ratings across different rating classes.¹⁹ Also, the requirement for NRSROs to have policies and procedures reasonably designed to disclose the meaning of each credit rating symbol, number, and score provides users of credit ratings with a better understanding of credit rating terminology and the ability to compare credit ratings across various NRSROs.²⁰

Policies and procedures adopted pursuant Rule 17g-8(c), which must address instances in which a look-back review determines that a conflict of interest influenced a credit rating, benefits users of credit ratings.²¹ Information, such as the disclosure of the conflict of interest and the NRSRO’s proposed remediation of the conflict, helps reduce the risk that users of credit ratings will rely on incomplete, biased, or inaccurate information to make credit-based decisions.²²

Standards established by an NRSRO and adopted pursuant to Rule 17g-9, which address the training, experience, and competence of individuals employed to determine credit ratings may lead to higher levels of competency among credit analysts at NRSROs and higher quality credit ratings.²³ Rule 17g-9 also provides factors for an NRSRO to consider when establishing standards under the rule. NRSROs may use these factors as guidance when designing standards of training, experience, and competence for credit analysts. Additionally, Commission staff uses these factors, among others, to evaluate whether an NRSRO’s standards for the individuals it employs to participate in the determination of credit ratings are reasonably designed to produce credit ratings with integrity.²⁴

3. Consideration Given to Information Technology

Commission staff does not believe that policies, procedures, or standards NRSROs establish, maintain, and enforce pursuant to Rules 17g-8 and 17g-9 generally implicate the use of information technology, except for certain information required to be published on the internet website of an NRSRO pursuant to policies and procedures adopted under Rule 17g-8(a). Commission staff believes improvements in data processing technology may reduce the burdens associated with the disclosure requirement.

In addition, Rules 17g-8 and 17g-9 require the documentation of policies, procedures or standards adopted pursuant to the rules. Computers, mechanical devices, or programmatic solutions may be used for this purpose, thereby reducing the potential burden of compliance.

4. Duplication

Commission staff has not identified any duplication with respect to the information required by Rule 17g-8 or Rule 17g-9.

5. Effect on Small Entities

Small entities may be affected by Rules 17g-8 and 17g-9 because all NRSROs regardless of their size are required to comply with the rules. However, none of the currently registered NRSROs, as of the time of the renewal of the information collection, meets the definition of small entity.²⁵ Even if an NRSRO were a small entity, the rules permit NRSROs to tailor and scale their policies, procedures, or standards to their size and business activities, reducing the impact of the rules on smaller NRSROs.

6. Consequences of Not Conducting Collection

The policies and procedures or standards required to be established, maintained, enforced, and documented by Rules 17g-8 and 17g-9 are instrumental in promoting and assessing compliance with the rules. Eliminating the collections (or reducing the frequency of collection) would frustrate the intended effect of the rules and the objectives of the authorizing statutes.

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 SEC’s Office of Credit Ratings (“OCR”), which administers Rules 17g-8 and 17g-9, conducts annual examinations of NRSROs under Section 15E(p)(3)(A) of the Exchange Act and engages representatives of the NRSRO industry through meetings and information exchanges . This provides OCR staff with the opportunity to determine, and act upon, paperwork burdens imposed upon by the rules.

_{The required notice with a 60-day comment period soliciting comments on this collection of information was published in the Federal Register} on April X, 2024.²⁶ _{The Commission [did not] receive[d] comments on its estimates of the paperwork burdens associated with Rule 17g-8 or 17g-9. [A commenter stated…. Another commenter stated…. In response to [this][these] comment[s], the [hour] [and cost] burden has been [increased] [decreased] to reflect ….]}

9. Payment or Gift

The Commission did not provide any payment or gift to respondents in connection with Rule 17g-8 or Rule 17g-9.

10. Confidentiality

The policies, procedures or standards required by Rules 17g-8 and 17g-9 will be made available to the Commission and its representatives as required in connection with examinations, investigations, and enforcement proceedings. However, an NRSRO can request confidential treatment for the information. If such confidential treatment request is made, the Commission will keep the information confidential subject to applicable law.

The information collection under Rules 17g-8 and 17g-9 does not collect any Personally Identifiable Information (PII). The Systems of Record Notice may be reviewed at https://www.sec.gov/oit/system-records-notices. The Privacy Impact Assessment document for Electronic Data Gathering Analysis and Retrieval may be reviewed at https://www.sec.gov/about/privacy/pia/pia-edgar.pdf.

11. Sensitive Questions

Not applicable.

