83_FR_50491 83 FR 50297 - Amendments to Rules for Nationally Recognized Statistical Rating Organizations

83 FR 50297 - Amendments to Rules for Nationally Recognized Statistical Rating Organizations

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 194 (October 5, 2018)

Page Range50297-50310
FR Document2018-21295

The Securities and Exchange Commission (``Commission'') is proposing amendments to rules for nationally recognized statistical rating organizations (``NRSROs'') under the Securities Exchange Act of 1934 (``Exchange Act''). The amendments would provide an exemption from a rule for NRSROs with respect to credit ratings if the issuer of the security or money market instrument referred to in the rule is not a U.S. person, and the NRSRO has a reasonable basis to conclude that all offers and sales of such security or money market instrument by any issuer, sponsor, or underwriter linked to such security or money market instrument will occur outside the United States. In addition, the amendments would make conforming changes to similar exemptions in two other Exchange Act rules. The Commission is requesting comment on the proposed rule amendments.

Federal Register, Volume 83 Issue 194 (Friday, October 5, 2018)
[Federal Register Volume 83, Number 194 (Friday, October 5, 2018)]
[Proposed Rules]
[Pages 50297-50310]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-21295]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 83, No. 194 / Friday, October 5, 2018 / 
Proposed Rules

[[Page 50297]]



SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-84289; File No. S7-22-18]
RIN 3235-AM05


Amendments to Rules for Nationally Recognized Statistical Rating 
Organizations

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
proposing amendments to rules for nationally recognized statistical 
rating organizations (``NRSROs'') under the Securities Exchange Act of 
1934 (``Exchange Act''). The amendments would provide an exemption from 
a rule for NRSROs with respect to credit ratings if the issuer of the 
security or money market instrument referred to in the rule is not a 
U.S. person, and the NRSRO has a reasonable basis to conclude that all 
offers and sales of such security or money market instrument by any 
issuer, sponsor, or underwriter linked to such security or money market 
instrument will occur outside the United States. In addition, the 
amendments would make conforming changes to similar exemptions in two 
other Exchange Act rules. The Commission is requesting comment on the 
proposed rule amendments.

DATES: Comments should be received on or before November 5, 2018.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to [email protected]. Please include 
File Number S7-22-18 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-22-18. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's website (http://www.sec.gov/rules/proposed.shtml). 
Comments also are available for website viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make publicly available.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the SEC's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Harriet Orol, Kevin Vasel, or Patrick 
Boyle, at (212) 336-9080, Office of Credit Ratings, Securities and 
Exchange Commission, New York Regional Office, 200 Vesey Street, Suite 
400, New York, NY 10281.

SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to:
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    \1\ 15 U.S.C. 78a et seq.

 
------------------------------------------------------------------------
                                    CFR citation (17
      Commission reference                CFR)
------------------------------------------------------
Securities Exchange Act of 1934   Rule 17g-5(a)(3)...    Sec.   240.17g-
 (Exchange Act) \1\.                                             5(a)(3)
                                  Rule 17g-7(a)......    Sec.   240.17g-
                                                                    7(a)
                                  Rule 15Ga-2........  Sec.   240.15Ga-2
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Table of Contents

I. Background 6
    A. Rule 17g-5(a)(3) 6
    B. Rule 17g-7(a) and Rule 15Ga-2 8
II. Proposed Rule Amendments 11
    A. Rule 17g-5(a)(3) 11
    B. Conforming Amendments to Rule 17g-7(a) and Rule 15Ga-2 18
III. Request for Comment 21
IV. Paperwork Reduction Act 23
    A. Summary of Collection of Information under the Proposed Rule 
Amendments and Proposed Use of Information 24
    1. Proposed Amendments to Rule 17g-5(a)(3) 24
    2. Proposed Amendments to Rule 17g-7(a) 24
    B. Respondents 25
    C. Burden and Cost Estimates Related to the Proposed Amendments 
25
    1. Proposed Amendments to Rule 17g-5(a)(3) 25
    2. Proposed Amendments to Rule 17g-7(a) 27
    D. Collection of Information is Required to Obtain a Benefit 28
    E. Confidentiality 28
    F. Request for Comment 28
V. Economic Analysis 29
    A. Introduction 29
    B. Baseline and Affected Parties 31
    C. Anticipated Costs and Benefits, Including Potential Effects 
on Efficiency, Competition, and Capital Formation 34
    1. Potential Benefits 34
    2. Potential Costs and Other Anticipated Effects 36
    3. Alternative Considered: Allow Exemptive Order to Expire 38
    a. Benefits 39
    b. Costs 42

[[Page 50298]]

VI. Small Business Regulatory Enforcement Fairness Act 46
VII. Regulatory Flexibility Act Certification 47
VIII. Statutory Authority 50

I. Background

A. Rule 17g-5(a)(3)

    In 2009, the Commission adopted amendments to 17 CFR 240.17g-5 
(``Rule 17g-5'') designed to address conflicts of interest arising from 
the business of determining credit ratings, and to improve competition 
and the quality of credit ratings for structured finance products, by 
making it possible for more NRSROs to rate such securities.\2\ The 
amendments established a program (``Rule 17g-5 Program'') by which an 
NRSRO that is not hired by an issuer, sponsor, or underwriter 
(collectively, ``arranger'') is able to obtain the same information 
that the arranger provides to an NRSRO hired to determine a credit 
rating for the structured finance product at the same time the 
information is provided to the hired NRSRO.\3\
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    \2\ Amendments to Rules for Nationally Recognized Statistical 
Rating Organizations, Exchange Act Release No. 61050 (Nov. 23, 
2009), 74 FR 63832 (Dec. 4, 2009) (``Rule 17g-5 Adopting Release''). 
The term ``structured finance product'' as used throughout this 
release refers broadly to any security or money market instrument 
issued by an asset pool or as part of any asset-backed securities 
transaction. This broad category of financial instruments includes 
an asset-backed security as defined in Section 3(a)(79) of the 
Exchange Act (15 U.S.C. 78c(a)(79)) and other types of structured 
debt instruments, including synthetic and hybrid collateralized debt 
obligations. See, e.g., Nationally Recognized Statistical Rating 
Organizations, Exchange Act Release No. 72936 (Aug. 27, 2014), 79 FR 
55078, 55081 n.18 (Sept. 15, 2014) (``2014 NRSRO Amendments'').
    \3\ Rule 17g-5 Adopting Release, supra note 2, 74 FR at 63832. 
See also 17 CFR 240.17g-5. Throughout this release, an NRSRO that is 
not hired by an arranger is referred to as a ``non-hired NRSRO.'' An 
NRSRO that is hired by an arranger is referred to as a ``hired 
NRSRO.''
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    The Rule 17g-5 Program operates by requiring a hired NRSRO to 
maintain a password-protected website containing a list of each 
structured finance product for which it is currently in the process of 
determining an initial credit rating.\4\ The list must be in 
chronological order and identify the type of structured finance 
product, the name of the issuer, the date the credit rating process was 
initiated, and the website where the arranger of the structured finance 
product represents that the information provided to the hired NRSRO can 
be accessed by non-hired NRSROs.\5\ The hired NRSRO must provide free 
and unlimited access to the website it maintains pursuant to the Rule 
17g-5 Program to any non-hired NRSRO that provides a copy of a 
certification it has furnished to the Commission in accordance with 17 
CFR 240.17g-5(e).\6\
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    \4\ See 17 CFR 240.17g-5(a)(3)(i).
    \5\ Id.
    \6\ See 17 CFR 240.17g-5(a)(3)(ii); 17 CFR 240.17g-5(e).
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    The Rule 17g-5 Program also requires the hired NRSRO to obtain a 
written representation from the arranger of the structured finance 
product that can be reasonably relied on by the hired NRSRO.\7\ Such 
representation must include: That the arranger will maintain a 
password-protected website that other NRSROs can access; that the 
arranger will post on this website all information the arranger 
provides to the hired NRSRO (or contracts with a third party to provide 
to the hired NRSRO) for the purpose of determining the initial credit 
rating and undertaking credit rating surveillance; and that the 
arranger will post this information to the website at the same time 
such information is provided to the hired NRSRO.\8\
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    \7\ See 17 CFR 240.17g-5(a)(3)(iii).
    \8\ Id.
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    Prior to the June 2, 2010 compliance date for the Rule 17g-5 
Program, the Commission by order granted a temporary conditional 
exemption to NRSROs from Rule 17g-5(a)(3). This temporary conditional 
exemption (the ``existing Rule 17g-5(a)(3) exemption'') applies solely 
with respect to credit ratings if: (1) The issuer of the security or 
money market instrument is not a U.S. person (as defined under 17 CFR 
230.902(k)); and (2) the NRSRO has a reasonable basis to conclude that 
the structured finance product will be offered and sold upon issuance, 
and that any arranger linked to the structured finance product will 
effect transactions of the structured finance product after issuance, 
only in transactions that occur outside the United States.\9\ These 
conditions were designed to confine the existing Rule 17g-5(a)(3) 
exemption's application to credit ratings of structured finance 
products issued in, and linked to, financial markets outside of the 
United States. The Commission granted this relief in light of concerns 
raised by various foreign securities regulators and market participants 
that local securitization markets may be disrupted if the rule applied 
to transactions outside the United States.\10\ The Commission has 
extended the existing Rule 17g-5(a)(3) exemption several times, most 
recently until the earlier of December 2, 2019, or the compliance date 
set forth in any final rule that may be adopted by the Commission that 
provides for a similar exemption.\11\
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    \9\ See Order Granting Temporary Conditional Exemption for 
Nationally Recognized Statistical Rating Organizations from 
Requirements of Rule 17g-5 Under the Securities Exchange Act of 1934 
and Request for Comment, Exchange Act Release No. 62120 (May 19, 
2010), 75 FR 28825 (May 24, 2010) (``Exemptive Order'').
    \10\ Id. at 28826-27. Such foreign securities regulators and 
market participants indicated that arrangers of structured finance 
products located outside the United States generally were not aware 
that they would be required to make the representations prescribed 
in Rule 17g-5 in order to obtain credit ratings from NRSROs and were 
not prepared to make and adhere to the new requirements set forth in 
Rule 17g-5(a)(3). These commenters also identified potential 
conflicts with local law in non-U.S. jurisdictions as a concern. Id.
    \11\ See Order Extending Conditional Temporary Exemption for 
Nationally Recognized Statistical Rating Organizations from 
Requirements of Rule 17g-5(a)(3) Under the Securities Exchange Act 
of 1934, Exchange Act Release No. 82144 (Nov. 22, 2017), 82 FR 56309 
(No. 28, 2017).
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B. Rule 17g-7(a) and Rule 15Ga-2

    In 2014, the Commission adopted Rule 17g-7(a) and Rule 15Ga-2. Rule 
17g-7(a) requires an NRSRO, when taking a rating action, to publish an 
information disclosure form containing specified information about the 
related credit rating.\12\ For example, the information disclosure form 
must specify, among other things, the version of the methodology used 
to determine the credit rating, a description of the types of data 
relied upon to determine the credit rating, and information on the 
sensitivity of the credit rating to assumptions made by the NRSRO.\13\ 
The NRSRO must also attach to the information disclosure form an 
attestation affirming that no part of the credit rating was influenced 
by any other business activities, that the credit rating was based 
solely upon the merits of the obligor, security, or money market 
instrument being rated, and that the rating was an independent 
evaluation of the credit risk of the obligor, security, or money market 
instrument.\14\
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    \12\ 17 CFR 240.17g-7(a)(1). Rule 17g-7(a) sets forth the 
required format and content of the information disclosure form and 
specifies that the form (and other items required by Rule 17g-7(a)) 
must be published in the same manner as the credit rating that is 
the result or subject of the rating action.
    \13\ See 17 CFR 240.17g-7(a)(1)(ii)(B), (H), and (M). For a 
comprehensive discussion of the required content of the form, see 
2014 NRSRO Amendments, supra note 2, 79 FR at 55167-77.
    \14\ 17 CFR 240.17g-7(a)(1)(iii).
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    Rule 17g-7(a) also requires an NRSRO, when taking a rating action, 
to publish any executed Form ABS Due Diligence-15E containing 
information about the security or money market instrument subject to 
the rating action received by the NRSRO or obtained by the NRSRO 
through the website maintained by an arranger under the Rule 17g-5 
Program.\15\ Form ABS Due Diligence-15E is the form on which a person 
employed by an NRSRO, issuer,

[[Page 50299]]

or underwriter to provide third-party due diligence services in 
connection with an asset-backed security must, among other things, 
describe the scope and manner of the due diligence provided, summarize 
the findings and conclusions of its review, and certify that it 
conducted a thorough review in performing the due diligence.\16\
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    \15\ 17 CFR 240.17g-7(a)(2).
    \16\ Rule 17g-10 identifies Form ABS Due Diligence-15E as the 
form on which the certification required pursuant to Exchange Act 
Section 15E(s)(4)(B) must be set forth. See 17 CFR 240.17g-10; see 
also 15 U.S.C. 78o-7(s)(4)(B).
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    Rule 15Ga-2 also relates to third-party due diligence services and 
requires the issuer or underwriter of an asset-backed security that is 
to be rated by an NRSRO to furnish to the Commission Form ABS-15G 
containing the findings and conclusions of any third-party due 
diligence report obtained by the issuer or underwriter.\17\
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    \17\ See 17 CFR 240.15Ga-2; 17 CFR 249.1400. Forms ABS-15G are 
made publicly available through the Commission's EDGAR system. See 
17 CFR 232.101(a)(xvi).
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    In response to concerns raised by commenters when the rules were 
proposed,\18\ the Commission included paragraph (a)(3) in 17 CFR 
240.17g-7 (``Rule 17g-7'') and paragraph (e) in Rule 15Ga-2 to provide 
an exemption from the disclosure requirements for certain offshore 
transactions.\19\ The Commission closely modeled the language of the 
Rule 17g-7(a) exemption on the existing Rule 17g-5(a)(3) exemption.\20\ 
The Commission noted that it was appropriate for the Rule 15Ga-2 
exemption to be aligned with the Rule 17g-7(a) exemption so that there 
is a consistent approach to determining when the Commission's NRSRO 
rules apply to offshore transactions.\21\
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    \18\ With respect to Rule 17g-7(a), a commenter suggested that 
local laws could impede the ability of an NRSRO to obtain or 
disclose information about the issuer as required by the proposed 
rule. See 2014 NRSRO Amendments, supra note 2, 79 FR at 55165. 
Similarly, with respect to Rule 15Ga-2, a commenter indicated that 
application of the rule to offshore transactions may conflict with 
foreign securities laws and other laws, rules, and regulations. See 
2014 NRSRO Amendments, supra note 2, 79 FR at 55184, n.1420. As 
discussed in Section II.A. of this release, similar concerns 
regarding potentially overlapping or conflicting foreign regulations 
have been raised by commenters with respect to Rule 17g-5(a)(3).
    \19\ See 2014 NRSRO Amendments, supra note 2, 79 FR at 55165, 
55184-85. See also 17 CFR 240.17g-7(a)(3) (providing for an 
exemption if: (1) The rated obligor or issuer of the rated security 
or money market instrument is not a U.S. person; and (2) the NRSRO 
has a reasonable basis to conclude that a security or money market 
instrument issued by the rated obligor or the issuer will be offered 
and sold upon issuance, and that any underwriter or arranger linked 
to the security or money market instrument will effect transactions 
in the security or money market instrument, only in transactions 
that occur outside the United States); 17 CFR 240.15Ga-2(e) 
(providing for an exemption with respect to offerings of asset-
backed securities if: (1) The offering is not required to be, and is 
not, registered under the Securities Act; (2) the issuer of the 
rated security is not a U.S. person; and (3) the security will be 
offered and sold upon issuance, and any underwriter or arranger 
linked to the security will effect transactions of the security 
after issuance, only in transactions that occur outside the United 
States).
    \20\ 2014 NRSRO Amendments, supra note 2, 79 FR at 55165.
    \21\ Id. at 55185 n.1422.
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II. Proposed Rule Amendments

A. Rule 17g-5(a)(3)

    In the Exemptive Order, the Commission requested comment regarding 
the application of Rule 17g-5(a)(3) to transactions outside the United 
States, including whether any specific conflicts would arise with 
respect to foreign regulators, regulations, and laws.\22\ In subsequent 
extension orders, the Commission continued to provide interested 
parties with the opportunity to comment. The Commission received a 
number of comment letters in response to these requests for 
comment.\23\
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    \22\ See Exemptive Order, supra note 9, 75 FR at 28825, 28828.
    \23\ Comment letters received in response to the request for 
comment regarding the application of Rule 17g-5(a)(3) to 
transactions outside the United States are available at https://www.sec.gov/comments/s7-04-09/s70409.shtml.
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    Commenters on the Exemptive Order and extensions generally have 
supported the existing Rule 17g-5(a)(3) exemption, with many commenters 
expressly requesting that such exemption be extended indefinitely, made 
permanent, or codified in Rule 17g-5(a)(3).\24\ In support of the 
existing Rule 17g-5(a)(3) exemption, some commenters indicated that 
broad application of Rule 17g-5(a)(3) to credit ratings of structured 
finance products offered and sold by non-U.S. persons outside the 
United States could disrupt local securitization markets or inhibit the 
ability of local firms to raise capital.\25\
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    \24\ See, e.g., letter from Rick Watson, Managing Director, 
Association for Financial Markets in Europe/European Securitisation 
Forum, dated November 11, 2010 (``AFME 2010 Letter''); letter from 
Jack Rando, Director, Capital Markets, Investment Industry 
Association of Canada, dated September 22, 2010 (``IIAC Letter''); 
letter from Masamichi Kono, Vice Commissioner for International 
Affairs, Financial Services Agency, Government of Japan, dated 
November 12, 2010 (``Japan FSA Letter''); letter from Takefumi 
Emori, Managing Director, Japan Credit Rating Agency, Ltd., dated 
June 25, 2010 (``JCR Letter''); letter from Patrick D. Dolan, Chair, 
Structured Finance Committee, New York City Bar Association, dated 
October 20, 2016 (``NYC Bar Association Letter''); letter from 
Richard Johns, Executive Director, Structured Finance Industry 
Group, and Chris Dalton, Chief Executive Officer, Australian 
Securitisation Forum, dated July 19, 2017 (``SFIG/AuSF Letter''); 
letter from Masaru Ono, Executive Director, Securitization Forum of 
Japan, dated November 12, 2010 (``SFJ Letter'').
    \25\ See, e.g., AFME 2010 Letter; letter from Chris Dalton, 
Chief Executive Officer, Australian Securitisation Forum, dated June 
25, 2010 (``AuSF Letter''); Japan FSA Letter; JCR Letter; SFJ 
Letter. Other commenters indicated more generally that such 
application of the rule could have a negative impact on foreign 
markets. See, e.g., IIAC Letter; NYC Bar Association Letter; SFIG/
AuSF Letter.
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    Specifically, some commenters discussed potentially overlapping 
regulatory regimes as a reason the exemption was appropriate.\26\ For 
example, one commenter indicated that new securitization disclosure 
requirements in Europe take a different approach in regulating the same 
general activity as Rule 17g-5(a)(3).\27\ In an earlier comment letter, 
this commenter asserted that subjecting European market participants to 
overlapping regulatory regimes may impose significant compliance issues 
and an increased execution burden.\28\ In this commenter's view, the 
application of Rule 17g-5(a)(3) in a non-U.S. offered context may be 
disruptive to local markets because the rule does not reflect certain 
features specific to the securitization market in Europe.\29\
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    \26\ See, e.g., AFME 2010 Letter; Japan FSA Letter;SFJ Letter.
    \27\ See letter from Richard Hopkin, Managing Director & Head of 
Fixed Income, Association for Financial Markets in Europe, dated 
November 1, 2017 (``AFME 2017 Letter'').
    \28\ See AFME 2010 Letter.
    \29\ See AFME 2010 Letter; AFME 2017 Letter.
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    Commenters also supported the exemption based on the disclosure of 
confidential information that could result from the application of Rule 
17g-5(a)(3) to non-U.S. offered transactions.\30\ One commenter 
indicated that compliance with Rule 17g-5(a)(3) could potentially 
conflict with local bank confidentiality and/or data protection 
laws.\31\ Other commenters also identified concerns regarding the 
posting of confidential information through the Rule 17g-5 Program, 
stating that a reluctance to disclose confidential information to non-
hired NRSROs could cause market participants to provide less 
information to hired NRSROs \32\ or to forgo obtaining credit ratings 
on structured finance products.\33\
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    \30\ See, e.g., AFME 2010 Letter; JCR Letter; SFJ Letter.
    \31\ See AFME 2010 Letter.
    \32\ See SFJ Letter. This commenter asserted that it would be 
difficult for Japanese market participants to obtain an adequate 
level of comfort regarding how non-hired NRSROs that are neither 
established in Japan nor have an affiliate registered in Japan would 
protect confidential information posted pursuant to the Rule 17g-5 
Program.
    \33\ See JCR Letter. This commenter noted a concern that an 
arranger may ``be held liable to a third party for disclosing such 
party's sensitive, proprietary information'' through the Rule 17g-5 
Program.