12. Burden of Information Collection

Rule 17g-8

For purposes of the Paperwork Reduction Act, Commission staff estimates the burden related to Rule 17g-8 based on the number of NRSROs and the number of hours each NRSRO would spend complying with the rule. There are 10 NRSROs currently registered with the SEC. Based on the discussion below, Commission staff estimates that the industry-wide annual hour and cost burden resulting from Rule 17g-8 is approximately 1,450 hours²⁷ and $539,400, respectively.²⁸

Commission staff estimates that an NRSRO will spend an average of approximately 50 hours per year reviewing policies and procedures required by Rule 17g-8(a), updating the policies and procedures (if necessary), and enforcing them, for an industry-wide annual recordkeeping burden of approximately 500 hours.²⁹ It is estimated that Rule 17g-8(a) will result in total industry-wide annual costs for NRSROs to maintain, review, update (if necessary), and enforce the policies and procedures of approximately $186,000.³⁰

In addition, Commission staff estimates that it will take an NRSRO an average of approximately 20 hours to promptly publish on its internet website information about material changes to its procedures and methodologies to determine credit ratings and the likelihood that such changes would result in changes to any current credit ratings, or a notice of significant errors identified in a procedure or methodology, pursuant to policies and procedures adopted under Rule 17g-8(a), for a total annual disclosure burden of approximately 200 hours.³¹ It is estimated that compliance with the disclosure requirement will result in a total industry-wide annual cost for NRSROs of approximately $74,400.³²

Rule 17g-8(b) requires an NRSRO to establish, maintain, enforce, and document policies and procedures with respect to the symbols, numbers, or scores it uses to denote credit ratings. Commission staff estimates an industry-wide, annual recordkeeping burden of approximately 500 hours for NRSROs to review, and if necessary, update the policies and procedures required by the rule.³³ Accordingly, Commission staff estimates that Rule 17g-8(b) will result in total industry-wide, annual costs of approximately $186,000 for NRSROs to maintain, review, and if necessary, update such policies and procedures.³⁴

Rule 17g-8(c) requires that the policies and procedures an NRSRO is required to establish, maintain, and enforce pursuant to Section 15E(h)(4)(A) of the Exchange Act with respect to look-back reviews must address instances in which a look-back review results in a determination that a conflict of interest influenced a credit rating. The policies and procedures must include, at a minimum, procedures that are reasonably designed to ensure that the NRSRO takes certain steps reasonably designed to ensure the credit rating is no longer influenced by the conflict and that the existence and an explanation of the conflict is disclosed in the form required by Rule 17g-7(a).

In connection with these requirements, Commission staff estimates that an NRSRO will spend an average of approximately 25 hours per year (i) reviewing, and, if necessary, updating the policies and procedures adopted pursuant to Rule 17g-8(c), and those records documenting the policies and procedures; (ii) maintaining and enforcing the policies and procedures; and (iii) taking steps pursuant to the policies and procedures when a look-back review reveals that a credit rating was influenced by a conflict, resulting in an average industry-wide annual recordkeeping burden of approximately 250 hours.³⁵ Accordingly, Commission staff estimates that Rule 17g-8(c) will result in total industry-wide annual costs for NRSROs of approximately $93,000³⁶ (i) to review and update (if necessary) their policies and procedures and the records documenting the policies and procedures; (ii) to maintain and enforce the policies and procedures; and (iii) to take steps pursuant to the policies and procedures when a look-back review determines that a credit rating was influenced by a conflict.

Rule 17g-9

With respect to Rule 17g-9, Commission staff estimates the hour burden based on the number of credit analysts employed by NRSROs. Commission staff estimates that NRSROs employ a total of approximately 5,897 credit analysts,³⁷ and that NRSROs will spend, per credit analyst, one hour to update standards of training, experience, and competence required by Rule 17g-9. Therefore, it is estimated that the industry-wide annual recordkeeping burden will be approximately 5,897 hours.³⁸ Commission staff allocates 75% of the burden hours (4,423 hours) to internal burden and 25% (1,474 hours) to external burden to hire outside professionals to assist in reviewing and updating training and testing programs.³⁹

Commission staff further estimates additional burdens associated with Rule 17g-9 that do not depend on the number of credit analysts employed by an NRSRO, such as establishing, maintaining, enforcing, and documenting standards of training, experience, and competence for credit analysts, establishing testing programs, and administering training and testing programs. Based on staff experience, this burden is estimated at approximately 100 hours per NRSRO annually, for an industry-wide burden of approximately 1,000 hours.⁴⁰ Commission staff believes that it is appropriate to allocate 75% of annual burden hours to internal burden and the remaining 25% to external burden to hire outside professionals to assist in updating credit analyst training programs. Of the totals, therefore, 750 hours are allocated to internal annual burden,⁴¹ and 250 hours are allocated to external annual burden.⁴²

Commission staff estimates that compliance with Rule 17g-9 will result in total industry-wide annual internal costs for NRSROs (based on the allocated internal burden hours) of approximately $1,924,356 to maintain, review, update (if necessary), and enforce the standards and to administer the training and testing programs.⁴³ In addition, it is estimated that NRSROs will spend approximately five hours per credit analyst per year to conduct periodic testing, for a total industry-wide annual hour burden to NRSROs of approximately 29,485 hours⁴⁴ and total annual cost of approximately $11,027,390.⁴⁵

Therefore, Commission staff estimates that Rule 17g-9 will result in a total aggregate annual hour and cost burden to maintain, review, update (if necessary), and enforce the standards and to administer the training and testing programs of approximately 34,658 hours⁴⁶ and $12,951,746.⁴⁷

As a result, the total aggregate hour and cost burden for compliance with Rules 17g-8 and 17g-9 is estimated at 36,108 hours and $13,491,146.⁴⁸

	IC Title	Annual No. of Responses			Annual Time Burden (Hrs.)			Internal Cost Burden ($)
		Previously approved	Requested	Change	Previously approved	Requested	Change	Previously approved	Requested	Change
IC1	Rule 17g-8(a) annual recordkeeping burden	9	10	1	450	500	50	$127,350	$186,000	$58,650
IC2	17g-8(a) internet website publication annual burden	9	10	1	180	200	20	$50,940	$74,400	$23,460
IC3	Rule 17g-8(b) annual recordkeeping burden	9	10	1	450	500	50	$127,350	$186,000	$58,650
IC4	Rule 17g-8(c) annual recordkeeping burden	9	10	1	225	250	25	$63,675	$93,000	$29,325
	Total for Rule 17g-8		40			1,450			$539,400
IC5	Rule 17g-9 annual recordkeeping	9	10	1	675	750	75	$1,359,815	$1,924,356	$564,541
IC6	Rule 17g-9 annual recordkeeping burden based on number of credit analysts	9	10	1	4,130	4,423	293
IC7	Rule 17g-9 annual recordkeeping burden per credit analyst	9	10	1	27,530	29,485	1,955	$7,818,520	$11,027,390	$3,208,870
	Total for Rule 17g-9		30			34,658			$12,951,746
Total for all ICs		63	70	7	26,454	36,108	2,468	$9,547,650	$13,491,146	$3,943,496

13. Costs to Respondents

As discussed above concerning the hour burden for Rule 17g-9, Commission staff estimates an industry-wide annual burden based on the number of credit analysts employed by NRSROs of approximately 5,897 hours and allocates 25% of the burden to external burden to hire outside professionals to assist in reviewing and updating training and testing programs, for a total burden of 1,474 hours.⁴⁹ The Commission estimates a cost of $526 per hour for retaining outside professionals, for an industry-wide annual cost of $775,324.⁵⁰

Commission staff also allocates 25% of the 1,000 hour industry-wide annual burden for Rule 17g-9 that does not depend on the number of credit analysts to external burden for outside professionals to assist in establishing and updating credit analyst training programs, for a total external burden of 250 hours.⁵¹ Commission staff estimates that it will cost $526 per hour to retain outside professionals, resulting in industry-wide annual costs of approximately $131,500.⁵²

In summary, there will be total industry-wide annual external costs of approximately $906,824 to hire outside professionals to assist in reviewing and updating training and testing programs.⁵³

IC	IC Title	External Burden Cost Burden ($)
		Previously approved	Requested	Change
IC6	Rule 17g-9 annual recordkeeping	$90,000	$131,500	$41,500
IC7	Rule 17g-9 annual recordkeeping burden based on number of credit analysts	$550,400	$775,324	$224,924
Total for all ICs		$640,400	$906,824	$266,424

14. Cost to Federal Government

Commission staff does not anticipate any costs to the Federal Government associated with the information collections under Rules 17g-8 and Rule 17g-9.

15. Changes in Burden

The cost and hour burden for Rules 17g-8 and 17g-9 has increased due to an increase in the number of NRSROs from 9 to 10 and credit analysts employed by NRSROs from 5,506 to 5,897, and to account for inflation.

16. Information Collection Planned for Statistical Purposes

Not applicable. The information collection is not used for statistical purposes.

17. Display of OMB Approval Date

Commission staff is not seeking approval to omit the expiration date.