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[[Page 50300]]

    One commenter also discussed business practices and characteristics 
of the securitization market in its jurisdiction that, according to the 
commenter, may make the Rule 17g-5 Program less likely to be 
effective.\34\ Among other things, the commenter indicated that it is 
not customary for credit rating agencies in Japan to issue unsolicited 
ratings on structured finance products. \35\ The commenter posited 
that, unless an NRSRO is established in Japan or has a Japanese 
affiliate, it may not have the requisite knowledge and expertise to 
rate Japanese structured finance products.\36\ This commenter also 
suggested that, given the smaller and less mature securitization market 
in Japan as compared to the United States, market participants in Japan 
may utilize other sources of financing rather than bear the costs 
associated with the Rule 17g-5 Program.\37\
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    \34\ See SFJ Letter.
    \35\ Id.
    \36\ Id.
    \37\ Id.
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    A number of commenters also advocated for the existing Rule 17g-
5(a)(3) exemption based on principles related to international comity, 
asserting that the Commission has a limited interest in regulating 
securities offered and sold exclusively outside the United States and 
that these transactions are more appropriately regulated by the 
relevant local authorities.\38\ A number of these commenters pointed to 
17 CFR 230.901 through 230.905 (``Regulation S''), which excludes 
offers and sales that occur outside the United States from the 
registration requirements under Section 5 of the Securities Act of 1933 
(``Securities Act''),\39\ as evidence, in the commenters' view, of the 
Commission's limited interest in regulating securities offered and sold 
solely outside the United States.\40\
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    \38\ See, e.g., AFME 2010 Letter; AuSF Letter; IIAC Letter; 
Japan FSA Letter; JCR Letter; NYC Bar Association Letter; SFJ 
Letter. Some of these commenters posited that these policy 
considerations are particularly acute given that Rule 17g-5(a)(3) 
impacts both the regulated entities (i.e., NRSROs) and their 
customers (i.e., the issuers of rated structured finance products). 
See, e.g., NYC Bar Association Letter.
    \39\ See 17 CFR 230.901 through 230.905.
    \40\ See, e.g., AFME 2010 Letter; AuSF Letter; NYC Bar 
Association Letter.
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    The Commission has considered the views and policy considerations 
expressed by commenters and preliminarily believes it is appropriate to 
provide relief regarding the application of Rule 17g-5(a)(3) to 
transactions outside the United States. The Commission is of the view 
that such an approach is consistent with the approach it has taken in 
other contexts, and with notions of international comity and the 
generally limited interest of the Commission in regulating securities 
offered and sold exclusively outside of the United States. For example, 
in adopting Regulation S,\41\ the Commission stated that ``[p]rinciples 
of comity and the reasonable expectations of participants in the global 
markets justify reliance on laws applicable in jurisdictions outside 
the United States to define requirements for transactions effected 
offshore.'' \42\ The Commission believes that the approach it 
articulated in adopting Regulation S applies similarly to the proposed 
exemption to Rule 17g-5(a)(3)--i.e., that providing relief regarding 
the application of Rule 17g-5(a)(3) to transactions outside the United 
States recognizes the reasonable expectations of participants in the 
global markets in defining requirements for transactions effected 
outside the United States.
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    \41\ 17 CFR 230.901 through 230.905.
    \42\ See Offshore Offers and Sales, Securities Act Release No. 
6863 (Apr. 24, 1990). As described in the Commission's adopting 
release for Regulation S, Regulation S relates solely to the 
applicability of the registration requirements of Section 5 of the 
Securities Act and does not limit in any way the scope or 
applicability of the antifraud or other provisions of the federal 
securities laws.
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    For the reasons discussed above, the Commission preliminarily 
believes that it is not necessary or appropriate in the public interest 
or for the protection of investors to require NRSROs and arrangers to 
comply with Rule 17g-5(a)(3) with respect to ratings of structured 
finance products offered and sold exclusively outside the United States 
and that it is therefore appropriate to propose to codify, with certain 
clarifying changes, the existing Rule 17g-5(a)(3) exemption.\43\ The 
proposed exemption only applies to the provisions of paragraphs (i) 
through (iii) of Rule 17g-5(a)(3). It does not limit in any way the 
scope or applicability of the other requirements in Rule 17g-5 or other 
provisions of the federal securities laws, including the antifraud 
provisions.
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    \43\ Codifying an exemption to Rule 17g-5(a)(3) also will 
standardize the manner in which the exemptions to Rule 17g-5(a)(3), 
Rule 17g-7(a), and Rule 15Ga-2 are promulgated. Unlike the existing 
Rule 17g-5(a)(3) exemption, the Rule 17g-7(a) and Rule 15Ga-2 
exemptions are included in the rule text and not subject to 
expiration. See supra Section I.B.
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    Accordingly, the Commission proposes to add new paragraph 
(a)(3)(iv) to Rule 17g-5 to provide that the provisions of paragraphs 
(i) through (iii) of Rule 17g-5(a)(3) will not apply to an NRSRO when 
issuing or maintaining a credit rating for a security or money market 
instrument issued by an asset pool or as part of any asset-backed 
securities transaction, if: (1) The issuer of the security or money 
market instrument is not a U.S. person (as defined in 17 CFR 
230.902(k)); and (2) the NRSRO has a reasonable basis to conclude that 
all offers and sales of the security or money market instrument by any 
issuer, sponsor, or underwriter linked to the security or money market 
instrument will occur outside the United States (as that phrase is used 
in Regulation S).\44\
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    \44\ See proposed new paragraph (a)(3)(iv) of Rule 17g-5.
---------------------------------------------------------------------------

    The first condition of the proposed exemption to Rule 17g-5(a)(3)--
that the issuer of the structured finance product must not be a U.S. 
person--is designed to limit relief to non-U.S. issuers. To this end, 
and for purposes of the exemption, the Commission is proposing that 
``U.S. person'' have the same definition as under Regulation S.\45\ 
Consequently, to qualify for the exemption, the NRSRO would have to be 
determining a credit rating for a structured finance product issued by 
a person that is not a U.S. person. This condition is identical to the 
corresponding condition in the existing Rule 17g-5(a)(3) exemption.
---------------------------------------------------------------------------

    \45\ See 17 CFR 230.902(k).
---------------------------------------------------------------------------

    The second condition of the proposed exemption to Rule 17g-
5(a)(3)--that the NRSRO has a reasonable basis to conclude that all 
offers and sales of the structured finance product by any arranger 
linked to the structured finance product will occur outside the United 
States--would limit the relief to transactions offered and sold 
exclusively outside the United States. This condition contains certain 
modifications to the corresponding condition in the existing Rule 17g-
5(a)(3) exemption. The Commission is proposing these modifications for 
two reasons: (1) To clarify the relationship between the proposed 
exemption and Regulation S--i.e., that the exemption applies when all 
offers and sales of a structured finance product by any arranger linked 
to the structured finance product are excluded from the registration 
requirements of Section 5 of the Securities Act in reliance on 
Regulation S; and (2) to clarify that the standards in the second 
condition are not the same as the standards that are developing in the 
case law with respect to Section 10(b) of the Exchange Act following 
the Supreme Court's decision in Morrison v. National Australia Bank, 
Ltd., 561 U.S. 247 (2010). The second condition of the proposed 
exemption closely tracks the language of Regulation

[[Page 50301]]

S \46\ and specifies that the phrase ``occur outside the United 
States'' has the same meaning as in Regulation S. The proposed 
modifications are not designed to change the scope of the second 
condition of the proposed exemption from the corresponding condition in 
the existing Rule 17g-5(a)(3)exemption.\47\
---------------------------------------------------------------------------

    \46\ See 17 CFR 230.901.
    \47\ From its inception, the existing Rule 17g-5(a)(3) exemption 
has been linked to Regulation S. For instance, in the Exemptive 
Order, the example given of a transaction that occurs outside the 
United States is a transaction that complies with the applicable 
safe harbor under Rules 903 and 904 of Regulation S. See Exemptive 
Order, supra note 9, 75 FR at 28827.
---------------------------------------------------------------------------

    The determination of whether an NRSRO would have a reasonable basis 
to conclude that all offers and sales of the structured finance product 
by any arranger linked to the structured finance product will occur 
outside the United States would depend on the facts and circumstances 
of a given situation. To have a reasonable basis to reach such a 
conclusion, the NRSRO generally should ascertain how any arranger 
linked to the structured finance product intends to market and sell the 
structured finance product and to engage in any secondary market 
activities (i.e., re-sales) of the structured finance product, and 
whether any such efforts and activities will occur in the United States 
(including any ``directed selling efforts,'' as defined in Regulation 
S).\48\
---------------------------------------------------------------------------

    \48\ 17 CFR 230.902(c).
---------------------------------------------------------------------------

    For instance, an NRSRO could obtain from the applicable arranger a 
representation upon which the NRSRO can reasonably rely that all offers 
and sales by the arranger of the structured finance product to be rated 
by the NRSRO will occur outside the United States. For example, the 
arranger's representation could provide assurances that all such offers 
and sales will be conducted in accordance with the applicable safe 
harbor under Regulation S.\49\ In determining whether it is reasonable 
to rely on any such representation, an NRSRO should evaluate the 
representation in light of other information known to the NRSRO, such 
as information in the relevant transaction documents, any ongoing or 
prior failures by the arranger to adhere to its representations, and 
any pattern of conduct by the arranger of it failing to promptly 
correct breaches of its representations.
---------------------------------------------------------------------------

    \49\ See 17 CFR 230.903 and 904.
---------------------------------------------------------------------------

    An NRSRO generally should reevaluate the reasonableness of its 
basis for concluding that the structured finance product will be 
offered and sold outside the United States if the NRSRO obtains 
information during the course of its engagement that could cause it to 
reasonably believe there are activities inside the U.S. In this regard, 
the NRSRO could include in any representation obtained from an arranger 
a mechanism for the arranger to promptly notify the NRSRO of any change 
that would render the representation untrue or inaccurate.

B. Conforming Amendments to Rule 17g-7(a) and Rule 15Ga-2

    As discussed in Section I.B. of this release, Rule 17g-7(a) and 
Rule 15Ga-2 contain exemptions similar to the existing Rule 17g-5(a)(3) 
exemption. The Commission closely modeled the language of the Rule 17g-
7(a) exemption on the existing Rule 17g-5(a)(3) exemption.\50\ The 
Commission then aligned the Rule 15Ga-2 exemption to the Rule 17g-7(a) 
exemption so that there is a consistent approach to determining when 
the Commission's NRSRO rules apply to offshore transactions.\51\
---------------------------------------------------------------------------

    \50\ 2014 NRSRO Amendments, supra note 2, 79 FR at 55165.
    \51\ Id. at 55185 n.1422.
---------------------------------------------------------------------------

    The Commission continues to believe that it is appropriate for 
there to be a consistent approach to determining how Rule 17g-5(a)(3), 
Rule 17g-7(a), and Rule 15Ga-2 apply to offshore transactions. 
Commenters raised similar concerns with respect to all three rules 
regarding the potential conflicts between such rules and foreign 
regulations and practices with respect to transactions offered and sold 
exclusively outside the United States.\52\ As discussed in Section 
II.A. of this release, the Commission believes that it has a limited 
interest in regulating securities offered and sold solely outside the 
United States (a view which is also consistent with international 
comity).
---------------------------------------------------------------------------

    \52\ See supra note 18 and Section II.A.
---------------------------------------------------------------------------

    Further, as discussed in Section II.A. of this release, the 
proposed modifications to the conditions of the existing Rule 17g-
5(a)(3) exemption are not designed to change the scope of the 
exemption, but rather to clarify how the exemption relates to 
Regulation S. The Commission believes that clarifying the conditions to 
the exemption with respect to Rule 17g-5(a)(3) without also clarifying 
the substantially identical conditions to the exemptions in Rule 17g-
7(a) and Rule 15Ga-2 could raise interpretive questions regarding the 
intended application of those exemptions. Accordingly, to promote 
clarity and consistency, the Commission proposes to amend Rule 17g-7(a) 
and Rule 15Ga-2 to align the exemptions to such rules with the proposed 
exemption to Rule 17g-5(a)(3).\53\
---------------------------------------------------------------------------

    \53\ See supra Section II.A.
---------------------------------------------------------------------------

    Specifically, the Commission proposes to amend the third condition 
of the Rule 15Ga-2 exemption to clarify that the exemption is available 
only if all offers and sales of an asset-backed security by any issuer, 
sponsor, or underwriter linked to the security will occur outside the 
United States (as that phrase is used in Regulation S).\54\
---------------------------------------------------------------------------

    \54\ See proposed revised paragraph (e)(3) of Rule 15Ga-2.
---------------------------------------------------------------------------

    Likewise, the Commission proposes to amend the second condition of 
the Rule 17g-7(a) exemption to clarify that the exemption is available 
only if an NRSRO has a reasonable basis to conclude that: (A) With 
respect to any security or money market instrument issued by a rated 
obligor, all offers and sales by any issuer, sponsor, or underwriter 
linked to the security or money market instrument will occur outside 
the United States (as that phrase is used in Regulation S); or (B) with 
respect to a rated security or money market instrument, all offers and 
sales by any issuer, sponsor, or underwriter linked to the security or 
money market instrument will occur outside the United States (as that 
phrase is used in Regulation S).\55\
---------------------------------------------------------------------------

    \55\ See proposed revised paragraph (a)(3)(ii) of Rule 17g-7.
---------------------------------------------------------------------------

    As is the case with the proposed exemption to Rule 17g-5(a)(3), the 
determination of whether an NRSRO would have a reasonable basis to 
conclude that all offers and sales of the applicable securities or 
money market instruments by any arranger linked to such securities or 
money market instruments will occur outside the United States would 
depend on the facts and circumstances of a given situation. The 
discussion in Section II.A. of this release regarding how an NRSRO may 
obtain such a reasonable basis for purposes of the proposed exemption 
to Rule 17g-5(a)(3) also applies for purposes of the proposed amendment 
to Rule 17g-7(a).
    The proposed amendment to Rule 17g-7(a) also clarifies that the 
second condition of the Rule 17g-7(a) exemption applies differently in 
the case of rated obligors than it does in the case of rated securities 
or money market instruments. In the case of rated securities or money 
market instruments, the condition to the Rule 17g-7(a) exemption 
applies in the same way as the condition to the proposed Rule 17g-
5(a)(3) exemption--i.e., an NRSRO must have a reasonable basis to 
conclude that

[[Page 50302]]

all offers and sales of the rated security or money market instrument 
by any arranger linked to that security or money market instrument will 
occur outside the United States. For the Rule 17g-7(a) exemption to 
apply with respect to a rating of an obligor, however, an NRSRO must 
have a reasonable basis to conclude that the condition is satisfied 
with respect to all securities or money market instruments issued by 
that obligor. Accordingly, if any of a rated obligor's securities or 
money market instruments are offered and sold by an arranger linked to 
those securities or money market instruments within the United States, 
the exemption would not apply to rating actions involving the credit 
rating assigned to the obligor as an entity. The Commission previously 
discussed the distinction between the application of the exemption with 
respect to rated obligors and rated securities or money market 
instruments in the adopting release for Rule 17g-7(a).\56\ The proposed 
amendment to Rule 17g-7(a) more clearly states this distinction in the 
rule text itself.
---------------------------------------------------------------------------

    \56\ See 2014 NRSRO Amendments, supra note 2, 79 FR at 55165 
n.1107.
---------------------------------------------------------------------------

III. Request for Comment

    The Commission generally requests comment on the proposal to add 
new paragraph (a)(3)(iv) of Rule 17g-5 and to amend paragraph 
(a)(3)(ii) of Rule 17g-7 and paragraph (e)(3) of Rule 15Ga-2. In 
addition, the Commission requests comment, including empirical data in 
support of comments, in response to the following questions:
    1. Is it appropriate for the Commission to amend Rule 17g-5(a)(3) 
to provide an exemption from the rule with respect to credit ratings 
where the issuer of the structured finance product is not a U.S. person 
and the NRSRO has a reasonable basis to conclude that all offers and 
sales of the structured finance product by any arranger linked to the 
structured finance produce will occur outside the United States? Why or 
why not?
    2. Would the proposed exemption be consistent with the Commission's 
general approach to regulating securities offered and sold exclusively 
outside the United States?
    3. Is it appropriate for the Commission to amend Rule 17g-7(a) and 
Rule 15Ga-2 to conform to the proposed exemption in Rule 17g-5(a)(3)? 
Why or why not?
    4. Are there other ways in which the Commission should consider 
amending Rule 17g-5, Rule 17g-7, and Rule 15Ga-2? Please be specific.
    5. What information might an NRSRO consider in order to form a 
reasonable basis to conclude that all offers and sales of a structured 
finance product by any arranger linked to the structured finance 
product will occur outside the United States?
    6. What actions might an NRSRO take to ensure that it continues 
throughout the ratings process to have a reasonable basis to conclude 
that all offers and sales of a structured finance product by any 
arranger linked to the structured finance product will occur outside 
the United States? In what circumstances might an NRSRO need to 
reevaluate its conclusion?
    7. Should Rule 17g-5(a)(3) be amended to require an NRSRO to take 
specific actions in order to obtain and continue to ensure that it has 
a reasonable basis to conclude that all offers and sales of a 
structured finance product by any arranger linked to the structured 
finance product will occur outside the United States? If so, how? For 
example, should an NRSRO be required to obtain from the applicable 
arranger a representation upon which the NRSRO can reasonably rely that 
all offers and sales by the arranger of the structured finance product 
to be rated by the NRSRO will occur outside the United States?
    8. If the Exemptive Order were allowed to expire without amending 
Rule 17g-5(a)(3) as proposed, are there any jurisdictions where 
applicable law would preclude compliance with Rule 17g-5(a)(3)? If so, 
what impact would application of Rule 17g-5(a)(3) to structured finance 
products offered and sold in such jurisdictions have on NRSROs? Would 
NRSROs and their affiliates be precluded from issuing ratings of 
structured finance products in such jurisdictions?
    9. What actions would NRSROs and arrangers need to take in order to 
comply with Rule 17g-5(a)(3) if the Exemptive Order were allowed to 
expire without codifying the existing Rule 17g-5(a)(3) exemption? How 
much advance notice would market participants currently relying on the 
Exemptive Order require in order to prepare to comply with Rule 17g-
5(a)(3)?
    10. If the Exemptive Order were allowed to expire without codifying 
the existing Rule 17g-5(a)(3) exemption, would any NRSROs use 
information available through the websites maintained by arrangers 
under the Rule 17g-5 Program to determine and monitor credit ratings 
with respect to transactions that would be exempted by the proposed 
rule?
    In responding to the specific requests for comment above, the 
Commission encourages interested persons to provide supporting data and 
analysis and, when appropriate, suggest modifications to the proposed 
rule text. Responses that are supported by data and analysis assist the 
Commission in considering the practicality and effectiveness of a 
proposed new requirement as well as evaluating the benefits and costs 
of the proposed rule.

IV. Paperwork Reduction Act

    The proposed amendments to Rule 17g-5(a)(3) and Rule 17g-7(a) 
contain new ``collection of information'' requirements within the 
meaning of the Paperwork Reduction Act of 1995 (``PRA'').\57\ The 
Commission will submit the proposed rule amendments to the Office of 
Management and Budget (``OMB'') for review in accordance with the 
PRA.\58\ An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid control number.
---------------------------------------------------------------------------

    \57\ 44 U.S.C. 3501 et seq.
    \58\ See 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

    The titles and OMB control numbers for the collections of 
information are:
    (1) Rule 17g-5, Conflicts of interest (OMB control number 3235-
0649); and
    (2) Rule 17g-7, Disclosure requirements (OMB control number 3235-
0656).
    The amendments to Rule 15Ga-2 do not contain a collection of 
information requirement within the meaning of the PRA.

A. Summary of Collection of Information Under the Proposed Rule 
Amendments and Proposed Use of Information

1. Proposed Amendments to Rule 17g-5(a)(3)
    The Commission is proposing amendments to Rule 17g-5(a)(3) that 
would provide an exemption to the rule with respect to credit ratings 
of structured finance products if the issuer of the structured finance 
product is not a U.S. person and the NRSRO has a reasonable basis to 
conclude that all offers and sales of the structured finance product by 
any arranger linked to the structured finance product will occur 
outside the United States.\59\ In order to have a reasonable basis for 
such a conclusion, an NRSRO may collect information from an arranger. 
For instance, an NRSRO may elect to obtain a representation from an 
arranger regarding the manner in which the structured finance product 
will be

[[Page 50303]]

offered and sold. Such information regarding the manner in which the 
structured finance product will be offered and sold may be necessary 
for an NRSRO to determine whether the proposed exemption applies with 
respect to the rating of the structured finance product.
---------------------------------------------------------------------------

    \59\ See proposed paragraph (a)(3)(iv) of Rule 17g-5; see also 
supra Section II.A. (discussing the proposed exemption in more 
detail).
---------------------------------------------------------------------------

2. Proposed Amendments to Rule 17g-7(a)
    The Commission is proposing amendments to an existing exemption in 
Rule 17g-7(a). The proposed amendment would clarify that, in order for 
the exemption to apply, an NRSRO must have a reasonable basis to 
conclude that: (A) With respect to any security or money market 
instrument issued by a rated obligor, all offers and sales by any 
issuer, sponsor, or underwriter linked to the security or money market 
instrument will occur outside the United States; or (B) with respect to 
a rated security or money market instrument, all offers and sales by 
any issuer, sponsor, or underwriter linked to the security or money 
market instrument will occur outside the United States.\60\ In order to 
have a reasonable basis for such a conclusion, an NRSRO may collect 
information from an arranger or obligor. For instance, an NRSRO may 
elect to obtain a representation from an arranger regarding the manner 
in which a rated security or money market instrument will be offered 
and sold or from an obligor regarding the manner in which all its 
securities and money market instruments have been offered and sold. 
Such information may be necessary for an NRSRO to determine whether the 
proposed exemption applies with respect to a rating action.
---------------------------------------------------------------------------

    \60\ See proposed paragraph (a)(3)(ii) of Rule 17g-7; see also 
supra Section II.B. (discussing the proposed amendments in more 
detail).
---------------------------------------------------------------------------

B. Respondents

    Rule 17g-5(a)(3) applies to NRSROs that rate structured finance 
products. Currently, there are seven NRSROs that are registered in the 
issuers of asset-backed securities ratings class that could rely on the 
proposed exemption to Rule 17g-5(a)(3).
    Rule 17g-7(a) applies to all rating actions taken by an NRSRO. 
There are currently ten credit rating agencies registered with the 
Commission as NRSROs that could rely on the proposed exemption to Rule 
17g-7(a).

C. Burden and Cost Estimates Related to the Proposed Amendments

1. Proposed Amendments to Rule 17g-5(a)(3)
    The Commission is proposing amendments to Rule 17g-5(a)(3) that 
would provide an exemption to the rule with respect to ratings of 
certain structured finance products if, among other things, the NRSRO 
has a reasonable basis to conclude that all offers and sales of the 
structured finance product by any arranger linked to the structured 
finance product will occur outside the United States.\61\ The proposed 
amendment would codify the existing Rule 17g-5(a)(3) exemption, with 
certain clarifying changes.
---------------------------------------------------------------------------

    \61\ See proposed paragraph (a)(3)(iv)(B) of Rule 17g-5; see 
also supra Section II.A. (discussing the proposed exemption in more 
detail).
---------------------------------------------------------------------------

    The Commission preliminarily believes that NRSROs will modify their 
processes to reflect the clarifying changes being proposed to the 
exemption. For instance, an NRSRO that currently seeks written 
representations from an arranger to support the reasonable belief 
required under the existing Rule 17g-5(a)(3) exemption may modify the 
form of the representation to conform to the language of the condition 
as proposed. The Commission estimates that it would take an NRSRO 
approximately five hours to update its process for obtaining a 
reasonable basis to reflect the clarifying language in the proposed 
exemption, for an industry-wide one-time burden of approximately 35 
hours.\62\
---------------------------------------------------------------------------

    \62\ 5 hours x 7 NRSROs registered to rate asset-backed 
securities = 35 hours.
---------------------------------------------------------------------------

    In order to have a reasonable basis to conclude that all offers and 
sales of the structured finance product by any arranger linked to the 
structured finance product will occur outside the United States, the 
Commission preliminarily believes that NRSROs will likely seek 
information from arrangers, thereby resulting in associated costs. The 
Commission estimates that an NRSRO would spend approximately two hours 
per transaction gathering and reviewing information received from 
arrangers to determine if the exemption applies. The Commission also 
currently estimates that approximately 267 rated transactions would be 
eligible for the proposed exemption in a given year and that each 
transaction is rated by approximately two NRSROs,\63\ resulting in a 
total aggregate annual hour burden of 1,068 hours.\64\
---------------------------------------------------------------------------

    \63\ These estimates were calculated using information, as of 
September 5, 2018, from the databases maintained by Asset-Backed 
Alert and Commercial Mortgage Alert. Isolating the transactions 
coded in the databases as ``Non-U.S.'' offerings provided an 
estimate of the number of transactions that would have been eligible 
for the proposed exemption. The databases also specify the number of 
NRSROs rating each transaction, which was used to calculate the 
average number of NRSROs per transaction (1.90). For purposes of the 
Commission's estimates, the number of NRSROs per transaction was 
rounded to the nearest whole number. The estimates represent the 
average number of transactions and NRSROs per transaction for the 
years ended December 31, 2015, 2016, and 2017.
    \64\ 2 hours x 267 transactions x 2 NRSROs per transaction = 
1,068 hours.
---------------------------------------------------------------------------

2. Proposed Amendments to Rule 17g-7(a)
    The Commission is proposing conforming and clarifying amendments to 
an existing exemption in Rule 17g-7(a). The proposed amendment would 
clarify that, in order for the exemption to apply, an NRSRO must have a 
reasonable basis to conclude that: (A) With respect to any security or 
money market instrument issued by a rated obligor, all offers and sales 
by any issuer, sponsor, or underwriter linked to the security or money 
market instrument will occur outside the United States; or (B) with 
respect to a rated security or money market instrument, all offers and 
sales by any issuer, sponsor, or underwriter linked to the security or 
money market instrument will occur outside the United States.\65\
---------------------------------------------------------------------------

    \65\ See proposed paragraph (a)(3)(ii) of Rule 17g-7; see also 
supra Section II.B. (discussing the proposed amendments in more 
detail).
---------------------------------------------------------------------------

    The Commission preliminarily believes that NRSROs will modify their 
processes to reflect the proposed amendments to the Rule 17g-7(a) 
exemption. For instance, an NRSRO that currently seeks written 
representations from an obligor or arranger to support the reasonable 
belief required under the Rule 17g-7(a) exemption, as currently in 
effect, may modify the form of the representation to conform to the 
language of the condition as proposed to be amended. The Commission 
estimates that it would take an NRSRO approximately five hours to 
update its process for obtaining a reasonable basis to reflect the 
proposed amendment to the Rule 17g-7(a) exemption, for an industry-wide 
one-time burden of approximately 50 hours.\66\
---------------------------------------------------------------------------

    \66\ 5 hours x 10 NRSROs = 50 hours.
---------------------------------------------------------------------------

D. Collection of Information is Required To Obtain a Benefit

    The proposed collection of information is required to obtain or 
maintain a benefit. In order to form a reasonable basis to conclude 
that all offers and sales of the structured finance

[[Page 50304]]

product will occur outside the United States, an NRSRO likely will 
gather certain information from the arranger including, for example, 
obtaining from the arranger a representation to that effect. The 
determination of a reasonable basis would be necessary for the proposed 
exemption to Rule 17g-5(a)(3) and the proposed amended exemption to 
Rule 17g-7(a) to apply.