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.

1 15 U.S.C. 78o-7.

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

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

4 15 U.S.C. 78o-7(r) (directing the Commission to prescribe rules concerning procedures and methodologies for determining credit ratings).

5 See 240.17g-8(a).

6 See Nationally Recognized Statistical Ratings Organizations,79 FR 55154 (Sept. 15, 2014).

7 15 U.S.C. 78o-7(h)(4)(a) (directing the Commission to adopt rules requiring NRSROs to establish look-back policies and procedures).

8 See Pub. L. No. 111-203 § 938(a) (directing the Commission to adopt rules requiring policies and procedures that clearly define and disclose the meaning of any symbol used by NRSROs to denote a credit rating and apply any such symbol in a manner that is consistent for all types of securities and money market instruments for which the symbol is used).

9 See 240.17g-8(b)

10 See 240.17g-8(b)(1).

11 See 240.17g-8(b)(2).

12 See 240.17g-8(b)(3).

13 See Pub. L. No. 111–203 § 936.

14 See 240.17g-9.

15 See id.

16 44 U.S.C. 3501, et seq.

17 See Nationally Recognized Statistical Ratings Organizations, 79 FR 55078, 55160 (Sept. 15, 2014)

18 See id. at 55161.

19 See id. at 55212.

20 See id.

21 See id. at 55124

22 See id.

23 See id. at 55207.

24 See id.

25 See 17 CFR 240.0-10 [Small entities under the Securities Exchange Act for purposes of the Regulatory Flexibility Act] (defining “small business or small organization” as a person that, on the last day of its most recent fiscal year, had total assets of $5 million or less).

26 See X FR X (X).

27 500 hours + 200 hours + 500 hours + 250 hours = 1,450 hours. The burden associated with retaining the record documenting the policies and procedures is attributed to Rule 17g-2(b)(13) and Rule 17g-2(b)(14).

28 $186,000 + $74,400 + $186,000 +$93,000 = $539,400.

29

50 hours x 10 NRSROs = 500 hours.

30 500 hours x $372 per hour for a compliance manager = $186,000. Commission staff assumes that a compliance manager at the estimated salary of $372 per hour will perform the necessary activities to comply with the rule. This salary estimate and other salary estimates discussed in the supporting statement are derived from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1,800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead, as adjusted for inflation using the Bureau of Labor Statistics CPI Inflation Calculator.

31 20 hours x 10 NRSROs = 200 hours.

32 200 hours x $372 per hour for a compliance manager = $74,400.

33 50 hours x 10 NRSROs = 500 hours.

34 500 hours x $372 per hour for a compliance manager = $186,000.

35 25 hours x 10 NRSROs = 250 hours.

36 250 hours x $372 per hour for a compliance manager = $93,000.

37 See Staff Report on Nationally Recognized Statistical Rating (Feb. 2024), p. 29, available here: https://www.sec.gov/files/feb-2024-ocr-staff-report.pdf.

38 1 hour x 5,897 credit analysts = 5,897 hours.

39 5,897 hours x 0.75 = 4,422.75 hours, rounded to 4,423 hours; 5,897 hours x 0.25 = 1,474.25 hours, rounded to 1,474 hours.

40 100 hours x 10 NRSROs = 1,000 hours.

41 1,000 hours x .75 = 750 hours.

42 1,000 hours x .25 = 250 hours.

43 4,423 hours + 750 hours (internal burden hours) = 5,173 hours x $372 per hour for a compliance manager = $1,924,356.

44 5,897 credit analysts x 5 hours = 29,485 hours.

45 29,485 hours x $374 per hour for a fixed income research analyst (intermediate) = $11,027,390. The $374 figure was adjusted for inflation using the Bureau of Labor Statistics CPI Inflation Calculator.

46 750 hours + 4,423 hours + 29,485 hours = 34,658 hours.

47 $1,924,356 + $11,027,390 = $12,951,746.

48 1,305 hours + 34,658 hours = 35,963 hours.

49 5,897 hours x 0.25 = 1,474.25 hours, rounded to 1,474.

50 1,474 hours x $526 an hour for outside professionals = $775,324. The $526 figure is based on the Commission’s estimate to engage outside professionals provided in Disclosure for Asset-Backed Securities Required by Section 943 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, 76 FR at 4507-4506 (Jan. 26, 2011), as adjusted for inflation using the Bureau of Labor Statistics CPI Inflation Calculator.

51 1,000 hours x .25 = 250 hours.

52 250 hours x $526 per hour = $131,500.

53 $131,500 + $775,324 = $906,824.