E. Confidentiality

    Any information obtained by an NRSRO from an obligor or arranger to 
establish a reasonable basis will not be made public, unless the NRSRO, 
obligor, or arranger chooses to make it public. Information provided to 
the Commission in connection with staff examinations or investigations 
would be kept confidential, subject to the provisions of applicable 
law.

F. Request for Comment

    The Commission requests comment on the proposed collections of 
information in order to: (1) Evaluate whether the proposed collections 
of information are necessary for the proper performance of the 
functions of the Commission, including whether the information would 
have practical utility; (2) evaluate the accuracy of the Commission's 
estimate of the burden of the proposed collection of information; (3) 
determine whether there are ways to enhance the quality, utility, and 
clarity of the information to be collected; and (4) evaluate whether 
there are ways to minimize the burden of collection of information on 
those who respond, including through the use of automated collection 
techniques or other forms of information technology.
    Persons who desire to submit comments on the collection of 
information should direct their comments to the OMB, Attention: Desk 
Officer for the U.S. Securities and Exchange Commission, Office of 
Information and Regulatory Affairs, Washington, DC 20503, and should 
also send a copy of their comments to Secretary, U.S. Securities and 
Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, with 
reference to File No. S7-22-18. Requests for materials submitted to the 
OMB with regard to these collections of information should be in 
writing, refer to File No. S7-22-18, and be submitted to the U.S. 
Securities and Exchange Commission, Office of FOIA Services, 100 F 
Street NE, Washington, DC 20549-2736. OMB is required to make a 
decision concerning the collection of information between 30 and 60 
days after publication of this release. Consequently, a comment to OMB 
is best assured of having its full effect if OMB receives it within 30 
days of publication.

V. Economic Analysis

A. Introduction

    As discussed above, the Commission is proposing to amend Rule 17g-
5(a)(3) to provide an exemption from the rule with respect to credit 
ratings where the issuer of the structured finance product is not a 
U.S. person, and the NRSRO has a reasonable basis to conclude that all 
offers and sales of the structured finance product by any arranger 
linked to the structured finance product will occur outside the United 
States. The Commission is also proposing conforming amendments to 
similar exemptions set forth in Rule 17g-7(a) and Rule 15Ga-2. The 
Commission is sensitive to the costs and benefits of its rules. When 
engaging in rulemaking that requires the Commission to consider or 
determine whether an action is necessary or appropriate in the public 
interest, Section 3(f) of the Exchange Act requires that the Commission 
consider, in addition to the protection of investors, whether the 
action will promote efficiency, competition, and capital formation.\67\ 
In addition, Section 23(a)(2) of the Exchange Act requires the 
Commission to consider the effects on competition of any rules the 
Commission adopts under the Exchange Act, and prohibits the Commission 
from adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act.\68\
---------------------------------------------------------------------------

    \67\ See 15 U.S.C. 78c(f).
    \68\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Commission has considered the effects of the proposed 
amendments on competition, efficiency, and capital formation. Many of 
the benefits discussed below are difficult to quantify, in particular 
when considering the potential impact on conflicts of interest or 
competition. Consequently, while the Commission has, wherever possible, 
attempted to quantify the economic effects expected to result from this 
proposal, much of the discussion below is qualitative in nature. 
Moreover, because the existing Rule 17g-5(a)(3) exemption is currently 
in effect (and has been in effect since May 19, 2010--i.e., prior to 
the compliance date for Rule 17g-5(a)(3)), there has been no effect on 
transactions outside the United States because changes in the market 
related to the application of Rule 17g-5(a)(3) have not occurred with 
respect to these transactions as a consequence of the Exemptive Order. 
Where the Commission is unable to quantify the economic effects of the 
proposed amendment, the Commission provides a qualitative assessment of 
the potential effects and encourages commenters to provide data and 
information that could help quantify the costs, benefits, and the 
potential impacts of the proposed amendment to Rule 17g-5(a)(3) on 
efficiency, competition, and capital formation.
    The Commission's preliminary view is that the codification of 
current practices with respect to Rule 17g-5(a)(3) is appropriate when 
compared to the alternative of allowing the existing Rule 17g-5(a)(3) 
exemption to expire, as discussed below. This view was shared by the 
various commenters who requested that the existing Rule 17g-5(a)(3) 
exemption be extended indefinitely, made permanent, or codified in Rule 
17g-5(a)(3).\69\
---------------------------------------------------------------------------

    \69\ See supra note 24 and accompanying text.
---------------------------------------------------------------------------

    As discussed in Section II.B. of this release, the amendments to 
Rule 17g-7(a) and Rule 15Ga-2 are conforming and clarifying in nature. 
Further, unlike the existing Rule 17g-5(a)(3) exemption, the Rule 17g-
7(a) and Rule 15Ga-2 exemptions are already included as part of the 
rule text, and thus not subject to expiration. Therefore, the 
Commission's preliminary view is that the proposed amendments to Rule 
17g-7(a) and Rule 15Ga-2 will not have a material impact on efficiency, 
competition, and capital formation or impose new costs of any 
significance.

B. Baseline and Affected Parties

    The Exemptive Order serves as the economic baseline against which 
the costs and benefits, as well as the impact on efficiency, 
competition, and capital formation, of the proposed codification of the 
existing Rule 17g-5(a)(3) exemption is considered.
    Currently, pursuant to the Exemptive Order, NRSROs are exempt from 
the requirements of paragraphs (i) through (iii) of Rule 17g-5(a)(3) 
for credit ratings where: (1) The issuer of the security or money 
market instrument is not a U.S. person (as defined under 17 CFR 
230.902(k)); and (2) the NRSRO has a reasonable basis to conclude that 
the structured finance product will be offered and sold upon issuance, 
and that any arranger linked to the structured finance product will 
effect transactions of the structured finance product after issuance, 
only in transactions that occur outside the United States. As a result, 
with respect to such structured finance products, NRSROs are currently 
not required to comply with the requirements of Rule 17g-5(a)(3),

[[Page 50305]]

including the requirement to obtain from the arranger a representation 
that the arranger will maintain a website containing all information 
the arranger provides to the hired NRSRO in connection with the rating.
    Similarly, the existing exemptive language of paragraph (a)(3) of 
Rule 17g-7 and paragraph (e) of Rule 15Ga-2 serves as the economic 
baseline against which the costs and benefits, as well as the impact on 
efficiency, competition, and capital formation, of the amendments to 
such rules are considered. As previously noted, the Commission believes 
the amendments to Rule 17g-7(a) and Rule 15Ga-2 are clarifying and 
conforming in nature and do not substantively deviate from the 
baseline.
    The economic and regulatory analysis in this section reflects 
structured finance product markets and the credit rating industry as 
they exist today. We begin with a summary of the approximate number of 
NRSROs that would be directly affected by the proposed codification and 
features of the regulatory and economic environment in which the 
affected entities operate. A discussion of the current economic 
environment will provide a framework for assessing how the proposed 
regulation may impact efficiency, competition, and capital formation in 
this market.
    Currently, ten credit rating agencies are registered with the 
Commission as NRSROs.\70\ Of the ten NRSROs, seven are currently 
registered in the class of credit ratings for issuers of asset-backed 
securities.\71\ Among these seven, three of the larger NRSROs accounted 
for approximately 96 percent of credit ratings outstanding as of 
December 31, 2017; \72\ these three firms have operations outside of 
the United States.
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    \70\ The following credit rating agencies are currently 
registered as NRSROs: A.M. Best Rating Services, Inc. (``A.M. 
Best''); DBRS, Inc. (``DBRS''); Egan-Jones Ratings Company; Fitch 
Ratings, Inc. (``Fitch''); HR Ratings de M[eacute]xico, S.A. de C.V. 
(``HR Ratings''); Japan Credit Rating Agency, Ltd. (``JCR''); Kroll 
Bond Rating Agency, Inc. (``KBRA''); Moody's Investors Service, Inc. 
(``Moody's''); Morningstar Credit Ratings, LLC (``Morningstar''); 
and S&P Global Ratings (``S&P'').
    \71\ The seven NRSROs registered to rate asset-backed securities 
are: A.M. Best; DBRS; Fitch; KBRA; Moody's; Morningstar; and S&P.
    \72\ The three NRSROs are Fitch, Moody's, and S&P. The 
percentage of credit ratings outstanding attributable to Fitch, 
Moody's, and S&P was calculated using information reported by each 
NRSRO on Item 7A of Form NRSRO with respect to its annual 
certification for calendar year 2017. Annual certifications on Form 
NRSRO must be filed with the Commission on EDGAR pursuant to Rule 
17g-1(f) and made publicly and freely available on each NRSRO's 
website pursuant to Rule 17g-1(i). The number of outstanding credit 
ratings for each class of credit ratings for which an NRSRO is 
registered is reported on Item 7A of Form NRSRO.
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    The credit rating industry is highly concentrated and this market 
structure persists, in part, as a result of the costs associated with 
building the necessary reputational capital. In addition, large and 
incumbent NRSROs benefit from economies of scale, as well as from 
switching costs that issuers are likely to bear if they were to 
consider using different NRSROs. These costs provide incentives for 
issuers to use the services of NRSROs that they have preexisting 
relationships with and represent a barrier that newcomers entering the 
market for credit ratings would need to overcome to compete with 
incumbent credit rating agencies.
    In addition to the above economic barriers to entry, there exist 
some commercial and other barriers to entry.\73\ For instance, the 
investment guidelines of fixed income mutual fund managers and pension 
plan sponsors often specify use of the ratings of particular credit 
rating agencies, and many of these guidelines refer to the larger 
NRSROs by name. Some fixed income indices also require ratings by 
specific NRSROs, thus increasing the demand for ratings from those 
NRSROs. However, it has been reported that some investors are changing 
their guidelines to include ratings from additional NRSROs, and several 
of the smaller NRSROs have reported success in gaining market share 
with respect to the issuers of asset-backed securities.\74\
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    \73\ See 2017 Annual Report on Nationally Recognized Statistical 
Rating Organizations, available at https://www.sec.gov/ocr/reportspubs/annual-reports/2017-annual-report-on-nrsros.pdf, 24-25 
(discussing various potential barriers to entry including economic, 
commercial, and regulatory barriers).
    \74\ See id. at 21-24.
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    Gathering comprehensive data on foreign issuances of asset-backed 
securities is difficult given the breadth of markets and products one 
needs to consider and that data may not be available for several 
lesser-developed markets. Further, it is often not clear whether these 
issuances are made by non-U.S. persons. However, there has been an 
increase in the issuances of asset-backed securities worldwide since 
2011, with the issuances amounting to approximately $693.9 billion in 
2017.\75\ For example, when considering all underwriters for deals in 
Europe, while the trend has varied over the past five years, the two 
highest annual issuance totals over such period were achieved in 2016 
and 2017.\76\ Asset-backed securities constitute a growing market in 
Europe and other major financial markets, and, as discussed below, any 
application of Rule 17g-5(a)(3) to transactions outside the United 
States could affect the functioning of these foreign markets.\77\
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    \75\ See Asset-Backed Alert (Rankings for Issuers of Worldwide 
Asset- and Mortgage-Backed Securities), available at https://www.abalert.com/rankings.pl?Q=100. See also Commercial Mortgage 
Alert (CMBS Summary--Global CMBS Issuance in 2017), available at 
https://www.cmalert.com/rankings.pl?Q=67. The information on these 
websites, reported as of September 5, 2018, indicates that, 
notwithstanding a slight decline in issuances in 2016, there has 
been an upward trend in the total annual issuances of asset-backed 
securities from 2011 through 2017.
    \76\ See Asset-Backed Alert (Rankings for Bookrunners of 
European Structured Finance Deals), available at https://www.abalert.com/rankings.pl?Q=98, information reported as of 
September 5, 2018. Total issuances in Europe amounted to 
approximately $101.1 billion in 2016 and approximately $95.5 billion 
in 2017. Id.
    \77\ See, e.g., the SIFMA databases that cover historical 
issuances and outstanding values in Europe, the United States, and 
Australia for the following: asset-backed securities, collateralized 
debt obligations/collateralized loan obligations, commercial 
mortgage-backed securities, and residential mortgage-backed 
securities, available at http://www.sifma.org.
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C. Anticipated Costs and Benefits, Including Potential Effects on 
Efficiency, Competition, and Capital Formation

1. Potential Benefits
    As discussed above, the Commission issued the Exemptive Order in 
2010, and an extension of the Exemptive Order is currently in effect. 
Because the proposed exemption to Rule 17g-5(a)(3) and amendments to 
Rule 17g-7(a) and Rule 15Ga-2 would generally maintain the status 
quo,\78\ we do not expect the amendments would result in any major 
economic effects. For the same reason, we also do not expect this 
rulemaking to affect efficiency, competition, or capital formation in 
any major way.
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    \78\ Although the language of the second condition of the 
proposed exemption to Rule 17g-5(a)(3) differs from the comparable 
condition set forth in the Exemptive Order, and conforming changes 
are being proposed to the corresponding conditions in Rule 17g-7(a) 
and Rule 15Ga-2, the changes are clarifying in nature and the 
Commission does not believe they will alter the status quo. See 
supra Section II. The conforming changes being proposed in Rule 17g-
7(a) and Rule 15Ga-2, however, could result in changes from the 
current state. Specifically, those changes could avoid potential 
confusion by arrangers and NRSROs that could result from differences 
in the language of the conditions set forth in the rules.
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    To the extent that the proposed amendments to Rule 17g-5(a)(3) 
would enhance the certainty of the future status of an exemption to 
this rule, they could result in marginal economic benefits to 
arrangers, NRSROs, and regulators. Specifically, if NRSROs and 
arrangers expect to be required to comply with Rule 17g-5(a)(3) in the 
future, they may allocate personnel and financial resources to 
correspond with foreign and U.S. regulators and to set up applicable 
websites in anticipation of

[[Page 50306]]

future compliance. By promulgating an exemptive rule without a set 
termination date, the Commission preliminarily believes the proposed 
amendment would eliminate the need to incur such costs. Furthermore, by 
reducing the need to incur such costs, the proposed amendment could 
allow issuers and smaller NRSROs to expand in the global structured 
finance market, and could improve competition.
    The proposed exemption would not necessarily result in more intense 
competition between issuers and other intermediaries because issuers 
would continue to offer structured finance products as they do under 
the current regulatory regime. Further, all existing NRSROs rating 
structured finance products could continue to rely on the exemption as 
they do currently under the extended Exemptive Order; therefore, 
competition among these existing credit rating agencies would most 
likely not be affected by the proposed exemption.
2. Potential Costs and Other Anticipated Effects
    Similarly, because the existing Rule 17g-5(a)(3) exemption is 
currently in effect, the proposed amendment to Rule 17g-5(a)(3) should 
not impose any significant additional costs on NRSROs or arrangers of 
structured finance products relative to the baseline.
    However, as is the case with the existing Rule 17g-5(a)(3) 
exemption, issuers and NRSROs may incur some expenses in relying on the 
proposed exemption to Rule 17g-5(a)(3), which is conditioned on an 
NRSRO having a reasonable basis to conclude that all offers and sales 
of the structured finance product by any arranger linked to the 
structured finance product will occur outside the United States. In 
order to have a reasonable basis for such a conclusion, the Commission 
preliminarily believes that NRSROs will likely seek representations 
from arrangers, thereby resulting in associated costs. The Commission 
currently estimates that approximately 267 rated transactions would be 
eligible for the proposed exemption in a given year.\79\ To the extent 
that NRSROs seek representations to support their reasonable belief, 
the Commission estimates that it would cost an arranger approximately 
$720 per transaction to provide such representations,\80\ for total 
aggregate annual costs for all arrangers of approximately 
$192,240.81.\81\
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    \79\ See supra note 63.
    \80\ Calculated as 2 hours per transaction x legal fee for a 
compliance attorney at $360 per hour = $720. The Commission 
estimates the wage rate associated with these burden hours based on 
salary information for the securities industry compiled by the 
Securities Industry and Financial Markets Association (SIFMA). For 
example, the estimated wage figure for compliance attorneys is based 
on published rates for compliance attorneys, modified to account for 
a 1,800-hour work-year and multiplied by 5.35 to account for 
bonuses, firm size, employee benefits, and overhead, yielding an 
effective hourly rate for 2013 of $334 for compliance attorneys. See 
Securities Industry and Financial Markets Association, Report on 
Management & Professional Earnings in the Securities Industry 2013. 
These estimates are adjusted for inflation based on Bureau of Labor 
Statistics data on CPI-U between January 2013 (230.280) and January 
2018 (247.873). Therefore, the 2018 inflation-adjusted effective 
hourly wage rates for compliance attorneys are estimated at $360 
($334 x 247.873/230.280). All effective hourly wage rates discussed 
throughout the release rely on the same SIFMA data inflation 
adjusted to January 2018.
    \81\ Calculated as $720 per transaction x 267 annual 
transactions = $192,240.
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    Similarly, for an NRSRO that chooses to seek representations to 
support its reasonable belief, the Commission estimates that it would 
cost the NRSRO approximately $720 per transaction.\82\ The Commission 
further estimates that each transaction is rated by approximately two 
NRSROs,\83\ for total aggregate annual costs for all NRSROs of 
$384,480.\84\ Thus, to the extent that all NRSROs seek representations 
for all transactions eligible to rely on the proposed exemption to Rule 
17g-5(a)(3) each year, the Commission estimates the proposed amendment 
would result in total annual costs of $576,720.\85\
---------------------------------------------------------------------------

    \82\ Calculated as 2 hours per transaction x legal fee for a 
compliance attorney at $360 per hour = $720.
    \83\ See supra note 63.
    \84\ Calculated as $720 per transaction x 267 annual 
transactions x 2 NRSROs per transaction = $384,480.
    \85\ Calculated as $720 per transaction x 267 annual 
transactions (for arrangers) + $720 per transaction x 267 annual 
transactions x 2 NRSROs per transaction (for NRSROs) = $576,720.
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    In addition, although the conditions with respect to the exemption 
to Rule 17g-5(a)(3) are substantially the same under the Exemptive 
Order, NRSROs may incur a modest one-time cost to conform their 
processes to reflect the clarifying change being proposed to one of the 
conditions to the exemption. For instance, an NRSRO that currently 
seeks written representations from an arranger to support the 
reasonable belief required under the Exemptive Order may modify the 
form of the representation to conform to the language of the condition 
as proposed. The Commission expects an NRSRO's in-house attorney would 
oversee revisions to the form representation and that there would be a 
one-time burden of five hours for the language to be revised, approved, 
and documented. Accordingly, the Commission estimates a one-time 
aggregate cost of $12,600 for NRSROs to adjust their procedures to 
reflect the clarifying language of the proposed exemption.\86\
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    \86\ Calculated as 5 hours per NRSRO x legal fee for a 
compliance attorney at $360 per hour x the 7 NRSROs registered to 
rate asset-backed securities = $12,600.
---------------------------------------------------------------------------

    Similarly, additional one-time costs may be incurred by NRSROs to 
modify their processes to reflect the proposed conforming amendments to 
the conditions with respect to the Rule 17g-7(a) exemption. The 
Commission expects the one-time costs incurred by such NRSROs to 
approximate the costs set forth with respect to Rule 17g-5(a)(3) above. 
As with Rule 17g-5(a)(3), the Commission expects an NRSRO's in-house 
attorney would oversee revisions to the form representation with 
respect to the Rule 17g-7(a) exemption and that there would be a one-
time burden of five hours for the language to be revised, approved, and 
documented. Accordingly, the Commission estimates a one-time aggregate 
cost of $18,000 for NRSROs to adjust their procedures to reflect the 
proposed conforming changes to the Rule 17g-7(a) exemption.\87\
---------------------------------------------------------------------------

    \87\ Calculated as 5 hours per NRSRO x legal fee for a 
compliance attorney at $360 per hour x all 10 NRSROs = $18,000.
---------------------------------------------------------------------------

    The Commission believes that no similar costs will be incurred by 
issuers and underwriters as a result of the proposed amendment to Rule 
15Ga-2, given that such rule relates to an obligation of the issuer or 
underwriter of a structured finance product and there is no equivalent 
need to obtain information from a third party to determine if the Rule 
15Ga-2 exemption applies.

3. Alternative Considered: Allow Exemptive Order to Expire

    The Commission considered the alternative of allowing the current 
extension of the Exemptive Order to expire without codifying an 
exemption to Rule 17g-5(a)(3). The Commission preliminarily believes 
that this alternative is not consistent with notions of international 
comity or the Commission's limited interest in regulating securities 
offered and sold exclusively outside the United States. As discussed in 
Section II.A. of this release, the Commission believes principles of 
international comity and reasonable expectations of participants would 
be better served by not allowing the expiration of the current 
extension of the Exemptive Order. The Commission has nevertheless 
considered the economic effects of this alternative, and, as with its 
economic analysis of the proposed exemption to Rule 17g-5(a)(3), the 
Commission

[[Page 50307]]

solicits comment, including estimates and data from interested parties, 
which could help it refine its analysis of the economic effects of this 
alternative.
a. Benefits
    This alternative offers several potential economic benefits. The 
last three decades have witnessed an increase in the globalization of 
financial markets and in cross-border trading. Greater international 
capital flows can contribute to the development of new product markets 
and industries by enabling issuers to raise capital in markets around 
the world. The Commission considered the potential implications of the 
expiration of the existing Rule 17g-5(a)(3) exemption on cross-listing 
activity for U.S. and non-U.S. issuers.\88\ One possible factor that 
hypothetically could affect the flow of capital from U.S. markets to 
foreign alternative trading venues is the costs associated with 
complying with U.S. securities laws. If complying with Rule 17g-5(a)(3) 
implies higher costs for issuers of structured finance products, and 
the costs affect the choice of an issuer's venue, non-U.S. issuers may 
benefit from the current exemptive relief by obtaining funding at a 
lower all-in cost than similarly situated U.S. issuers. If the 
Exemptive Order were to expire, however, such non-U.S. issuers would be 
unable to pursue such a strategy because they would have the same 
regulatory treatment as U.S. issuers. As a result, if the existing Rule 
17g-5(a)(3) exemption were to expire, U.S. and non-U.S. issuers may 
compete for funding on more even terms.
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    \88\ Although the Commission regulations are designed to promote 
competition, efficiency, and capital formation in U.S. markets and 
to protect U.S. investors, the Commission recognizes that some of 
its regulations impact market participants globally. When 
applicable, the economic effects to those market participants are 
discussed.
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    Investors and issuers globally could obtain potential economic 
benefits, such as reduced conflicts of interest and informational 
efficiency in credit ratings, if arrangers were required to comply with 
the Rule 17g-5 Program. With respect to certain debt and structured 
finance products, credit ratings provided by non-hired NRSROs using 
information provided pursuant to the Rule 17g-5 Program could serve a 
verification function in capital markets by offering market 
participants a broader set of opinions on the creditworthiness of those 
products.\89\ This information could help investors in their decisions 
to augment the risk profiles of their portfolios through economic 
exposure to investment opportunities.\90\
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    \89\ See Rule 17g-5 Adopting Release, supra note 2, 74 FR at 
63857.
    \90\ See e.g., Arthur R. Pinto, Control and Responsibility of 
Credit Rating Agencies in the United States, American Journal of 
Comparative Law, Vol. 54 at 341-56 (2006). See also John R.M. Hand 
et al., The Effect of Bond Rating Agency Announcements on Bond and 
Stock Prices, Journal of Finance, Vol. 47, No. 2 at 733-52 (1992).
---------------------------------------------------------------------------

    Globalization, however, can be a conduit of risk and could lead to 
problems in one market or jurisdiction spilling over to other markets 
or jurisdictions.\91\ If the existing Rule 17g-5(a)(3) exemption were 
to expire, then it is possible that any benefits of this rule with 
respect to the credit rating industry in the United States may apply to 
foreign markets as well, potentially reducing the risk of spillovers 
that may result from conflicts of interest that Rule 17g-5(a)(3) was 
designed to address.\92\ Specifically, arrangers that engage in 
structured finance transactions in foreign markets would also need to 
maintain websites containing all information provided to hired NRSROs 
with respect to the rating of such structured finance products and 
provide access to any non-hired NRSRO that makes the required 
certifications. This may permit non-hired NRSROs to provide ratings of 
these products. The availability of additional ratings from an 
independent source may provide incentives to hired NRSROs to provide 
more accurate and unbiased ratings due to reputational concerns. Any 
additional ratings by non-hired NRSROs could, in turn, provide 
investors with independent views on the risk profiles of the structured 
finance products and improve the reliability of the credit ratings of 
these products.\93\ The potential improvement in the quality of ratings 
in foreign markets could attenuate the risk of spillovers, which could 
benefit financial markets globally.
---------------------------------------------------------------------------

    \91\ For instance, the European sovereign debt crisis renewed 
the debate on the role credit rating agencies play during crises and 
the interdependence between different financial markets. This debt 
crisis has included sovereign credit rating downgrades, widening of 
sovereign bond and credit default swap spreads, and pressures on 
stock markets. See, e.g., Manfred G[auml]rtner et al., PIGS or 
Lambs? The European Sovereign Debt Crisis and the Role of Rating 
Agencies, International Advances in Economic Research, Vol. 17, No. 
3 at 288 (2011). See also Valerie De Bruyckere et al., Bank/
Sovereign Risk Spillovers in the European Debt Crisis, Journal of 
Banking & Finance, Vol. 37, Issue 12 at 4793-809 (2013).
    \92\ See Rule 17g-5 Adopting Release, supra note 2, 74 FR at 
63857.
    \93\ See, e.g., Daniel Covitz and Paul Harrison, Testing 
Conflicts of Interest at Bond Rating Agencies with Market 
Anticipation: Evidence that Reputation Incentives Dominate, Federal 
Reserve Board Working Paper No. 2003-68 (2003), for evidence on the 
role of reputation among credit rating agencies. However, there is 
also some evidence to the contrary, wherein the argument is that if 
reputation losses are lower in an industry due to increased 
competition, then there are lesser incentives to provide accurate 
ratings. See Bo Becker and Todd Milbourn, How Did Increased 
Competition Affect Credit Ratings?, Journal of Financial Economics, 
Vol. 101, No. 3 at 493-514 (2011).
---------------------------------------------------------------------------

    The Commission notes, however, that the possible benefits 
attributable to the expiration of the Exemptive Order for Rule 17g-
5(a)(3) should be viewed in light of the concerns expressed by 
commenters (as described in Section II.A. of this release). If any 
foreign laws limit the information an arranger is able to post on the 
website maintained pursuant to the Rule 17g-5 Program, a hired NRSRO 
may not have sufficient information on which to base a credit rating 
or, if the arranger provides information to a hired NRSRO that it 
cannot also post to the website, the hired NRSRO will not be able to 
reasonably rely on the representation it received from the 
arranger.\94\ In either case, NRSROs effectively would be precluded 
from rating structured finance products in such jurisdictions, 
attenuating the benefits described above.
---------------------------------------------------------------------------

    \94\ See supra notes 7-8 and accompanying text.
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b. Costs
    Several costs of expiration of the existing Rule 17g-5(a)(3) 
exemption are relevant to consider. As mentioned earlier, the 
Commission currently estimates that approximately 267 rated 
transactions would be eligible for the proposed exemption to Rule 17g-
5(a)(3) in a given year.\95\ If the existing Rule 17g-5(a)(3) exemption 
were allowed to expire, the requirements of Rule 17g-5(a)(3) would 
apply with respect to these transactions. The Commission preliminarily 
estimates the following costs as a result of expiration of the existing 
Rule 17g-5(a)(3) exemption.
---------------------------------------------------------------------------

    \95\ See supra note 63.
---------------------------------------------------------------------------

    The Commission believes that expiration of the existing Rule 17g-
5(a)(3) exemption would result in an annual increase in costs of 
$155,916 for NRSROs for additional website maintenance and associated 
compliance costs.\96\ The Commission also estimates

[[Page 50308]]

an annual increase in costs of $45,924 for arrangers to post 
information about new structured finance product transactions to the 
related websites.\97\ Additionally, if certain sponsors do not also 
currently issue rated structured finance products in transactions that 
occur within the United States (which are currently subject to the 
requirements of Rule 17g-5(a)(3)), then they may incur one-time costs 
to set up websites. The Commission estimates that it would take a 
sponsor 300 hours to develop a system, as well as the policies and 
procedures governing the disclosures, resulting in a total of up to 
41,400 hours across 138 sponsors.\98\ The Commission estimates that the 
average one-time cost to each sponsor would be $81,300, and the total 
aggregate one-time cost across all sponsors would be up to 
$11,219,400.\99\ Finally, on an ongoing basis, the Commission estimates 
an annual increase in costs of $2,231,453 for arrangers to make 
additional information about these transactions available on the 
related websites each month and to monitor compliance with its 
obligations over the life of the structured finance products.\100\
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    \96\ The Commission estimates that it will take approximately 
one hour per transaction for website maintenance and that an NRSRO 
would have a webmaster perform these responsibilities, at a cost of 
$244 per hour. The Commission further estimates that each 
transaction will be rated by approximately two NRSROs (see supra 
note 63). Therefore, the estimated annual cost for website 
maintenance by NRSROs involved with 267 structured finance ratings 
would be $130,296 (267 transactions x 1 hour per transaction x $244 
per hour x 2 NRSROs per transaction). In addition, the Commission 
estimates that compliance personnel at an NRSRO will spend, on 
average, one hour per month to monitor compliance with the 
requirements of the Rule 17g-5 Program. Staff estimates a $305 per 
hour figure for a compliance manager. Therefore, the estimated 
annual compliance cost would be $25,620 (12 months per year x 1 hour 
per month x $305 per hour x 7 NRSROs registered to rate asset-backed 
securities). As a result, the total estimated annual cost for NRSROs 
would be $155,916 ($130,296 website maintenance cost + $25,620 
compliance cost).
    \97\ The Commission estimates that it will take an arranger 
approximately one hour per transaction to post the information it 
provides to a hired NRSRO to the related website. The Commission 
believes that an arranger would have a junior business analyst 
perform these responsibilities, at a cost of $172 per hour. 
Therefore, based on the estimate of 267 rated transactions per year, 
the estimated annual cost for arrangers to make such information 
available on the related website would be $45,924 (267 transactions 
x 1 hour per transaction x $172 per hour).
    \98\ Total hours to develop systems would be 41,400 (138 
sponsors x 300 hours per sponsor). The number of sponsors was 
estimated using information as of September 5, 2018 from the Asset-
Backed Alert and Commercial Mortgage Alert databases. Isolating the 
transactions coded in the database as ``Non-U.S.'' offerings and 
sorting the data by sponsor (in the case of the Asset-Backed Alert 
database) or seller (in the case of the Commercial Mortgage Alert 
database) enables an estimate of the number of separate sponsors 
that would be eligible for the exemption. The estimate represents 
the average number of such sponsors for the years ended December 31, 
2015, 2016, and 2017. We note that the estimate of the aggregate 
hours across all sponsors represents upper bounds, as it is 
plausible that some sponsors also issue structured finance products 
in U.S.-based transactions and would have already incurred any such 
one-time costs.
    \99\ As discussed in the Rule 17g-5 Adopting Release, the 
Commission believes that a sponsor would use a compliance manager 
and a programmer analyst to perform these functions, and each would 
spend 50% of the estimated hours conducting these tasks. The average 
hourly cost for a compliance manager is $305 and the average hourly 
cost for a programmer analyst is $237. Therefore, the average one-
time cost to a sponsor would be $81,300 ([150 hours x $305 per hour] 
+ [150 hours x $237 per hour]). The aggregate cost across all 
sponsors would be up to $11,219,400 (138 sponsors x $81,300 per 
sponsor). We note that these estimates represent upper bounds. As 
noted in note 98, some sponsors may have already incurred any one-
time set up costs in connection with U.S.-based issuances. In 
addition, it is plausible that sponsors will obtain these services 
for a much lower cost from web service providers.
    \100\ The Commission estimates that it will take an arranger 
approximately half an hour per month for each transaction to make 
such information available on the related website. The hourly burden 
per transaction for a year is 6 hours (0.5 hours per month x 12 
months). The Commission believes that an arranger would have a 
junior business analyst perform these responsibilities at a rate of 
$172. Further, we relied on the Rule 17g-5 Adopting Release to infer 
the total number of outstanding deals under surveillance. In that 
release, the Commission indicated that, on average, an arranger will 
issue 20 new deals a year and will have 125 outstanding deals, or 
6.25 outstanding deals for every new deal. Combining this with our 
estimate of 267 new transactions per year yields an estimate of 6.25 
x 267 = 1,669 outstanding deals. Combining these estimates, the 
annual cost for arrangers to provide information on ongoing deals is 
$1,722,408 (1,669 outstanding transactions x $172 per hour x 6 hours 
per year). In addition, the Commission estimates that compliance 
personnel at an arranger will spend, for each outstanding 
transaction, one hour per year to monitor compliance with its 
requirements in connection with the Rule 17g-5 Program. The 
Commission estimates a $305 per hour figure for a compliance 
manager. Therefore, the estimated annual compliance cost would be 
$509,045 (1 hour per transaction, per year x $305 per hour x 1,669 
outstanding transactions). As a result, the total estimated annual 
ongoing cost for arrangers would be $2,231,453 ($1,722,408 website 
maintenance cost + $509,045 compliance cost).
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    In addition to these direct compliance costs, expiration of the 
existing Rule 17g-5(a)(3) exemption could result in costs that are 
difficult to quantify. For instance, an incremental increase in costs 
resulting from the applicability of the Rule 17g-5 Program may vary 
significantly from transaction to transaction, contributing to the 
difficulty in quantifying such costs. A bespoke transaction may require 
significantly more communications between the arranger and the hired 
NRSRO than a transaction by a frequent issuer of similar securities, 
resulting in the incurrence of higher costs to arrangers. Moreover, the 
Rule 17g-5 Program requires that information must be posted to the 
arranger's website at the same time such information is provided to a 
hired NRSRO. If the exemption were to expire, information that may have 
previously been communicated verbally to a hired NRSRO may need to be 
memorialized in writing. In certain cases, an arranger may enlist 
outside counsel to draft or review materials to be provided to a hired 
NRSRO, resulting in additional costs.
    Further, there are potential negative economic consequences. Since 
the global financial crisis there have been other efforts, in addition 
to the Dodd-Frank Wall Street Reform and Consumer Protection Act,\101\ 
to assess and regulate the credit rating industry as well as to 
encourage market participants to establish stronger internal credit 
risk assessment practices. As discussed in Section II.A. of this 
release, commenters have expressed concerns that the requirements of 
Rule 17g-5(a)(3) could potentially be duplicative of or conflict with 
regulations applicable to NRSROs and arrangers in foreign markets, and 
thus harm the competitive position of NRSROs in those markets.\102\ 
Failure to provide relief regarding the application of Rule 17g-5(a)(3) 
to transactions offered and sold exclusively outside the United States 
may be viewed as inconsistent with notions of international comity.
---------------------------------------------------------------------------

    \101\ Public Law 111-203, 124 Stat. 1376, H.R. 4173 (July 21, 
2010).
    \102\ See supra notes 26-33 and accompanying text.
---------------------------------------------------------------------------

    The expiration of the existing Rule 17g-5(a)(3) exemption may lead 
to losses for NRSROs if, as commenters suggest, conflicts exist between 
the requirements of the Rule 17g-5 Program and foreign laws that limit 
the information available to NRSROs. Some NRSROs could be precluded 
from rating structured finance products in such jurisdictions, which 
could lead to loss of revenue associated with credit ratings that 
NRSROs currently provide under the existing Exemptive Order. NRSROs may 
also experience losses as a result of the expiration of the existing 
Rule 17g-5(a)(3) exemption due to competitive pressures in the foreign 
markets from credit rating agencies that are not registered as NRSROs 
(``non-NRSRO rating agencies'') and therefore not subject to Rule 17g-
5(a)(3). Expiration of the existing Rule 17g-5(a)(3) exemption may also 
lead to new compliance costs for NRSROs and arrangers relating to 
posting information on the websites with respect to credit ratings 
maintained by NRSROs that had previously been subject to the exemption. 
From the point of view of arrangers, additional costs of compliance 
could result in a decline in their issuances of structured finance 
products if alternative non-NRSRO rating agencies are unavailable or 
unacceptable to arrangers or investors.
    Finally, if the existing Rule 17g-5(a)(3) exemption were allowed to 
expire, this could also raise legal barriers to entry for smaller 
NRSROs that may be planning to expand their

[[Page 50309]]

foreign ratings business.\103\ The increased set-up costs may lower 
such NRSROs' incentives to rate structured finance products in those 
foreign markets.
---------------------------------------------------------------------------

    \103\ Three of the four smaller NRSROs registered in the class 
of credit ratings for issuers of asset-backed securities list 
foreign affiliates as credit rating affiliates on their most 
recently filed Form NRSRO. Form NRSRO filings can be accessed 
through the Commission's EDGAR system.
---------------------------------------------------------------------------

VI. Small Business Regulatory Enforcement Fairness Act

    Under the Small Business Regulatory Enforcement Fairness Act of 
1996, or ``SBREFA,'' \104\ the Commission must advise OMB as to whether 
the proposed regulation constitutes a ``major rule.'' Under SBREFA, a 
rule is considered ``major'' where, if adopted, it results or is likely 
to result in: (i) An annual effect on the economy of $100 million or 
more (either in the form of an increase or a decrease); (ii) a major 
increase in costs or prices for consumers or individual industries; or 
(iii) a significant adverse effect on competition, investment, or 
innovation. If a rule is ``major,'' its effective date will generally 
be delayed for 60 days pending Congressional review.
---------------------------------------------------------------------------

    \104\ 123 Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C. and 15 U.S.C., including 
as a note to 5 U.S.C. 601).
---------------------------------------------------------------------------

    The Commission requests comment on the potential annual economic 
impact of the proposed amendments to Rule 17g-5(a)(3), Rule 17g-7(a), 
and Rule 15Ga-2, any potential increase in costs or prices for 
consumers or individual industries, and any potential effect on 
competition, investment, or innovation. Commenters are requested to 
provide empirical data and other factual support for their views to the 
extent possible.

VII. Regulatory Flexibility Act Certification

    Section 603(a) of the Regulatory Flexibility Act of 1980 (``RFA'') 
\105\ requires the Commission to undertake an initial regulatory 
flexibility analysis of the proposed rule amendments on small entities 
unless the Commission certifies that the proposal, if adopted, would 
not have a significant economic impact on a substantial number of small 
entities.\106\ Pursuant to 5 U.S.C. 605(b), the Commission hereby 
certifies that the proposed amendments to Rule 17g-5(a)(3), Rule 17g-
7(a), and Rule 15Ga-2 would not, if adopted, have a significant 
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \105\ 5 U.S.C. 601 et seq.
    \106\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    The proposed amendment to Rule 17g-5(a)(3) would provide an 
exemption from the requirements of paragraphs (i) through (iii) of Rule 
17g-5(a)(3) with respect to credit ratings if the issuer of the 
structured finance product is not a U.S. person, and the NRSRO has a 
reasonable basis to conclude that all offers and sales of the 
structured finance product by any arranger linked to the structured 
finance product will occur outside the United States. The proposed 
amendments to Rule 17g-7(a) and Rule 15Ga-2 conform the existing 
exemptions with respect to such rules to the proposed amendment to Rule 
17g-5(a)(3) in order to reflect certain clarifying changes to the 
conditions thereof.
    The Commission's rules do not define ``small business'' or ``small 
organization'' with respect to NRSROs. However, 17 CFR 240.0-10(a) 
provides that, for purposes of the RFA, a small entity ``[w]hen used 
with reference to an `issuer' or a `person' other than an investment 
company'' means ``an `issuer' or `person' that, on the last day of its 
most recent fiscal year, had total assets of $5 million or less.'' 
\107\ The Commission has stated in the past that an NRSRO with total 
assets of $5 million or less would qualify as a ``small'' entity for 
purposes of the RFA.\108\ The Commission continues to believe this 
threshold of total assets of $5 million or less would qualify an NRSRO 
as ``small'' for purposes of the RFA.\109\
---------------------------------------------------------------------------

    \107\ See Rule 0-10(a).
    \108\ See, e.g., Oversight of Credit Rating Agencies Registered 
as Nationally Recognized Statistical Rating Organizations, Exchange 
Act Release No. 55857 (June 5, 2007), 72 FR 33564, 33618 (June 18, 
2007); Amendments to Rules for Nationally Recognized Statistical 
Rating Organizations, Exchange Act Release No. 59342 (Feb. 2, 2009), 
74 FR 6456, 6481 (Feb. 9, 2009); Rule 17g-5 Adopting Release, supra 
note 2, 74 FR at 63863.
    \109\ Under Section 601(3) of the RFA, the term ``small 
business'' is defined as having ``the same meaning as the term 
`small business concern' under Section 3 of the Small Business Act, 
unless an agency, after consultation with the Office of Advocacy of 
the Small Business Administration and after opportunity for public 
comment, establishes one or more definitions of such term which are 
appropriate to the activities of the agency and publishes such 
definition(s) in the Federal Register.''
---------------------------------------------------------------------------

    Currently, there are ten credit rating agencies registered with the 
Commission as NRSROs and, based on their most recently filed annual 
reports pursuant to 17 CFR 240.17g-3,\110\ two NRSROs are small 
entities under the above definition. Neither of these two NRSROs is 
currently registered for the class of credit ratings for issuers of 
asset-backed securities.
---------------------------------------------------------------------------

    \110\ See Rule 17g-3.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed amendments 
to Rule 17g-5(a)(3) would not, if adopted, have a significant economic 
impact on a substantial number of ``small entities'' as defined by the 
RFA. The proposed amendment to Rule 17g-5(a)(3) applies exclusively to 
rated structured finance products and the NRSROs that are considered 
small under the above definition are not currently registered for the 
class of credit ratings for issuers of asset-backed securities.
    The Commission preliminarily believes that the proposed amendments 
to Rule 17g-7(a) would not, if adopted, have a significant economic 
impact on a substantial number of ``small entities'' as defined by the 
RFA. Although Rule 17g-7(a) applies to all NRSROs, including the two 
NRSROs that qualify as ``small'' for purposes of the RFA, the 
Commission preliminarily believes that the economic impact of the 
proposed amendments to Rule 17g-7(a) would not be significant. The Rule 
17g-7(a) exemption is already included as part of the rule text, and 
the proposed amendments to such exemption are clarifying in 
nature.\111\ The Commission preliminarily believes NRSROs may incur 
modest one-time costs to modify their processes to reflect the proposed 
amendments to the Rule 17g-7(a) exemption,\112\ but that any ongoing 
annual costs related to the exemption, amended as proposed, are likely 
to be unchanged relative to the existing exemption.
---------------------------------------------------------------------------

    \111\ See supra Section II.B. (discussing the proposed 
amendments to Rule 17g-7(a) in more detail).
    \112\ The Commission estimates that it will take an NRSRO 
approximately 5 hours to modify its processes to reflect the 
proposed amended language of the exemption. The Commission believes 
that the work will likely be completed by a compliance attorney at 
$360 per hour, resulting in a cost of $1,800 for each NRSRO. See 
supra note 87 and accompanying text.
---------------------------------------------------------------------------

    The adopting release for Rule 15Ga-2 certified that Rule 15Ga-2 and 
the amendments to Form ABS-15G will not have a significant economic 
impact on a substantial number of small entities.\113\ As is the case 
with Rule 17g-7(a), the Rule 15Ga-2 exemption is already included as 
part of the rule text, and the proposed amendments to such exemption 
are clarifying in nature.\114\ In addition, Rule 15Ga-2 relates to an 
obligation of the issuer or underwriter of a structured finance product 
and there is no need to obtain information from a third party to 
determine if the 15Ga-2 exemption applies. As such, the Commission 
preliminarily believes that

[[Page 50310]]

no costs will be incurred by issuers and underwriters as a result of 
the proposed amendment to the Rule 15Ga-2 exemption.
---------------------------------------------------------------------------

    \113\ See 2014 NRSRO Amendments, supra note 2, 79 FR at 55257.
    \114\ See supra Section II.B. (discussing the proposed 
amendments to Rule 17g-7(a) in more detail).
---------------------------------------------------------------------------

    The Commission encourages written comments regarding this 
certification. We solicit comment as to whether the proposed amendments 
to Rule 17g-5(a)(3), Rule 17g-7(a), and Rule 15Ga-2 could have a 
significant economic impact on a substantial number of small entities. 
The Commission requests that commenters describe the nature of any 
impact on small entities and provide empirical data to support the 
extent of such impact.

VIII. Statutory Authority

    The Commission is proposing an amendment to 17 CFR 240.17g-5(a)(3), 
17 CFR 240.17g-7(a), and 17 CRF 240.15Ga-2 pursuant to the authority 
conferred by the Exchange Act, including Sections 15E, 17(a), and 36 
(15 U.S.C. 78o-7, 78q, and 78mm).

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of Proposed Amendment

    In accordance with the foregoing, the Commission proposes that 
title 17, chapter II of the Code of Federal Regulations be amended as 
follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The authority citation for part 240 continues to read as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq.; and 
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and 
Pub. L. 111-203, 939A, 124 Stat. 1887 (2010); and secs. 503 and 602, 
Pub. L. 112-106, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
    Section 240.15Ga-2 is also issued under sec. 943, Public Law 
111-203, 124 Stat. 1376.
* * * * *
    Section 240.17g-7 is also issued under sec. 943, Public Law 111-
203, 124 Stat. 1376.
* * * * *
0
2. Amend Sec.  240.15Ga-2 by revising paragraph (e) to read as follows:


Sec.  240.15Ga-2  Findings and conclusions of third-party due diligence 
reports.

* * * * *
    (e) The requirements of this rule would not apply to an offering of 
an asset-backed security if certain conditions are met, including:
    (1) The offering is not required to be, and is not, registered 
under the Securities Act of 1933;
    (2) The issuer of the rated security is not a U.S. person (as 
defined in Sec.  230.902(k)); and
    (3) All offers and sales of the security by any issuer, sponsor, or 
underwriter linked to the security will occur outside the United States 
(as that phrase is used in Sec. Sec.  230.901 through 230.905 
(Regulation S)).
* * * * *
0
3. Amend Sec.  240.17g-5 by adding paragraph (a)(3)(iv) to read as 
follows:


Sec.  240.17g-5  Conflicts of interest.

    (a) * * *
    (3) * * *
    (iv) The provisions of paragraphs (a)(3)(i) through (iii) of this 
section will not apply to a nationally recognized statistical rating 
organization when issuing or maintaining a credit rating for a security 
or money market instrument issued by an asset pool or as part of any 
asset-backed securities transaction, if:
    (A) The issuer of the security or money market instrument is not a 
U.S. person (as defined in Sec.  230.902(k) of this chapter); and
    (B) The nationally recognized statistical rating organization has a 
reasonable basis to conclude that all offers and sales of the security 
or money market instrument by any issuer, sponsor, or underwriter 
linked to the security or money market instrument will occur outside 
the United States (as that phrase is used in Sec. Sec.  230.901 through 
230.905 (Regulation S) of this chapter).
* * * * *
0
4. Amend Sec.  240.17g-7 by revising paragraph (a)(3) to read as 
follows:


Sec.  240.17g-7   Disclosure requirements.

    (a) * * *
    (3) Exemption. The provisions of paragraphs (a)(1) and (2) of this 
section do not apply to a rating action if:
    (i) The rated obligor or issuer of the rated security or money 
market instrument is not a U.S. person (as defined in Sec.  230.902(k) 
of this chapter); and
    (ii) The nationally recognized statistical rating organization has 
a reasonable basis to conclude that:
    (A) With respect to any security or money market instrument issued 
by a rated obligor, all offers and sales by any issuer, sponsor, or 
underwriter linked to the security or money market instrument will 
occur outside the United States (as that phrase is used in Sec. Sec.  
230.901 through 230.905 (Regulation S) of this chapter); or
    (B) With respect to a rated security or money market instrument, 
all offers and sales by any issuer, sponsor, or underwriter linked to 
the security or money market instrument will occur outside the United 
States (as that phrase is used in Sec. Sec.  230.901 through 230.905 
(Regulation S) of this chapter).
* * * * *

    By the Commission.

    Dated: September 26, 2018.
Brent J. Fields,
Secretary.
[FR Doc. 2018-21295 Filed 10-4-18; 8:45 am]
BILLING CODE 8011-01-P



                                                                                                                                                                                                                                 50297

                                                 Proposed Rules                                                                                                                 Federal Register
                                                                                                                                                                                Vol. 83, No. 194

                                                                                                                                                                                Friday, October 5, 2018



                                                 This section of the FEDERAL REGISTER                       security or money market instrument by                              website (http://www.sec.gov/rules/
                                                 contains notices to the public of the proposed             any issuer, sponsor, or underwriter                                 proposed.shtml). Comments also are
                                                 issuance of rules and regulations. The                     linked to such security or money market                             available for website viewing and
                                                 purpose of these notices is to give interested             instrument will occur outside the                                   printing in the Commission’s Public
                                                 persons an opportunity to participate in the               United States. In addition, the                                     Reference Room, 100 F Street NE,
                                                 rule making prior to the adoption of the final
                                                 rules.
                                                                                                            amendments would make conforming                                    Washington, DC 20549, on official
                                                                                                            changes to similar exemptions in two                                business days between the hours of
                                                                                                            other Exchange Act rules. The                                       10:00 a.m. and 3:00 p.m. All comments
                                                 SECURITIES AND EXCHANGE                                    Commission is requesting comment on                                 received will be posted without change.
                                                 COMMISSION                                                 the proposed rule amendments.                                       Persons submitting comments are
                                                                                                            DATES: Comments should be received on                               cautioned that we do not redact or edit
                                                 17 CFR Part 240                                            or before November 5, 2018.                                         personal identifying information from
                                                 [Release No. 34–84289; File No. S7–22–18]                  ADDRESSES: Comments may be                                          comment submissions. You should
                                                                                                            submitted by any of the following                                   submit only information that you wish
                                                 RIN 3235–AM05                                              methods:                                                            to make publicly available.
                                                                                                                                                                                  Studies, memoranda, or other
                                                 Amendments to Rules for Nationally                         Electronic Comments                                                 substantive items may be added by the
                                                 Recognized Statistical Rating                                • Use the Commission’s internet                                   Commission or staff to the comment file
                                                 Organizations                                              comment form (http://www.sec.gov/                                   during this rulemaking. A notification of
                                                 AGENCY:  Securities and Exchange                           rules/proposed.shtml); or                                           the inclusion in the comment file of any
                                                 Commission.                                                  • Send an email to rule-comments@                                 such materials will be made available
                                                 ACTION: Proposed rule.                                     sec.gov. Please include File Number S7–                             on the SEC’s website. To ensure direct
                                                                                                            22–18 on the subject line.                                          electronic receipt of such notifications,
                                                 SUMMARY:    The Securities and Exchange                                                                                        sign up through the ‘‘Stay Connected’’
                                                                                                            Paper Comments
                                                 Commission (‘‘Commission’’) is                                                                                                 option at www.sec.gov to receive
                                                 proposing amendments to rules for                             • Send paper comments in triplicate                              notifications by email.
                                                 nationally recognized statistical rating                   to Brent J. Fields, Secretary, Securities
                                                                                                            and Exchange Commission, 100 F Street                               FOR FURTHER INFORMATION CONTACT:
                                                 organizations (‘‘NRSROs’’) under the
                                                 Securities Exchange Act of 1934                            NE, Washington, DC 20549–1090.                                      Harriet Orol, Kevin Vasel, or Patrick
                                                 (‘‘Exchange Act’’). The amendments                         All submissions should refer to File                                Boyle, at (212) 336–9080, Office of
                                                 would provide an exemption from a rule                     Number S7–22–18. This file number                                   Credit Ratings, Securities and Exchange
                                                 for NRSROs with respect to credit                          should be included on the subject line                              Commission, New York Regional Office,
                                                 ratings if the issuer of the security or                   if email is used. To help the                                       200 Vesey Street, Suite 400, New York,
                                                 money market instrument referred to in                     Commission process and review your                                  NY 10281.
                                                 the rule is not a U.S. person, and the                     comments more efficiently, please use                               SUPPLEMENTARY INFORMATION: The
                                                 NRSRO has a reasonable basis to                            only one method. The Commission will                                Commission is proposing amendments
                                                 conclude that all offers and sales of such                 post all comments on the Commission’s                               to:



                                                                                                                                                                 CFR citation
                                                                         Commission reference                                                                     (17 CFR)

                                                 Securities Exchange Act of 1934 (Exchange Act) 1 ................            Rule 17g–5(a)(3) .....................................................................     § 240.17g–5(a)(3)
                                                                                                                              Rule 17g–7(a) ..........................................................................      § 240.17g–7(a)
                                                                                                                              Rule 15Ga–2 ...........................................................................        § 240.15Ga–2



                                                 Table of Contents                                            1. Proposed Amendments to Rule 17g–                                 F. Request for Comment 28
                                                                                                                 5(a)(3) 24                                                     V. Economic Analysis 29
                                                 I. Background 6                                              2. Proposed Amendments to Rule 17g–7(a)                             A. Introduction 29
                                                    A. Rule 17g–5(a)(3) 6                                        24                                                               B. Baseline and Affected Parties 31
                                                    B. Rule 17g–7(a) and Rule 15Ga–2 8                        B. Respondents 25                                                   C. Anticipated Costs and Benefits,
                                                 II. Proposed Rule Amendments 11                              C. Burden and Cost Estimates Related to                                Including Potential Effects on Efficiency,
                                                    A. Rule 17g–5(a)(3) 11                                       the Proposed Amendments 25                                          Competition, and Capital Formation 34
                                                    B. Conforming Amendments to Rule 17g–
daltland on DSKBBV9HB2PROD with PROPOSALS




                                                                                                              1. Proposed Amendments to Rule 17g–                                 1. Potential Benefits 34
                                                       7(a) and Rule 15Ga–2 18                                   5(a)(3) 25                                                       2. Potential Costs and Other Anticipated
                                                 III. Request for Comment 21                                  2. Proposed Amendments to Rule 17g–7(a)                                Effects 36
                                                 IV. Paperwork Reduction Act 23                                  27                                                               3. Alternative Considered: Allow
                                                    A. Summary of Collection of Information                   D. Collection of Information is Required to                            Exemptive Order to Expire 38
                                                       under the Proposed Rule Amendments                        Obtain a Benefit 28                                              a. Benefits 39
                                                       and Proposed Use of Information 24                     E. Confidentiality 28                                               b. Costs 42

                                                   1 15   U.S.C. 78a et seq.



                                            VerDate Sep<11>2014      16:31 Oct 04, 2018   Jkt 247001   PO 00000   Frm 00001    Fmt 4702     Sfmt 4702      E:\FR\FM\05OCP1.SGM             05OCP1


                                                 50298                    Federal Register / Vol. 83, No. 194 / Friday, October 5, 2018 / Proposed Rules

                                                 VI. Small Business Regulatory Enforcement                provides a copy of a certification it has             The Commission has extended the
                                                      Fairness Act 46                                     furnished to the Commission in                        existing Rule 17g–5(a)(3) exemption
                                                 VII. Regulatory Flexibility Act Certification            accordance with 17 CFR 240.17g–5(e).6                 several times, most recently until the
                                                      47
                                                                                                             The Rule 17g–5 Program also requires               earlier of December 2, 2019, or the
                                                 VIII. Statutory Authority 50
                                                                                                          the hired NRSRO to obtain a written                   compliance date set forth in any final
                                                 I. Background                                            representation from the arranger of the               rule that may be adopted by the
                                                 A. Rule 17g–5(a)(3)                                      structured finance product that can be                Commission that provides for a similar
                                                                                                          reasonably relied on by the hired                     exemption.11
                                                    In 2009, the Commission adopted                       NRSRO.7 Such representation must
                                                 amendments to 17 CFR 240.17g–5                                                                                 B. Rule 17g–7(a) and Rule 15Ga–2
                                                                                                          include: That the arranger will maintain
                                                 (‘‘Rule 17g–5’’) designed to address                     a password-protected website that other                  In 2014, the Commission adopted
                                                 conflicts of interest arising from the                   NRSROs can access; that the arranger                  Rule 17g–7(a) and Rule 15Ga–2. Rule
                                                 business of determining credit ratings,                  will post on this website all information             17g–7(a) requires an NRSRO, when
                                                 and to improve competition and the                       the arranger provides to the hired                    taking a rating action, to publish an
                                                 quality of credit ratings for structured                 NRSRO (or contracts with a third party                information disclosure form containing
                                                 finance products, by making it possible                  to provide to the hired NRSRO) for the                specified information about the related
                                                 for more NRSROs to rate such                             purpose of determining the initial credit             credit rating.12 For example, the
                                                 securities.2 The amendments                              rating and undertaking credit rating                  information disclosure form must
                                                 established a program (‘‘Rule 17g–5                      surveillance; and that the arranger will              specify, among other things, the version
                                                 Program’’) by which an NRSRO that is                     post this information to the website at               of the methodology used to determine
                                                 not hired by an issuer, sponsor, or                      the same time such information is                     the credit rating, a description of the
                                                 underwriter (collectively, ‘‘arranger’’) is              provided to the hired NRSRO.8                         types of data relied upon to determine
                                                 able to obtain the same information that                    Prior to the June 2, 2010 compliance               the credit rating, and information on the
                                                 the arranger provides to an NRSRO                        date for the Rule 17g–5 Program, the                  sensitivity of the credit rating to
                                                 hired to determine a credit rating for the               Commission by order granted a                         assumptions made by the NRSRO.13 The
                                                 structured finance product at the same                   temporary conditional exemption to                    NRSRO must also attach to the
                                                 time the information is provided to the                  NRSROs from Rule 17g–5(a)(3). This                    information disclosure form an
                                                 hired NRSRO.3                                            temporary conditional exemption (the                  attestation affirming that no part of the
                                                    The Rule 17g–5 Program operates by                                                                          credit rating was influenced by any
                                                                                                          ‘‘existing Rule 17g–5(a)(3) exemption’’)
                                                 requiring a hired NRSRO to maintain a                                                                          other business activities, that the credit
                                                                                                          applies solely with respect to credit
                                                 password-protected website containing                                                                          rating was based solely upon the merits
                                                                                                          ratings if: (1) The issuer of the security
                                                 a list of each structured finance product                                                                      of the obligor, security, or money market
                                                                                                          or money market instrument is not a
                                                 for which it is currently in the process                                                                       instrument being rated, and that the
                                                                                                          U.S. person (as defined under 17 CFR
                                                 of determining an initial credit rating.4                                                                      rating was an independent evaluation of
                                                                                                          230.902(k)); and (2) the NRSRO has a
                                                 The list must be in chronological order                                                                        the credit risk of the obligor, security, or
                                                                                                          reasonable basis to conclude that the
                                                 and identify the type of structured                                                                            money market instrument.14
                                                                                                          structured finance product will be
                                                 finance product, the name of the issuer,                                                                          Rule 17g–7(a) also requires an
                                                 the date the credit rating process was                   offered and sold upon issuance, and that
                                                                                                                                                                NRSRO, when taking a rating action, to
                                                 initiated, and the website where the                     any arranger linked to the structured
                                                                                                                                                                publish any executed Form ABS Due
                                                 arranger of the structured finance                       finance product will effect transactions
                                                                                                                                                                Diligence–15E containing information
                                                 product represents that the information                  of the structured finance product after
                                                                                                                                                                about the security or money market
                                                 provided to the hired NRSRO can be                       issuance, only in transactions that occur
                                                                                                                                                                instrument subject to the rating action
                                                 accessed by non-hired NRSROs.5 The                       outside the United States.9 These
                                                                                                                                                                received by the NRSRO or obtained by
                                                 hired NRSRO must provide free and                        conditions were designed to confine the               the NRSRO through the website
                                                 unlimited access to the website it                       existing Rule 17g–5(a)(3) exemption’s                 maintained by an arranger under the
                                                 maintains pursuant to the Rule 17g–5                     application to credit ratings of                      Rule 17g–5 Program.15 Form ABS Due
                                                 Program to any non-hired NRSRO that                      structured finance products issued in,
                                                                                                                                                                Diligence–15E is the form on which a
                                                                                                          and linked to, financial markets outside
                                                                                                                                                                person employed by an NRSRO, issuer,
                                                    2 Amendments to Rules for Nationally Recognized       of the United States. The Commission
                                                 Statistical Rating Organizations, Exchange Act           granted this relief in light of concerns              representations prescribed in Rule 17g–5 in order
                                                 Release No. 61050 (Nov. 23, 2009), 74 FR 63832           raised by various foreign securities                  to obtain credit ratings from NRSROs and were not
                                                 (Dec. 4, 2009) (‘‘Rule 17g–5 Adopting Release’’).
                                                 The term ‘‘structured finance product’’ as used
                                                                                                          regulators and market participants that               prepared to make and adhere to the new
                                                                                                          local securitization markets may be                   requirements set forth in Rule 17g–5(a)(3). These
                                                 throughout this release refers broadly to any
                                                                                                                                                                commenters also identified potential conflicts with
                                                 security or money market instrument issued by an         disrupted if the rule applied to                      local law in non-U.S. jurisdictions as a concern. Id.
                                                 asset pool or as part of any asset-backed securities     transactions outside the United States.10               11 See Order Extending Conditional Temporary
                                                 transaction. This broad category of financial
                                                 instruments includes an asset-backed security as                                                               Exemption for Nationally Recognized Statistical
                                                                                                            6 See 17 CFR 240.17g–5(a)(3)(ii); 17 CFR 240.17g–   Rating Organizations from Requirements of Rule
                                                 defined in Section 3(a)(79) of the Exchange Act (15
                                                 U.S.C. 78c(a)(79)) and other types of structured debt    5(e).                                                 17g–5(a)(3) Under the Securities Exchange Act of
                                                 instruments, including synthetic and hybrid                7 See 17 CFR 240.17g–5(a)(3)(iii).                  1934, Exchange Act Release No. 82144 (Nov. 22,
                                                 collateralized debt obligations. See, e.g., Nationally     8 Id.                                               2017), 82 FR 56309 (No. 28, 2017).
                                                                                                                                                                  12 17 CFR 240.17g–7(a)(1). Rule 17g–7(a) sets forth
                                                 Recognized Statistical Rating Organizations,               9 See Order Granting Temporary Conditional
                                                 Exchange Act Release No. 72936 (Aug. 27, 2014),          Exemption for Nationally Recognized Statistical       the required format and content of the information
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                                                 79 FR 55078, 55081 n.18 (Sept. 15, 2014) (‘‘2014         Rating Organizations from Requirements of Rule        disclosure form and specifies that the form (and
                                                 NRSRO Amendments’’).                                     17g–5 Under the Securities Exchange Act of 1934       other items required by Rule 17g–7(a)) must be
                                                    3 Rule 17g–5 Adopting Release, supra note 2, 74       and Request for Comment, Exchange Act Release         published in the same manner as the credit rating
                                                 FR at 63832. See also 17 CFR 240.17g–5.                  No. 62120 (May 19, 2010), 75 FR 28825 (May 24,        that is the result or subject of the rating action.
                                                                                                                                                                  13 See 17 CFR 240.17g–7(a)(1)(ii)(B), (H), and (M).
                                                 Throughout this release, an NRSRO that is not hired      2010) (‘‘Exemptive Order’’).
                                                 by an arranger is referred to as a ‘‘non-hired             10 Id. at 28826–27. Such foreign securities         For a comprehensive discussion of the required
                                                 NRSRO.’’ An NRSRO that is hired by an arranger           regulators and market participants indicated that     content of the form, see 2014 NRSRO Amendments,
                                                 is referred to as a ‘‘hired NRSRO.’’                     arrangers of structured finance products located      supra note 2, 79 FR at 55167–77.
                                                    4 See 17 CFR 240.17g–5(a)(3)(i).                                                                              14 17 CFR 240.17g–7(a)(1)(iii).
                                                                                                          outside the United States generally were not aware
                                                    5 Id.                                                 that they would be required to make the                 15 17 CFR 240.17g–7(a)(2).




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                                                                          Federal Register / Vol. 83, No. 194 / Friday, October 5, 2018 / Proposed Rules                                                      50299

                                                 or underwriter to provide third-party                    exemption.20 The Commission noted                         the ability of local firms to raise
                                                 due diligence services in connection                     that it was appropriate for the Rule                      capital.25
                                                 with an asset-backed security must,                      15Ga–2 exemption to be aligned with                          Specifically, some commenters
                                                 among other things, describe the scope                   the Rule 17g–7(a) exemption so that                       discussed potentially overlapping
                                                 and manner of the due diligence                          there is a consistent approach to                         regulatory regimes as a reason the
                                                 provided, summarize the findings and                     determining when the Commission’s                         exemption was appropriate.26 For
                                                 conclusions of its review, and certify                   NRSRO rules apply to offshore                             example, one commenter indicated that
                                                 that it conducted a thorough review in                   transactions.21                                           new securitization disclosure
                                                 performing the due diligence.16                                                                                    requirements in Europe take a different
                                                                                                          II. Proposed Rule Amendments                              approach in regulating the same general
                                                    Rule 15Ga–2 also relates to third-party
                                                 due diligence services and requires the                  A. Rule 17g–5(a)(3)                                       activity as Rule 17g–5(a)(3).27 In an
                                                 issuer or underwriter of an asset-backed                                                                           earlier comment letter, this commenter
                                                                                                            In the Exemptive Order, the
                                                 security that is to be rated by an NRSRO                                                                           asserted that subjecting European
                                                                                                          Commission requested comment
                                                 to furnish to the Commission Form                                                                                  market participants to overlapping
                                                                                                          regarding the application of Rule 17g–
                                                 ABS–15G containing the findings and                                                                                regulatory regimes may impose
                                                                                                          5(a)(3) to transactions outside the
                                                 conclusions of any third-party due                                                                                 significant compliance issues and an
                                                                                                          United States, including whether any                      increased execution burden.28 In this
                                                 diligence report obtained by the issuer                  specific conflicts would arise with
                                                 or underwriter.17                                                                                                  commenter’s view, the application of
                                                                                                          respect to foreign regulators,                            Rule 17g–5(a)(3) in a non-U.S. offered
                                                    In response to concerns raised by                     regulations, and laws.22 In subsequent
                                                 commenters when the rules were                                                                                     context may be disruptive to local
                                                                                                          extension orders, the Commission                          markets because the rule does not reflect
                                                 proposed,18 the Commission included                      continued to provide interested parties
                                                 paragraph (a)(3) in 17 CFR 240.17g–7                                                                               certain features specific to the
                                                                                                          with the opportunity to comment. The                      securitization market in Europe.29
                                                 (‘‘Rule 17g–7’’) and paragraph (e) in                    Commission received a number of
                                                 Rule 15Ga–2 to provide an exemption                                                                                   Commenters also supported the
                                                                                                          comment letters in response to these                      exemption based on the disclosure of
                                                 from the disclosure requirements for                     requests for comment.23
                                                 certain offshore transactions.19 The                                                                               confidential information that could
                                                                                                            Commenters on the Exemptive Order                       result from the application of Rule 17g–
                                                 Commission closely modeled the                           and extensions generally have
                                                 language of the Rule 17g–7(a) exemption                                                                            5(a)(3) to non-U.S. offered
                                                                                                          supported the existing Rule 17g–5(a)(3)                   transactions.30 One commenter
                                                 on the existing Rule 17g–5(a)(3)                         exemption, with many commenters                           indicated that compliance with Rule
                                                                                                          expressly requesting that such                            17g–5(a)(3) could potentially conflict
                                                    16 Rule 17g–10 identifies Form ABS Due
                                                                                                          exemption be extended indefinitely,                       with local bank confidentiality and/or
                                                 Diligence–15E as the form on which the
                                                 certification required pursuant to Exchange Act
                                                                                                          made permanent, or codified in Rule                       data protection laws.31 Other
                                                 Section 15E(s)(4)(B) must be set forth. See 17 CFR       17g–5(a)(3).24 In support of the existing                 commenters also identified concerns
                                                 240.17g–10; see also 15 U.S.C. 78o–7(s)(4)(B).           Rule 17g–5(a)(3) exemption, some                          regarding the posting of confidential
                                                    17 See 17 CFR 240.15Ga–2; 17 CFR 249.1400.
                                                                                                          commenters indicated that broad                           information through the Rule 17g–5
                                                 Forms ABS–15G are made publicly available                application of Rule 17g–5(a)(3) to credit
                                                 through the Commission’s EDGAR system. See 17                                                                      Program, stating that a reluctance to
                                                 CFR 232.101(a)(xvi).                                     ratings of structured finance products                    disclose confidential information to
                                                    18 With respect to Rule 17g–7(a), a commenter         offered and sold by non-U.S. persons                      non-hired NRSROs could cause market
                                                 suggested that local laws could impede the ability       outside the United States could disrupt                   participants to provide less information
                                                 of an NRSRO to obtain or disclose information            local securitization markets or inhibit
                                                 about the issuer as required by the proposed rule.
                                                                                                                                                                    to hired NRSROs 32 or to forgo obtaining
                                                 See 2014 NRSRO Amendments, supra note 2, 79 FR                                                                     credit ratings on structured finance
                                                                                                             20 2014 NRSRO Amendments, supra note 2, 79 FR
                                                 at 55165. Similarly, with respect to Rule 15Ga–2,                                                                  products.33
                                                 a commenter indicated that application of the rule       at 55165.
                                                                                                             21 Id. at 55185 n.1422.
                                                 to offshore transactions may conflict with foreign                                                                   25 See, e.g., AFME 2010 Letter; letter from Chris
                                                                                                             22 See Exemptive Order, supra note 9, 75 FR at
                                                 securities laws and other laws, rules, and                                                                         Dalton, Chief Executive Officer, Australian
                                                 regulations. See 2014 NRSRO Amendments, supra            28825, 28828.
                                                                                                                                                                    Securitisation Forum, dated June 25, 2010 (‘‘AuSF
                                                 note 2, 79 FR at 55184, n.1420. As discussed in             23 Comment letters received in response to the
                                                                                                                                                                    Letter’’); Japan FSA Letter; JCR Letter; SFJ Letter.
                                                 Section II.A. of this release, similar concerns          request for comment regarding the application of          Other commenters indicated more generally that
                                                 regarding potentially overlapping or conflicting         Rule 17g–5(a)(3) to transactions outside the United       such application of the rule could have a negative
                                                 foreign regulations have been raised by commenters       States are available at https://www.sec.gov/              impact on foreign markets. See, e.g., IIAC Letter;
                                                 with respect to Rule 17g–5(a)(3).                        comments/s7-04-09/s70409.shtml.                           NYC Bar Association Letter; SFIG/AuSF Letter.
                                                    19 See 2014 NRSRO Amendments, supra note 2,              24 See, e.g., letter from Rick Watson, Managing          26 See, e.g., AFME 2010 Letter; Japan FSA
                                                 79 FR at 55165, 55184–85. See also 17 CFR                Director, Association for Financial Markets in            Letter;SFJ Letter.
                                                 240.17g–7(a)(3) (providing for an exemption if: (1)      Europe/European Securitisation Forum, dated                 27 See letter from Richard Hopkin, Managing
                                                 The rated obligor or issuer of the rated security or     November 11, 2010 (‘‘AFME 2010 Letter’’); letter          Director & Head of Fixed Income, Association for
                                                 money market instrument is not a U.S. person; and        from Jack Rando, Director, Capital Markets,               Financial Markets in Europe, dated November 1,
                                                 (2) the NRSRO has a reasonable basis to conclude         Investment Industry Association of Canada, dated          2017 (‘‘AFME 2017 Letter’’).
                                                 that a security or money market instrument issued        September 22, 2010 (‘‘IIAC Letter’’); letter from           28 See AFME 2010 Letter.
                                                 by the rated obligor or the issuer will be offered and   Masamichi Kono, Vice Commissioner for                       29 See AFME 2010 Letter; AFME 2017 Letter.
                                                 sold upon issuance, and that any underwriter or          International Affairs, Financial Services Agency,           30 See, e.g., AFME 2010 Letter; JCR Letter; SFJ
                                                 arranger linked to the security or money market          Government of Japan, dated November 12, 2010
                                                 instrument will effect transactions in the security or   (‘‘Japan FSA Letter’’); letter from Takefumi Emori,       Letter.
                                                                                                                                                                      31 See AFME 2010 Letter.
                                                 money market instrument, only in transactions that       Managing Director, Japan Credit Rating Agency,
                                                                                                                                                                      32 See SFJ Letter. This commenter asserted that it
                                                 occur outside the United States); 17 CFR 240.15Ga–       Ltd., dated June 25, 2010 (‘‘JCR Letter’’); letter from
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                                                 2(e) (providing for an exemption with respect to         Patrick D. Dolan, Chair, Structured Finance               would be difficult for Japanese market participants
                                                 offerings of asset-backed securities if: (1) The         Committee, New York City Bar Association, dated           to obtain an adequate level of comfort regarding
                                                 offering is not required to be, and is not, registered   October 20, 2016 (‘‘NYC Bar Association Letter’’);        how non-hired NRSROs that are neither established
                                                 under the Securities Act; (2) the issuer of the rated    letter from Richard Johns, Executive Director,            in Japan nor have an affiliate registered in Japan
                                                 security is not a U.S. person; and (3) the security      Structured Finance Industry Group, and Chris              would protect confidential information posted
                                                 will be offered and sold upon issuance, and any          Dalton, Chief Executive Officer, Australian               pursuant to the Rule 17g–5 Program.
                                                 underwriter or arranger linked to the security will      Securitisation Forum, dated July 19, 2017 (‘‘SFIG/          33 See JCR Letter. This commenter noted a

                                                 effect transactions of the security after issuance,      AuSF Letter’’); letter from Masaru Ono, Executive         concern that an arranger may ‘‘be held liable to a
                                                 only in transactions that occur outside the United       Director, Securitization Forum of Japan, dated            third party for disclosing such party’s sensitive,
                                                 States).                                                 November 12, 2010 (‘‘SFJ Letter’’).                                                                  Continued




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                                                 50300                    Federal Register / Vol. 83, No. 194 / Friday, October 5, 2018 / Proposed Rules

                                                    One commenter also discussed                          such an approach is consistent with the                   market instrument issued by an asset
                                                 business practices and characteristics of                approach it has taken in other contexts,                  pool or as part of any asset-backed
                                                 the securitization market in its                         and with notions of international comity                  securities transaction, if: (1) The issuer
                                                 jurisdiction that, according to the                      and the generally limited interest of the                 of the security or money market
                                                 commenter, may make the Rule 17g–5                       Commission in regulating securities                       instrument is not a U.S. person (as
                                                 Program less likely to be effective.34                   offered and sold exclusively outside of                   defined in 17 CFR 230.902(k)); and (2)
                                                 Among other things, the commenter                        the United States. For example, in                        the NRSRO has a reasonable basis to
                                                 indicated that it is not customary for                   adopting Regulation S,41 the                              conclude that all offers and sales of the
                                                 credit rating agencies in Japan to issue                 Commission stated that ‘‘[p]rinciples of                  security or money market instrument by
                                                 unsolicited ratings on structured finance                comity and the reasonable expectations                    any issuer, sponsor, or underwriter
                                                 products. 35 The commenter posited                       of participants in the global markets                     linked to the security or money market
                                                 that, unless an NRSRO is established in                  justify reliance on laws applicable in                    instrument will occur outside the
                                                 Japan or has a Japanese affiliate, it may                jurisdictions outside the United States                   United States (as that phrase is used in
                                                 not have the requisite knowledge and                     to define requirements for transactions                   Regulation S).44
                                                 expertise to rate Japanese structured                    effected offshore.’’ 42 The Commission                       The first condition of the proposed
                                                 finance products.36 This commenter                       believes that the approach it articulated                 exemption to Rule 17g–5(a)(3)—that the
                                                 also suggested that, given the smaller                   in adopting Regulation S applies                          issuer of the structured finance product
                                                 and less mature securitization market in                 similarly to the proposed exemption to                    must not be a U.S. person—is designed
                                                 Japan as compared to the United States,                  Rule 17g–5(a)(3)—i.e., that providing                     to limit relief to non-U.S. issuers. To
                                                 market participants in Japan may utilize                 relief regarding the application of Rule                  this end, and for purposes of the
                                                 other sources of financing rather than                   17g–5(a)(3) to transactions outside the                   exemption, the Commission is
                                                 bear the costs associated with the Rule                  United States recognizes the reasonable                   proposing that ‘‘U.S. person’’ have the
                                                 17g–5 Program.37                                         expectations of participants in the                       same definition as under Regulation S.45
                                                    A number of commenters also                           global markets in defining requirements                   Consequently, to qualify for the
                                                 advocated for the existing Rule 17g–                     for transactions effected outside the                     exemption, the NRSRO would have to
                                                 5(a)(3) exemption based on principles                    United States.                                            be determining a credit rating for a
                                                 related to international comity, asserting                  For the reasons discussed above, the                   structured finance product issued by a
                                                 that the Commission has a limited                        Commission preliminarily believes that                    person that is not a U.S. person. This
                                                 interest in regulating securities offered                it is not necessary or appropriate in the                 condition is identical to the
                                                 and sold exclusively outside the United                  public interest or for the protection of                  corresponding condition in the existing
                                                 States and that these transactions are                   investors to require NRSROs and                           Rule 17g–5(a)(3) exemption.
                                                 more appropriately regulated by the                      arrangers to comply with Rule 17g–                           The second condition of the proposed
                                                 relevant local authorities.38 A number of                5(a)(3) with respect to ratings of                        exemption to Rule 17g–5(a)(3)—that the
                                                                                                          structured finance products offered and                   NRSRO has a reasonable basis to
                                                 these commenters pointed to 17 CFR
                                                                                                          sold exclusively outside the United                       conclude that all offers and sales of the
                                                 230.901 through 230.905 (‘‘Regulation
                                                                                                          States and that it is therefore                           structured finance product by any
                                                 S’’), which excludes offers and sales that
                                                                                                          appropriate to propose to codify, with                    arranger linked to the structured finance
                                                 occur outside the United States from the
                                                                                                          certain clarifying changes, the existing                  product will occur outside the United
                                                 registration requirements under Section
                                                 5 of the Securities Act of 1933                          Rule 17g–5(a)(3) exemption.43 The                         States—would limit the relief to
                                                                                                          proposed exemption only applies to the                    transactions offered and sold
                                                 (‘‘Securities Act’’),39 as evidence, in the
                                                                                                          provisions of paragraphs (i) through (iii)                exclusively outside the United States.
                                                 commenters’ view, of the Commission’s
                                                                                                          of Rule 17g–5(a)(3). It does not limit in                 This condition contains certain
                                                 limited interest in regulating securities
                                                                                                          any way the scope or applicability of the                 modifications to the corresponding
                                                 offered and sold solely outside the
                                                                                                          other requirements in Rule 17g–5 or                       condition in the existing Rule 17g–
                                                 United States.40
                                                                                                          other provisions of the federal securities                5(a)(3) exemption. The Commission is
                                                    The Commission has considered the
                                                                                                          laws, including the antifraud                             proposing these modifications for two
                                                 views and policy considerations
                                                                                                          provisions.                                               reasons: (1) To clarify the relationship
                                                 expressed by commenters and                                 Accordingly, the Commission                            between the proposed exemption and
                                                 preliminarily believes it is appropriate                 proposes to add new paragraph (a)(3)(iv)                  Regulation S—i.e., that the exemption
                                                 to provide relief regarding the                          to Rule 17g–5 to provide that the                         applies when all offers and sales of a
                                                 application of Rule 17g–5(a)(3) to                       provisions of paragraphs (i) through (iii)                structured finance product by any
                                                 transactions outside the United States.                  of Rule 17g–5(a)(3) will not apply to an                  arranger linked to the structured finance
                                                 The Commission is of the view that                       NRSRO when issuing or maintaining a                       product are excluded from the
                                                                                                          credit rating for a security or money                     registration requirements of Section 5 of
                                                 proprietary information’’ through the Rule 17g–5
                                                 Program.                                                                                                           the Securities Act in reliance on
                                                                                                            41 17 CFR 230.901 through 230.905.
                                                   34 See SFJ Letter.
                                                                                                            42 See
                                                                                                                                                                    Regulation S; and (2) to clarify that the
                                                                                                                    Offshore Offers and Sales, Securities Act
                                                   35 Id.
                                                                                                          Release No. 6863 (Apr. 24, 1990). As described in
                                                                                                                                                                    standards in the second condition are
                                                   36 Id.
                                                                                                          the Commission’s adopting release for Regulation S,       not the same as the standards that are
                                                   37 Id.
                                                                                                          Regulation S relates solely to the applicability of the   developing in the case law with respect
                                                   38 See, e.g., AFME 2010 Letter; AuSF Letter; IIAC
                                                                                                          registration requirements of Section 5 of the             to Section 10(b) of the Exchange Act
                                                 Letter; Japan FSA Letter; JCR Letter; NYC Bar            Securities Act and does not limit in any way the
                                                                                                                                                                    following the Supreme Court’s decision
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                                                 Association Letter; SFJ Letter. Some of these            scope or applicability of the antifraud or other
                                                 commenters posited that these policy                     provisions of the federal securities laws.                in Morrison v. National Australia Bank,
                                                 considerations are particularly acute given that Rule       43 Codifying an exemption to Rule 17g–5(a)(3)          Ltd., 561 U.S. 247 (2010). The second
                                                 17g–5(a)(3) impacts both the regulated entities (i.e.,   also will standardize the manner in which the
                                                 NRSROs) and their customers (i.e., the issuers of
                                                                                                                                                                    condition of the proposed exemption
                                                                                                          exemptions to Rule 17g–5(a)(3), Rule 17g–7(a), and
                                                 rated structured finance products). See, e.g., NYC       Rule 15Ga–2 are promulgated. Unlike the existing
                                                                                                                                                                    closely tracks the language of Regulation
                                                 Bar Association Letter.                                  Rule 17g–5(a)(3) exemption, the Rule 17g–7(a) and
                                                   39 See 17 CFR 230.901 through 230.905.                                                                             44 See proposed new paragraph (a)(3)(iv) of Rule
                                                                                                          Rule 15Ga–2 exemptions are included in the rule
                                                   40 See, e.g., AFME 2010 Letter; AuSF Letter; NYC       text and not subject to expiration. See supra Section     17g–5.
                                                 Bar Association Letter.                                  I.B.                                                        45 See 17 CFR 230.902(k).




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                                                                          Federal Register / Vol. 83, No. 194 / Friday, October 5, 2018 / Proposed Rules                                                   50301

                                                 S 46 and specifies that the phrase ‘‘occur              obtains information during the course of              Rule 15Ga–2 to align the exemptions to
                                                 outside the United States’’ has the same                its engagement that could cause it to                 such rules with the proposed exemption
                                                 meaning as in Regulation S. The                         reasonably believe there are activities               to Rule 17g–5(a)(3).53
                                                 proposed modifications are not                          inside the U.S. In this regard, the                      Specifically, the Commission
                                                 designed to change the scope of the                     NRSRO could include in any                            proposes to amend the third condition
                                                 second condition of the proposed                        representation obtained from an                       of the Rule 15Ga–2 exemption to clarify
                                                 exemption from the corresponding                        arranger a mechanism for the arranger to              that the exemption is available only if
                                                 condition in the existing Rule 17g–                     promptly notify the NRSRO of any                      all offers and sales of an asset-backed
                                                 5(a)(3)exemption.47                                     change that would render the                          security by any issuer, sponsor, or
                                                    The determination of whether an                      representation untrue or inaccurate.                  underwriter linked to the security will
                                                 NRSRO would have a reasonable basis                                                                           occur outside the United States (as that
                                                                                                         B. Conforming Amendments to Rule
                                                 to conclude that all offers and sales of                                                                      phrase is used in Regulation S).54
                                                                                                         17g–7(a) and Rule 15Ga–2                                 Likewise, the Commission proposes to
                                                 the structured finance product by any
                                                 arranger linked to the structured finance                  As discussed in Section I.B. of this               amend the second condition of the Rule
                                                 product will occur outside the United                   release, Rule 17g–7(a) and Rule 15Ga–2                17g–7(a) exemption to clarify that the
                                                 States would depend on the facts and                    contain exemptions similar to the                     exemption is available only if an
                                                 circumstances of a given situation. To                  existing Rule 17g–5(a)(3) exemption.                  NRSRO has a reasonable basis to
                                                 have a reasonable basis to reach such a                 The Commission closely modeled the                    conclude that: (A) With respect to any
                                                 conclusion, the NRSRO generally                         language of the Rule 17g–7(a) exemption               security or money market instrument
                                                 should ascertain how any arranger                       on the existing Rule 17g–5(a)(3)                      issued by a rated obligor, all offers and
                                                 linked to the structured finance product                exemption.50 The Commission then                      sales by any issuer, sponsor, or
                                                 intends to market and sell the structured               aligned the Rule 15Ga–2 exemption to                  underwriter linked to the security or
                                                 finance product and to engage in any                    the Rule 17g–7(a) exemption so that                   money market instrument will occur
                                                 secondary market activities (i.e., re-                  there is a consistent approach to                     outside the United States (as that phrase
                                                 sales) of the structured finance product,               determining when the Commission’s                     is used in Regulation S); or (B) with
                                                 and whether any such efforts and                        NRSRO rules apply to offshore                         respect to a rated security or money
                                                 activities will occur in the United States              transactions.51                                       market instrument, all offers and sales
                                                 (including any ‘‘directed selling efforts,’’               The Commission continues to believe                by any issuer, sponsor, or underwriter
                                                 as defined in Regulation S).48                          that it is appropriate for there to be a              linked to the security or money market
                                                    For instance, an NRSRO could obtain                  consistent approach to determining how                instrument will occur outside the
                                                 from the applicable arranger a                          Rule 17g–5(a)(3), Rule 17g–7(a), and                  United States (as that phrase is used in
                                                 representation upon which the NRSRO                     Rule 15Ga–2 apply to offshore                         Regulation S).55
                                                 can reasonably rely that all offers and                 transactions. Commenters raised similar                  As is the case with the proposed
                                                 sales by the arranger of the structured                 concerns with respect to all three rules              exemption to Rule 17g–5(a)(3), the
                                                 finance product to be rated by the                      regarding the potential conflicts                     determination of whether an NRSRO
                                                 NRSRO will occur outside the United                     between such rules and foreign                        would have a reasonable basis to
                                                 States. For example, the arranger’s                     regulations and practices with respect to             conclude that all offers and sales of the
                                                 representation could provide assurances                 transactions offered and sold                         applicable securities or money market
                                                 that all such offers and sales will be                  exclusively outside the United States.52              instruments by any arranger linked to
                                                 conducted in accordance with the                        As discussed in Section II.A. of this                 such securities or money market
                                                 applicable safe harbor under Regulation                 release, the Commission believes that it              instruments will occur outside the
                                                 S.49 In determining whether it is                       has a limited interest in regulating                  United States would depend on the facts
                                                 reasonable to rely on any such                          securities offered and sold solely                    and circumstances of a given situation.
                                                 representation, an NRSRO should                         outside the United States (a view which               The discussion in Section II.A. of this
                                                 evaluate the representation in light of                 is also consistent with international                 release regarding how an NRSRO may
                                                 other information known to the NRSRO,                   comity).                                              obtain such a reasonable basis for
                                                 such as information in the relevant                        Further, as discussed in Section II.A.             purposes of the proposed exemption to
                                                 transaction documents, any ongoing or                   of this release, the proposed                         Rule 17g–5(a)(3) also applies for
                                                 prior failures by the arranger to adhere                modifications to the conditions of the                purposes of the proposed amendment to
                                                 to its representations, and any pattern of              existing Rule 17g–5(a)(3) exemption are               Rule 17g–7(a).
                                                 conduct by the arranger of it failing to                not designed to change the scope of the                  The proposed amendment to Rule
                                                 promptly correct breaches of its                        exemption, but rather to clarify how the              17g–7(a) also clarifies that the second
                                                 representations.                                        exemption relates to Regulation S. The                condition of the Rule 17g–7(a)
                                                    An NRSRO generally should                            Commission believes that clarifying the               exemption applies differently in the
                                                 reevaluate the reasonableness of its                    conditions to the exemption with                      case of rated obligors than it does in the
                                                 basis for concluding that the structured                respect to Rule 17g–5(a)(3) without also              case of rated securities or money market
                                                 finance product will be offered and sold                clarifying the substantially identical                instruments. In the case of rated
                                                 outside the United States if the NRSRO                  conditions to the exemptions in Rule                  securities or money market instruments,
                                                                                                         17g–7(a) and Rule 15Ga–2 could raise                  the condition to the Rule 17g–7(a)
                                                   46 See  17 CFR 230.901.                               interpretive questions regarding the                  exemption applies in the same way as
                                                                                                         intended application of those
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                                                   47 From   its inception, the existing Rule 17g–                                                             the condition to the proposed Rule 17g–
                                                 5(a)(3) exemption has been linked to Regulation S.      exemptions. Accordingly, to promote                   5(a)(3) exemption—i.e., an NRSRO must
                                                 For instance, in the Exemptive Order, the example       clarity and consistency, the Commission
                                                 given of a transaction that occurs outside the United                                                         have a reasonable basis to conclude that
                                                 States is a transaction that complies with the          proposes to amend Rule 17g–7(a) and
                                                 applicable safe harbor under Rules 903 and 904 of                                                               53 See   supra Section II.A.
                                                 Regulation S. See Exemptive Order, supra note 9,          50 2014   NRSRO Amendments, supra note 2, 79 FR       54 See   proposed revised paragraph (e)(3) of Rule
                                                 75 FR at 28827.                                         at 55165.                                             15Ga–2.
                                                   48 17 CFR 230.902(c).                                    51 Id. at 55185 n.1422.                              55 See proposed revised paragraph (a)(3)(ii) of
                                                   49 See 17 CFR 230.903 and 904.                           52 See supra note 18 and Section II.A.             Rule 17g–7.



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                                                 50302                    Federal Register / Vol. 83, No. 194 / Friday, October 5, 2018 / Proposed Rules

                                                 all offers and sales of the rated security                 5. What information might an NRSRO                 encourages interested persons to
                                                 or money market instrument by any                       consider in order to form a reasonable                provide supporting data and analysis
                                                 arranger linked to that security or                     basis to conclude that all offers and                 and, when appropriate, suggest
                                                 money market instrument will occur                      sales of a structured finance product by              modifications to the proposed rule text.
                                                 outside the United States. For the Rule                 any arranger linked to the structured                 Responses that are supported by data
                                                 17g–7(a) exemption to apply with                        finance product will occur outside the                and analysis assist the Commission in
                                                 respect to a rating of an obligor,                      United States?                                        considering the practicality and
                                                 however, an NRSRO must have a                              6. What actions might an NRSRO take                effectiveness of a proposed new
                                                 reasonable basis to conclude that the                   to ensure that it continues throughout                requirement as well as evaluating the
                                                 condition is satisfied with respect to all              the ratings process to have a reasonable              benefits and costs of the proposed rule.
                                                 securities or money market instruments                  basis to conclude that all offers and
                                                                                                         sales of a structured finance product by              IV. Paperwork Reduction Act
                                                 issued by that obligor. Accordingly, if
                                                 any of a rated obligor’s securities or                  any arranger linked to the structured                    The proposed amendments to Rule
                                                 money market instruments are offered                    finance product will occur outside the                17g–5(a)(3) and Rule 17g–7(a) contain
                                                 and sold by an arranger linked to those                 United States? In what circumstances                  new ‘‘collection of information’’
                                                 securities or money market instruments                  might an NRSRO need to reevaluate its                 requirements within the meaning of the
                                                 within the United States, the exemption                 conclusion?                                           Paperwork Reduction Act of 1995
                                                 would not apply to rating actions                          7. Should Rule 17g–5(a)(3) be                      (‘‘PRA’’).57 The Commission will submit
                                                 involving the credit rating assigned to                 amended to require an NRSRO to take                   the proposed rule amendments to the
                                                 the obligor as an entity. The                           specific actions in order to obtain and               Office of Management and Budget
                                                 Commission previously discussed the                     continue to ensure that it has a                      (‘‘OMB’’) for review in accordance with
                                                 distinction between the application of                  reasonable basis to conclude that all                 the PRA.58 An agency may not conduct
                                                 the exemption with respect to rated                     offers and sales of a structured finance              or sponsor, and a person is not required
                                                 obligors and rated securities or money                  product by any arranger linked to the                 to respond to, a collection of
                                                 market instruments in the adopting                      structured finance product will occur                 information unless it displays a
                                                 release for Rule 17g–7(a).56 The                        outside the United States? If so, how?                currently valid control number.
                                                 proposed amendment to Rule 17g–7(a)                     For example, should an NRSRO be                          The titles and OMB control numbers
                                                 more clearly states this distinction in                 required to obtain from the applicable                for the collections of information are:
                                                 the rule text itself.                                   arranger a representation upon which                     (1) Rule 17g–5, Conflicts of interest
                                                                                                         the NRSRO can reasonably rely that all                (OMB control number 3235–0649); and
                                                 III. Request for Comment                                offers and sales by the arranger of the                  (2) Rule 17g–7, Disclosure
                                                    The Commission generally requests                    structured finance product to be rated                requirements (OMB control number
                                                 comment on the proposal to add new                      by the NRSRO will occur outside the                   3235–0656).
                                                 paragraph (a)(3)(iv) of Rule 17g–5 and to               United States?                                           The amendments to Rule 15Ga–2 do
                                                 amend paragraph (a)(3)(ii) of Rule 17g–                    8. If the Exemptive Order were                     not contain a collection of information
                                                 7 and paragraph (e)(3) of Rule 15Ga–2.                  allowed to expire without amending                    requirement within the meaning of the
                                                 In addition, the Commission requests                    Rule 17g–5(a)(3) as proposed, are there               PRA.
                                                 comment, including empirical data in                    any jurisdictions where applicable law
                                                                                                         would preclude compliance with Rule                   A. Summary of Collection of
                                                 support of comments, in response to the                                                                       Information Under the Proposed Rule
                                                 following questions:                                    17g–5(a)(3)? If so, what impact would
                                                                                                         application of Rule 17g–5(a)(3) to                    Amendments and Proposed Use of
                                                    1. Is it appropriate for the                                                                               Information
                                                 Commission to amend Rule 17g–5(a)(3)                    structured finance products offered and
                                                 to provide an exemption from the rule                   sold in such jurisdictions have on                    1. Proposed Amendments to Rule 17g–
                                                 with respect to credit ratings where the                NRSROs? Would NRSROs and their                        5(a)(3)
                                                 issuer of the structured finance product                affiliates be precluded from issuing                     The Commission is proposing
                                                 is not a U.S. person and the NRSRO has                  ratings of structured finance products in             amendments to Rule 17g–5(a)(3) that
                                                 a reasonable basis to conclude that all                 such jurisdictions?                                   would provide an exemption to the rule
                                                 offers and sales of the structured finance                 9. What actions would NRSROs and
                                                                                                                                                               with respect to credit ratings of
                                                 product by any arranger linked to the                   arrangers need to take in order to
                                                                                                                                                               structured finance products if the issuer
                                                 structured finance produce will occur                   comply with Rule 17g–5(a)(3) if the
                                                                                                                                                               of the structured finance product is not
                                                 outside the United States? Why or why                   Exemptive Order were allowed to expire
                                                                                                                                                               a U.S. person and the NRSRO has a
                                                 not?                                                    without codifying the existing Rule 17g–
                                                                                                                                                               reasonable basis to conclude that all
                                                    2. Would the proposed exemption be                   5(a)(3) exemption? How much advance
                                                                                                                                                               offers and sales of the structured finance
                                                 consistent with the Commission’s                        notice would market participants
                                                                                                                                                               product by any arranger linked to the
                                                 general approach to regulating securities               currently relying on the Exemptive
                                                                                                                                                               structured finance product will occur
                                                 offered and sold exclusively outside the                Order require in order to prepare to
                                                                                                                                                               outside the United States.59 In order to
                                                 United States?                                          comply with Rule 17g–5(a)(3)?
                                                                                                            10. If the Exemptive Order were                    have a reasonable basis for such a
                                                    3. Is it appropriate for the                                                                               conclusion, an NRSRO may collect
                                                 Commission to amend Rule 17g–7(a)                       allowed to expire without codifying the
                                                                                                         existing Rule 17g–5(a)(3) exemption,                  information from an arranger. For
                                                 and Rule 15Ga–2 to conform to the                                                                             instance, an NRSRO may elect to obtain
                                                 proposed exemption in Rule 17g–                         would any NRSROs use information
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                                                                                                         available through the websites                        a representation from an arranger
                                                 5(a)(3)? Why or why not?                                                                                      regarding the manner in which the
                                                    4. Are there other ways in which the                 maintained by arrangers under the Rule
                                                                                                         17g–5 Program to determine and                        structured finance product will be
                                                 Commission should consider amending
                                                 Rule 17g–5, Rule 17g–7, and Rule 15Ga–                  monitor credit ratings with respect to                  57 44  U.S.C. 3501 et seq.
                                                 2? Please be specific.                                  transactions that would be exempted by                  58 See  44 U.S.C. 3507(d); 5 CFR 1320.11.
                                                                                                         the proposed rule?                                       59 See proposed paragraph (a)(3)(iv) of Rule 17g–
                                                   56 See 2014 NRSRO Amendments, supra note 2,              In responding to the specific requests             5; see also supra Section II.A. (discussing the
                                                 79 FR at 55165 n.1107.                                  for comment above, the Commission                     proposed exemption in more detail).



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                                                                          Federal Register / Vol. 83, No. 194 / Friday, October 5, 2018 / Proposed Rules                                                 50303

                                                 offered and sold. Such information                      C. Burden and Cost Estimates Related to               in a total aggregate annual hour burden
                                                 regarding the manner in which the                       the Proposed Amendments                               of 1,068 hours.64
                                                 structured finance product will be                      1. Proposed Amendments to Rule 17g–                   2. Proposed Amendments to Rule 17g–
                                                 offered and sold may be necessary for an                5(a)(3)                                               7(a)
                                                 NRSRO to determine whether the
                                                 proposed exemption applies with                            The Commission is proposing                           The Commission is proposing
                                                                                                         amendments to Rule 17g–5(a)(3) that                   conforming and clarifying amendments
                                                 respect to the rating of the structured
                                                                                                         would provide an exemption to the rule                to an existing exemption in Rule 17g–
                                                 finance product.
                                                                                                         with respect to ratings of certain                    7(a). The proposed amendment would
                                                 2. Proposed Amendments to Rule 17g–                     structured finance products if, among                 clarify that, in order for the exemption
                                                 7(a)                                                    other things, the NRSRO has a                         to apply, an NRSRO must have a
                                                                                                         reasonable basis to conclude that all                 reasonable basis to conclude that: (A)
                                                    The Commission is proposing                          offers and sales of the structured finance            With respect to any security or money
                                                 amendments to an existing exemption                     product by any arranger linked to the                 market instrument issued by a rated
                                                 in Rule 17g–7(a). The proposed                          structured finance product will occur                 obligor, all offers and sales by any
                                                 amendment would clarify that, in order                  outside the United States.61 The                      issuer, sponsor, or underwriter linked to
                                                 for the exemption to apply, an NRSRO                    proposed amendment would codify the                   the security or money market
                                                 must have a reasonable basis to                         existing Rule 17g–5(a)(3) exemption,                  instrument will occur outside the
                                                 conclude that: (A) With respect to any                  with certain clarifying changes.                      United States; or (B) with respect to a
                                                 security or money market instrument                        The Commission preliminarily                       rated security or money market
                                                 issued by a rated obligor, all offers and               believes that NRSROs will modify their                instrument, all offers and sales by any
                                                 sales by any issuer, sponsor, or                        processes to reflect the clarifying                   issuer, sponsor, or underwriter linked to
                                                 underwriter linked to the security or                   changes being proposed to the                         the security or money market
                                                 money market instrument will occur                      exemption. For instance, an NRSRO that                instrument will occur outside the
                                                                                                         currently seeks written representations               United States.65
                                                 outside the United States; or (B) with
                                                                                                         from an arranger to support the                          The Commission preliminarily
                                                 respect to a rated security or money                                                                          believes that NRSROs will modify their
                                                 market instrument, all offers and sales                 reasonable belief required under the
                                                                                                         existing Rule 17g–5(a)(3) exemption                   processes to reflect the proposed
                                                 by any issuer, sponsor, or underwriter                                                                        amendments to the Rule 17g–7(a)
                                                 linked to the security or money market                  may modify the form of the
                                                                                                         representation to conform to the                      exemption. For instance, an NRSRO that
                                                 instrument will occur outside the                                                                             currently seeks written representations
                                                 United States.60 In order to have a                     language of the condition as proposed.
                                                                                                         The Commission estimates that it would                from an obligor or arranger to support
                                                 reasonable basis for such a conclusion,                                                                       the reasonable belief required under the
                                                                                                         take an NRSRO approximately five
                                                 an NRSRO may collect information from                                                                         Rule 17g–7(a) exemption, as currently in
                                                                                                         hours to update its process for obtaining
                                                 an arranger or obligor. For instance, an                a reasonable basis to reflect the                     effect, may modify the form of the
                                                 NRSRO may elect to obtain a                             clarifying language in the proposed                   representation to conform to the
                                                 representation from an arranger                         exemption, for an industry-wide one-                  language of the condition as proposed to
                                                 regarding the manner in which a rated                   time burden of approximately 35                       be amended. The Commission estimates
                                                 security or money market instrument                     hours.62                                              that it would take an NRSRO
                                                 will be offered and sold or from an                        In order to have a reasonable basis to             approximately five hours to update its
                                                 obligor regarding the manner in which                   conclude that all offers and sales of the             process for obtaining a reasonable basis
                                                 all its securities and money market                     structured finance product by any                     to reflect the proposed amendment to
                                                 instruments have been offered and sold.                 arranger linked to the structured finance             the Rule 17g–7(a) exemption, for an
                                                 Such information may be necessary for                   product will occur outside the United                 industry-wide one-time burden of
                                                 an NRSRO to determine whether the                       States, the Commission preliminarily                  approximately 50 hours.66
                                                 proposed exemption applies with                         believes that NRSROs will likely seek                 D. Collection of Information is Required
                                                 respect to a rating action.                             information from arrangers, thereby                   To Obtain a Benefit
                                                                                                         resulting in associated costs. The
                                                 B. Respondents                                                                                                  The proposed collection of
                                                                                                         Commission estimates that an NRSRO
                                                                                                                                                               information is required to obtain or
                                                   Rule 17g–5(a)(3) applies to NRSROs                    would spend approximately two hours
                                                                                                                                                               maintain a benefit. In order to form a
                                                 that rate structured finance products.                  per transaction gathering and reviewing
                                                                                                                                                               reasonable basis to conclude that all
                                                 Currently, there are seven NRSROs that                  information received from arrangers to
                                                                                                                                                               offers and sales of the structured finance
                                                                                                         determine if the exemption applies. The
                                                 are registered in the issuers of asset-
                                                                                                         Commission also currently estimates
                                                 backed securities ratings class that                                                                          offerings provided an estimate of the number of
                                                                                                         that approximately 267 rated                          transactions that would have been eligible for the
                                                 could rely on the proposed exemption                    transactions would be eligible for the                proposed exemption. The databases also specify the
                                                 to Rule 17g–5(a)(3).                                    proposed exemption in a given year and                number of NRSROs rating each transaction, which
                                                   Rule 17g–7(a) applies to all rating                                                                         was used to calculate the average number of
                                                                                                         that each transaction is rated by                     NRSROs per transaction (1.90). For purposes of the
                                                 actions taken by an NRSRO. There are                    approximately two NRSROs,63 resulting                 Commission’s estimates, the number of NRSROs per
                                                 currently ten credit rating agencies                                                                          transaction was rounded to the nearest whole
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                                                 registered with the Commission as                          61 See proposed paragraph (a)(3)(iv)(B) of Rule    number. The estimates represent the average
                                                                                                         17g–5; see also supra Section II.A. (discussing the   number of transactions and NRSROs per transaction
                                                 NRSROs that could rely on the proposed                  proposed exemption in more detail).                   for the years ended December 31, 2015, 2016, and
                                                 exemption to Rule 17g–7(a).                                62 5 hours × 7 NRSROs registered to rate asset-    2017.
                                                                                                                                                                  64 2 hours × 267 transactions × 2 NRSROs per
                                                                                                         backed securities = 35 hours.
                                                                                                            63 These estimates were calculated using           transaction = 1,068 hours.
                                                                                                                                                                  65 See proposed paragraph (a)(3)(ii) of Rule 17g–
                                                                                                         information, as of September 5, 2018, from the
                                                    60 See proposed paragraph (a)(3)(ii) of Rule 17g–
                                                                                                         databases maintained by Asset-Backed Alert and        7; see also supra Section II.B. (discussing the
                                                 7; see also supra Section II.B. (discussing the         Commercial Mortgage Alert. Isolating the              proposed amendments in more detail).
                                                 proposed amendments in more detail).                    transactions coded in the databases as ‘‘Non-U.S.’’      66 5 hours × 10 NRSROs = 50 hours.




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                                                 50304                    Federal Register / Vol. 83, No. 194 / Friday, October 5, 2018 / Proposed Rules

                                                 product will occur outside the United                   best assured of having its full effect if              Commission is unable to quantify the
                                                 States, an NRSRO likely will gather                     OMB receives it within 30 days of                      economic effects of the proposed
                                                 certain information from the arranger                   publication.                                           amendment, the Commission provides a
                                                 including, for example, obtaining from                                                                         qualitative assessment of the potential
                                                                                                         V. Economic Analysis
                                                 the arranger a representation to that                                                                          effects and encourages commenters to
                                                 effect. The determination of a                          A. Introduction                                        provide data and information that could
                                                 reasonable basis would be necessary for                                                                        help quantify the costs, benefits, and the
                                                                                                            As discussed above, the Commission
                                                 the proposed exemption to Rule 17g–                                                                            potential impacts of the proposed
                                                                                                         is proposing to amend Rule 17g–5(a)(3)
                                                 5(a)(3) and the proposed amended                                                                               amendment to Rule 17g–5(a)(3) on
                                                                                                         to provide an exemption from the rule
                                                 exemption to Rule 17g–7(a) to apply.                                                                           efficiency, competition, and capital
                                                                                                         with respect to credit ratings where the
                                                                                                                                                                formation.
                                                 E. Confidentiality                                      issuer of the structured finance product                  The Commission’s preliminary view
                                                   Any information obtained by an                        is not a U.S. person, and the NRSRO has                is that the codification of current
                                                 NRSRO from an obligor or arranger to                    a reasonable basis to conclude that all                practices with respect to Rule 17g–
                                                 establish a reasonable basis will not be                offers and sales of the structured finance             5(a)(3) is appropriate when compared to
                                                 made public, unless the NRSRO,                          product by any arranger linked to the                  the alternative of allowing the existing
                                                 obligor, or arranger chooses to make it                 structured finance product will occur                  Rule 17g–5(a)(3) exemption to expire, as
                                                 public. Information provided to the                     outside the United States. The                         discussed below. This view was shared
                                                 Commission in connection with staff                     Commission is also proposing                           by the various commenters who
                                                 examinations or investigations would be                 conforming amendments to similar                       requested that the existing Rule 17g–
                                                 kept confidential, subject to the                       exemptions set forth in Rule 17g–7(a)                  5(a)(3) exemption be extended
                                                 provisions of applicable law.                           and Rule 15Ga–2. The Commission is                     indefinitely, made permanent, or
                                                                                                         sensitive to the costs and benefits of its             codified in Rule 17g–5(a)(3).69
                                                 F. Request for Comment                                  rules. When engaging in rulemaking that                   As discussed in Section II.B. of this
                                                    The Commission requests comment                      requires the Commission to consider or                 release, the amendments to Rule 17g–
                                                 on the proposed collections of                          determine whether an action is                         7(a) and Rule 15Ga–2 are conforming
                                                 information in order to: (1) Evaluate                   necessary or appropriate in the public                 and clarifying in nature. Further, unlike
                                                 whether the proposed collections of                     interest, Section 3(f) of the Exchange                 the existing Rule 17g–5(a)(3) exemption,
                                                 information are necessary for the proper                Act requires that the Commission                       the Rule 17g–7(a) and Rule 15Ga–2
                                                 performance of the functions of the                     consider, in addition to the protection of             exemptions are already included as part
                                                 Commission, including whether the                       investors, whether the action will                     of the rule text, and thus not subject to
                                                 information would have practical                        promote efficiency, competition, and                   expiration. Therefore, the Commission’s
                                                 utility; (2) evaluate the accuracy of the               capital formation.67 In addition, Section              preliminary view is that the proposed
                                                 Commission’s estimate of the burden of                  23(a)(2) of the Exchange Act requires the              amendments to Rule 17g–7(a) and Rule
                                                 the proposed collection of information;                 Commission to consider the effects on                  15Ga–2 will not have a material impact
                                                 (3) determine whether there are ways to                 competition of any rules the                           on efficiency, competition, and capital
                                                 enhance the quality, utility, and clarity               Commission adopts under the Exchange                   formation or impose new costs of any
                                                 of the information to be collected; and                 Act, and prohibits the Commission from                 significance.
                                                 (4) evaluate whether there are ways to                  adopting any rule that would impose a
                                                 minimize the burden of collection of                    burden on competition not necessary or                 B. Baseline and Affected Parties
                                                 information on those who respond,                       appropriate in furtherance of the                         The Exemptive Order serves as the
                                                 including through the use of automated                  purposes of the Exchange Act.68                        economic baseline against which the
                                                 collection techniques or other forms of                    The Commission has considered the                   costs and benefits, as well as the impact
                                                 information technology.                                 effects of the proposed amendments on                  on efficiency, competition, and capital
                                                    Persons who desire to submit                         competition, efficiency, and capital                   formation, of the proposed codification
                                                 comments on the collection of                           formation. Many of the benefits                        of the existing Rule 17g–5(a)(3)
                                                 information should direct their                         discussed below are difficult to                       exemption is considered.
                                                 comments to the OMB, Attention: Desk                    quantify, in particular when considering                  Currently, pursuant to the Exemptive
                                                 Officer for the U.S. Securities and                     the potential impact on conflicts of                   Order, NRSROs are exempt from the
                                                 Exchange Commission, Office of                          interest or competition. Consequently,                 requirements of paragraphs (i) through
                                                 Information and Regulatory Affairs,                     while the Commission has, wherever                     (iii) of Rule 17g–5(a)(3) for credit ratings
                                                 Washington, DC 20503, and should also                   possible, attempted to quantify the                    where: (1) The issuer of the security or
                                                 send a copy of their comments to                        economic effects expected to result from               money market instrument is not a U.S.
                                                 Secretary, U.S. Securities and Exchange                 this proposal, much of the discussion                  person (as defined under 17 CFR
                                                 Commission, 100 F Street NE,                            below is qualitative in nature. Moreover,              230.902(k)); and (2) the NRSRO has a
                                                 Washington, DC 20549–1090, with                         because the existing Rule 17g–5(a)(3)                  reasonable basis to conclude that the
                                                 reference to File No. S7–22–18.                         exemption is currently in effect (and has              structured finance product will be
                                                 Requests for materials submitted to the                 been in effect since May 19, 2010—i.e.,                offered and sold upon issuance, and that
                                                 OMB with regard to these collections of                 prior to the compliance date for Rule                  any arranger linked to the structured
                                                 information should be in writing, refer                 17g–5(a)(3)), there has been no effect on              finance product will effect transactions
                                                 to File No. S7–22–18, and be submitted                  transactions outside the United States                 of the structured finance product after
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                                                 to the U.S. Securities and Exchange                     because changes in the market related to               issuance, only in transactions that occur
                                                 Commission, Office of FOIA Services,                    the application of Rule 17g–5(a)(3) have               outside the United States. As a result,
                                                 100 F Street NE, Washington, DC                         not occurred with respect to these                     with respect to such structured finance
                                                 20549–2736. OMB is required to make                     transactions as a consequence of the                   products, NRSROs are currently not
                                                 a decision concerning the collection of                 Exemptive Order. Where the                             required to comply with the
                                                 information between 30 and 60 days                                                                             requirements of Rule 17g–5(a)(3),
                                                 after publication of this release.                        67 See   15 U.S.C. 78c(f).
                                                 Consequently, a comment to OMB is                         68 See   15 U.S.C. 78w(a)(2).                          69 See   supra note 24 and accompanying text.



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                                                                           Federal Register / Vol. 83, No. 194 / Friday, October 5, 2018 / Proposed Rules                                                     50305

                                                 including the requirement to obtain                          The credit rating industry is highly                 underwriters for deals in Europe, while
                                                 from the arranger a representation that                   concentrated and this market structure                  the trend has varied over the past five
                                                 the arranger will maintain a website                      persists, in part, as a result of the costs             years, the two highest annual issuance
                                                 containing all information the arranger                   associated with building the necessary                  totals over such period were achieved in
                                                 provides to the hired NRSRO in                            reputational capital. In addition, large                2016 and 2017.76 Asset-backed
                                                 connection with the rating.                               and incumbent NRSROs benefit from                       securities constitute a growing market in
                                                    Similarly, the existing exemptive                      economies of scale, as well as from                     Europe and other major financial
                                                 language of paragraph (a)(3) of Rule                      switching costs that issuers are likely to              markets, and, as discussed below, any
                                                 17g–7 and paragraph (e) of Rule 15Ga–                     bear if they were to consider using                     application of Rule 17g–5(a)(3) to
                                                 2 serves as the economic baseline                         different NRSROs. These costs provide                   transactions outside the United States
                                                 against which the costs and benefits, as                  incentives for issuers to use the services              could affect the functioning of these
                                                 well as the impact on efficiency,                         of NRSROs that they have preexisting                    foreign markets.77
                                                 competition, and capital formation, of                    relationships with and represent a
                                                 the amendments to such rules are                                                                                  C. Anticipated Costs and Benefits,
                                                                                                           barrier that newcomers entering the                     Including Potential Effects on Efficiency,
                                                 considered. As previously noted, the                      market for credit ratings would need to
                                                 Commission believes the amendments                                                                                Competition, and Capital Formation
                                                                                                           overcome to compete with incumbent
                                                 to Rule 17g–7(a) and Rule 15Ga–2 are                      credit rating agencies.                                 1. Potential Benefits
                                                 clarifying and conforming in nature and                      In addition to the above economic                       As discussed above, the Commission
                                                 do not substantively deviate from the                     barriers to entry, there exist some                     issued the Exemptive Order in 2010,
                                                 baseline.                                                 commercial and other barriers to                        and an extension of the Exemptive
                                                    The economic and regulatory analysis                   entry.73 For instance, the investment                   Order is currently in effect. Because the
                                                 in this section reflects structured                       guidelines of fixed income mutual fund                  proposed exemption to Rule 17g–5(a)(3)
                                                 finance product markets and the credit                    managers and pension plan sponsors                      and amendments to Rule 17g–7(a) and
                                                 rating industry as they exist today. We                   often specify use of the ratings of                     Rule 15Ga–2 would generally maintain
                                                 begin with a summary of the                               particular credit rating agencies, and                  the status quo,78 we do not expect the
                                                 approximate number of NRSROs that                         many of these guidelines refer to the                   amendments would result in any major
                                                 would be directly affected by the                         larger NRSROs by name. Some fixed                       economic effects. For the same reason,
                                                 proposed codification and features of                     income indices also require ratings by                  we also do not expect this rulemaking
                                                 the regulatory and economic                               specific NRSROs, thus increasing the                    to affect efficiency, competition, or
                                                 environment in which the affected                         demand for ratings from those NRSROs.                   capital formation in any major way.
                                                 entities operate. A discussion of the                     However, it has been reported that some                    To the extent that the proposed
                                                 current economic environment will                         investors are changing their guidelines                 amendments to Rule 17g–5(a)(3) would
                                                 provide a framework for assessing how                     to include ratings from additional                      enhance the certainty of the future
                                                 the proposed regulation may impact                        NRSROs, and several of the smaller                      status of an exemption to this rule, they
                                                 efficiency, competition, and capital                      NRSROs have reported success in                         could result in marginal economic
                                                 formation in this market.                                 gaining market share with respect to the                benefits to arrangers, NRSROs, and
                                                    Currently, ten credit rating agencies
                                                                                                           issuers of asset-backed securities.74                   regulators. Specifically, if NRSROs and
                                                 are registered with the Commission as                        Gathering comprehensive data on                      arrangers expect to be required to
                                                 NRSROs.70 Of the ten NRSROs, seven                        foreign issuances of asset-backed                       comply with Rule 17g–5(a)(3) in the
                                                 are currently registered in the class of                  securities is difficult given the breadth               future, they may allocate personnel and
                                                 credit ratings for issuers of asset-backed
                                                                                                           of markets and products one needs to                    financial resources to correspond with
                                                 securities.71 Among these seven, three
                                                                                                           consider and that data may not be                       foreign and U.S. regulators and to set up
                                                 of the larger NRSROs accounted for
                                                                                                           available for several lesser-developed                  applicable websites in anticipation of
                                                 approximately 96 percent of credit
                                                                                                           markets. Further, it is often not clear
                                                 ratings outstanding as of December 31,
                                                                                                           whether these issuances are made by                       76 See Asset-Backed Alert (Rankings for
                                                 2017; 72 these three firms have                                                                                   Bookrunners of European Structured Finance
                                                                                                           non-U.S. persons. However, there has
                                                 operations outside of the United States.                                                                          Deals), available at https://www.abalert.com/
                                                                                                           been an increase in the issuances of                    rankings.pl?Q=98, information reported as of
                                                    70 The following credit rating agencies are
                                                                                                           asset-backed securities worldwide since                 September 5, 2018. Total issuances in Europe
                                                 currently registered as NRSROs: A.M. Best Rating          2011, with the issuances amounting to                   amounted to approximately $101.1 billion in 2016
                                                 Services, Inc. (‘‘A.M. Best’’); DBRS, Inc. (‘‘DBRS’’);    approximately $693.9 billion in 2017.75                 and approximately $95.5 billion in 2017. Id.
                                                                                                                                                                     77 See, e.g., the SIFMA databases that cover
                                                 Egan-Jones Ratings Company; Fitch Ratings, Inc.           For example, when considering all
                                                 (‘‘Fitch’’); HR Ratings de México, S.A. de C.V. (‘‘HR                                                            historical issuances and outstanding values in
                                                 Ratings’’); Japan Credit Rating Agency, Ltd. (‘‘JCR’’);                                                           Europe, the United States, and Australia for the
                                                                                                              73 See 2017 Annual Report on Nationally
                                                 Kroll Bond Rating Agency, Inc. (‘‘KBRA’’); Moody’s                                                                following: asset-backed securities, collateralized
                                                 Investors Service, Inc. (‘‘Moody’s’’); Morningstar        Recognized Statistical Rating Organizations,            debt obligations/collateralized loan obligations,
                                                 Credit Ratings, LLC (‘‘Morningstar’’); and S&P            available at https://www.sec.gov/ocr/reportspubs/       commercial mortgage-backed securities, and
                                                 Global Ratings (‘‘S&P’’).                                 annual-reports/2017-annual-report-on-nrsros.pdf,        residential mortgage-backed securities, available at
                                                    71 The seven NRSROs registered to rate asset-          24–25 (discussing various potential barriers to entry   http://www.sifma.org.
                                                 backed securities are: A.M. Best; DBRS; Fitch;            including economic, commercial, and regulatory            78 Although the language of the second condition

                                                 KBRA; Moody’s; Morningstar; and S&P.                      barriers).                                              of the proposed exemption to Rule 17g–5(a)(3)
                                                                                                              74 See id. at 21–24.
                                                    72 The three NRSROs are Fitch, Moody’s, and                                                                    differs from the comparable condition set forth in
                                                                                                              75 See Asset-Backed Alert (Rankings for Issuers of   the Exemptive Order, and conforming changes are
                                                 S&P. The percentage of credit ratings outstanding
                                                 attributable to Fitch, Moody’s, and S&P was               Worldwide Asset- and Mortgage-Backed Securities),       being proposed to the corresponding conditions in
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                                                 calculated using information reported by each             available at https://www.abalert.com/                   Rule 17g–7(a) and Rule 15Ga–2, the changes are
                                                 NRSRO on Item 7A of Form NRSRO with respect               rankings.pl?Q=100. See also Commercial Mortgage         clarifying in nature and the Commission does not
                                                 to its annual certification for calendar year 2017.       Alert (CMBS Summary—Global CMBS Issuance in             believe they will alter the status quo. See supra
                                                 Annual certifications on Form NRSRO must be filed         2017), available at https://www.cmalert.com/            Section II. The conforming changes being proposed
                                                 with the Commission on EDGAR pursuant to Rule             rankings.pl?Q=67. The information on these              in Rule 17g–7(a) and Rule 15Ga–2, however, could
                                                 17g–1(f) and made publicly and freely available on        websites, reported as of September 5, 2018,             result in changes from the current state.
                                                 each NRSRO’s website pursuant to Rule 17g–1(i).           indicates that, notwithstanding a slight decline in     Specifically, those changes could avoid potential
                                                 The number of outstanding credit ratings for each         issuances in 2016, there has been an upward trend       confusion by arrangers and NRSROs that could
                                                 class of credit ratings for which an NRSRO is             in the total annual issuances of asset-backed           result from differences in the language of the
                                                 registered is reported on Item 7A of Form NRSRO.          securities from 2011 through 2017.                      conditions set forth in the rules.



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                                                 50306                     Federal Register / Vol. 83, No. 194 / Friday, October 5, 2018 / Proposed Rules

                                                 future compliance. By promulgating an                     aggregate annual costs for all arrangers                  adjust their procedures to reflect the
                                                 exemptive rule without a set                              of approximately $192,240.81.81                           clarifying language of the proposed
                                                 termination date, the Commission                             Similarly, for an NRSRO that chooses                   exemption.86
                                                 preliminarily believes the proposed                       to seek representations to support its                       Similarly, additional one-time costs
                                                 amendment would eliminate the need to                     reasonable belief, the Commission                         may be incurred by NRSROs to modify
                                                 incur such costs. Furthermore, by                         estimates that it would cost the NRSRO                    their processes to reflect the proposed
                                                 reducing the need to incur such costs,                    approximately $720 per transaction.82                     conforming amendments to the
                                                 the proposed amendment could allow                        The Commission further estimates that                     conditions with respect to the Rule 17g–
                                                 issuers and smaller NRSROs to expand                      each transaction is rated by                              7(a) exemption. The Commission
                                                 in the global structured finance market,                  approximately two NRSROs,83 for total                     expects the one-time costs incurred by
                                                 and could improve competition.                            aggregate annual costs for all NRSROs of                  such NRSROs to approximate the costs
                                                    The proposed exemption would not                       $384,480.84 Thus, to the extent that all                  set forth with respect to Rule 17g–5(a)(3)
                                                 necessarily result in more intense                        NRSROs seek representations for all                       above. As with Rule 17g–5(a)(3), the
                                                 competition between issuers and other                     transactions eligible to rely on the                      Commission expects an NRSRO’s in-
                                                 intermediaries because issuers would                      proposed exemption to Rule 17g–5(a)(3)                    house attorney would oversee revisions
                                                 continue to offer structured finance                      each year, the Commission estimates the                   to the form representation with respect
                                                 products as they do under the current                     proposed amendment would result in                        to the Rule 17g–7(a) exemption and that
                                                 regulatory regime. Further, all existing                  total annual costs of $576,720.85                         there would be a one-time burden of
                                                 NRSROs rating structured finance                             In addition, although the conditions                   five hours for the language to be revised,
                                                 products could continue to rely on the                    with respect to the exemption to Rule                     approved, and documented.
                                                 exemption as they do currently under                      17g–5(a)(3) are substantially the same                    Accordingly, the Commission estimates
                                                 the extended Exemptive Order;                             under the Exemptive Order, NRSROs                         a one-time aggregate cost of $18,000 for
                                                 therefore, competition among these                        may incur a modest one-time cost to                       NRSROs to adjust their procedures to
                                                 existing credit rating agencies would                     conform their processes to reflect the                    reflect the proposed conforming changes
                                                 most likely not be affected by the                        clarifying change being proposed to one                   to the Rule 17g–7(a) exemption.87
                                                 proposed exemption.                                       of the conditions to the exemption. For                      The Commission believes that no
                                                                                                           instance, an NRSRO that currently seeks                   similar costs will be incurred by issuers
                                                 2. Potential Costs and Other Anticipated                                                                            and underwriters as a result of the
                                                 Effects                                                   written representations from an arranger
                                                                                                           to support the reasonable belief required                 proposed amendment to Rule 15Ga–2,
                                                    Similarly, because the existing Rule                                                                             given that such rule relates to an
                                                                                                           under the Exemptive Order may modify
                                                 17g–5(a)(3) exemption is currently in                                                                               obligation of the issuer or underwriter of
                                                                                                           the form of the representation to
                                                 effect, the proposed amendment to Rule                                                                              a structured finance product and there
                                                                                                           conform to the language of the condition
                                                 17g–5(a)(3) should not impose any                                                                                   is no equivalent need to obtain
                                                                                                           as proposed. The Commission expects
                                                 significant additional costs on NRSROs                                                                              information from a third party to
                                                                                                           an NRSRO’s in-house attorney would
                                                 or arrangers of structured finance                                                                                  determine if the Rule 15Ga–2 exemption
                                                                                                           oversee revisions to the form
                                                 products relative to the baseline.                                                                                  applies.
                                                    However, as is the case with the                       representation and that there would be
                                                 existing Rule 17g–5(a)(3) exemption,                      a one-time burden of five hours for the                   3. Alternative Considered: Allow
                                                 issuers and NRSROs may incur some                         language to be revised, approved, and                     Exemptive Order to Expire
                                                 expenses in relying on the proposed                       documented. Accordingly, the                                 The Commission considered the
                                                 exemption to Rule 17g–5(a)(3), which is                   Commission estimates a one-time                           alternative of allowing the current
                                                 conditioned on an NRSRO having a                          aggregate cost of $12,600 for NRSROs to                   extension of the Exemptive Order to
                                                 reasonable basis to conclude that all                                                                               expire without codifying an exemption
                                                                                                           Association (SIFMA). For example, the estimated
                                                 offers and sales of the structured finance                wage figure for compliance attorneys is based on          to Rule 17g–5(a)(3). The Commission
                                                 product by any arranger linked to the                     published rates for compliance attorneys, modified        preliminarily believes that this
                                                 structured finance product will occur                     to account for a 1,800-hour work-year and                 alternative is not consistent with
                                                 outside the United States. In order to                    multiplied by 5.35 to account for bonuses, firm size,     notions of international comity or the
                                                                                                           employee benefits, and overhead, yielding an
                                                 have a reasonable basis for such a                        effective hourly rate for 2013 of $334 for                Commission’s limited interest in
                                                 conclusion, the Commission                                compliance attorneys. See Securities Industry and         regulating securities offered and sold
                                                 preliminarily believes that NRSROs will                   Financial Markets Association, Report on                  exclusively outside the United States.
                                                 likely seek representations from                          Management & Professional Earnings in the                 As discussed in Section II.A. of this
                                                                                                           Securities Industry 2013. These estimates are
                                                 arrangers, thereby resulting in                           adjusted for inflation based on Bureau of Labor           release, the Commission believes
                                                 associated costs. The Commission                          Statistics data on CPI–U between January 2013             principles of international comity and
                                                 currently estimates that approximately                    (230.280) and January 2018 (247.873). Therefore,          reasonable expectations of participants
                                                 267 rated transactions would be eligible                  the 2018 inflation-adjusted effective hourly wage         would be better served by not allowing
                                                                                                           rates for compliance attorneys are estimated at $360
                                                 for the proposed exemption in a given                     ($334 × 247.873/230.280). All effective hourly wage       the expiration of the current extension
                                                 year.79 To the extent that NRSROs seek                    rates discussed throughout the release rely on the        of the Exemptive Order. The
                                                 representations to support their                          same SIFMA data inflation adjusted to January             Commission has nevertheless
                                                 reasonable belief, the Commission                         2018.                                                     considered the economic effects of this
                                                                                                              81 Calculated as $720 per transaction × 267 annual
                                                 estimates that it would cost an arranger                  transactions = $192,240.
                                                                                                                                                                     alternative, and, as with its economic
                                                 approximately $720 per transaction to                        82 Calculated as 2 hours per transaction × legal fee   analysis of the proposed exemption to
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                                                 provide such representations,80 for total                 for a compliance attorney at $360 per hour = $720.        Rule 17g–5(a)(3), the Commission
                                                                                                              83 See supra note 63.
                                                   79 See supra note 63.                                      84 Calculated as $720 per transaction × 267 annual       86 Calculated as 5 hours per NRSRO × legal fee
                                                   80 Calculated  as 2 hours per transaction × legal fee   transactions × 2 NRSROs per transaction =                 for a compliance attorney at $360 per hour × the
                                                 for a compliance attorney at $360 per hour = $720.        $384,480.                                                 7 NRSROs registered to rate asset-backed securities
                                                 The Commission estimates the wage rate associated            85 Calculated as $720 per transaction × 267 annual     = $12,600.
                                                 with these burden hours based on salary                   transactions (for arrangers) + $720 per transaction         87 Calculated as 5 hours per NRSRO × legal fee

                                                 information for the securities industry compiled by       × 267 annual transactions × 2 NRSROs per                  for a compliance attorney at $360 per hour × all 10
                                                 the Securities Industry and Financial Markets             transaction (for NRSROs) = $576,720.                      NRSROs = $18,000.



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                                                                          Federal Register / Vol. 83, No. 194 / Friday, October 5, 2018 / Proposed Rules                                                 50307

                                                 solicits comment, including estimates                   economic exposure to investment                       potential improvement in the quality of
                                                 and data from interested parties, which                 opportunities.90                                      ratings in foreign markets could
                                                 could help it refine its analysis of the                   Globalization, however, can be a                   attenuate the risk of spillovers, which
                                                 economic effects of this alternative.                   conduit of risk and could lead to                     could benefit financial markets globally.
                                                                                                         problems in one market or jurisdiction                   The Commission notes, however, that
                                                 a. Benefits                                             spilling over to other markets or                     the possible benefits attributable to the
                                                    This alternative offers several                      jurisdictions.91 If the existing Rule 17g–            expiration of the Exemptive Order for
                                                 potential economic benefits. The last                   5(a)(3) exemption were to expire, then it             Rule 17g–5(a)(3) should be viewed in
                                                 three decades have witnessed an                         is possible that any benefits of this rule            light of the concerns expressed by
                                                 increase in the globalization of financial              with respect to the credit rating industry            commenters (as described in Section
                                                 markets and in cross-border trading.                    in the United States may apply to                     II.A. of this release). If any foreign laws
                                                 Greater international capital flows can                 foreign markets as well, potentially                  limit the information an arranger is able
                                                 contribute to the development of new                    reducing the risk of spillovers that may              to post on the website maintained
                                                 product markets and industries by                       result from conflicts of interest that Rule           pursuant to the Rule 17g–5 Program, a
                                                 enabling issuers to raise capital in                    17g–5(a)(3) was designed to address.92                hired NRSRO may not have sufficient
                                                 markets around the world. The                           Specifically, arrangers that engage in                information on which to base a credit
                                                 Commission considered the potential                     structured finance transactions in                    rating or, if the arranger provides
                                                 implications of the expiration of the                   foreign markets would also need to                    information to a hired NRSRO that it
                                                 existing Rule 17g–5(a)(3) exemption on                  maintain websites containing all                      cannot also post to the website, the
                                                 cross-listing activity for U.S. and non-                information provided to hired NRSROs                  hired NRSRO will not be able to
                                                 U.S. issuers.88 One possible factor that                with respect to the rating of such                    reasonably rely on the representation it
                                                 hypothetically could affect the flow of                 structured finance products and provide               received from the arranger.94 In either
                                                 capital from U.S. markets to foreign                    access to any non-hired NRSRO that                    case, NRSROs effectively would be
                                                 alternative trading venues is the costs                 makes the required certifications. This               precluded from rating structured
                                                 associated with complying with U.S.                     may permit non-hired NRSROs to                        finance products in such jurisdictions,
                                                 securities laws. If complying with Rule                 provide ratings of these products. The                attenuating the benefits described
                                                 17g–5(a)(3) implies higher costs for                    availability of additional ratings from an            above.
                                                 issuers of structured finance products,                 independent source may provide
                                                 and the costs affect the choice of an                   incentives to hired NRSROs to provide                 b. Costs
                                                 issuer’s venue, non-U.S. issuers may                    more accurate and unbiased ratings due                   Several costs of expiration of the
                                                 benefit from the current exemptive relief               to reputational concerns. Any additional              existing Rule 17g–5(a)(3) exemption are
                                                 by obtaining funding at a lower all-in                  ratings by non-hired NRSROs could, in                 relevant to consider. As mentioned
                                                 cost than similarly situated U.S. issuers.              turn, provide investors with                          earlier, the Commission currently
                                                 If the Exemptive Order were to expire,                  independent views on the risk profiles                estimates that approximately 267 rated
                                                 however, such non-U.S. issuers would                    of the structured finance products and                transactions would be eligible for the
                                                 be unable to pursue such a strategy                     improve the reliability of the credit                 proposed exemption to Rule 17g–5(a)(3)
                                                 because they would have the same                        ratings of these products.93 The                      in a given year.95 If the existing Rule
                                                 regulatory treatment as U.S. issuers. As                                                                      17g–5(a)(3) exemption were allowed to
                                                                                                            90 See e.g., Arthur R. Pinto, Control and
                                                 a result, if the existing Rule 17g–5(a)(3)                                                                    expire, the requirements of Rule 17g–
                                                                                                         Responsibility of Credit Rating Agencies in the
                                                 exemption were to expire, U.S. and non-                 United States, American Journal of Comparative        5(a)(3) would apply with respect to
                                                 U.S. issuers may compete for funding on                 Law, Vol. 54 at 341–56 (2006). See also John R.M.     these transactions. The Commission
                                                 more even terms.                                        Hand et al., The Effect of Bond Rating Agency         preliminarily estimates the following
                                                    Investors and issuers globally could                 Announcements on Bond and Stock Prices, Journal
                                                                                                         of Finance, Vol. 47, No. 2 at 733–52 (1992).
                                                                                                                                                               costs as a result of expiration of the
                                                 obtain potential economic benefits, such                   91 For instance, the European sovereign debt       existing Rule 17g–5(a)(3) exemption.
                                                 as reduced conflicts of interest and                    crisis renewed the debate on the role credit rating      The Commission believes that
                                                 informational efficiency in credit                      agencies play during crises and the                   expiration of the existing Rule 17g–
                                                 ratings, if arrangers were required to                  interdependence between different financial           5(a)(3) exemption would result in an
                                                                                                         markets. This debt crisis has included sovereign
                                                 comply with the Rule 17g–5 Program.                     credit rating downgrades, widening of sovereign       annual increase in costs of $155,916 for
                                                 With respect to certain debt and                        bond and credit default swap spreads, and             NRSROs for additional website
                                                 structured finance products, credit                     pressures on stock markets. See, e.g., Manfred        maintenance and associated compliance
                                                 ratings provided by non-hired NRSROs                    Gärtner et al., PIGS or Lambs? The European          costs.96 The Commission also estimates
                                                                                                         Sovereign Debt Crisis and the Role of Rating
                                                 using information provided pursuant to                  Agencies, International Advances in Economic
                                                 the Rule 17g–5 Program could serve a                    Research, Vol. 17, No. 3 at 288 (2011). See also      Financial Economics, Vol. 101, No. 3 at 493–514
                                                 verification function in capital markets                Valerie De Bruyckere et al., Bank/Sovereign Risk      (2011).
                                                                                                         Spillovers in the European Debt Crisis, Journal of      94 See supra notes 7–8 and accompanying text.
                                                 by offering market participants a
                                                                                                         Banking & Finance, Vol. 37, Issue 12 at 4793–809        95 See supra note 63.
                                                 broader set of opinions on the                          (2013).                                                 96 The Commission estimates that it will take
                                                 creditworthiness of those products.89                      92 See Rule 17g–5 Adopting Release, supra note
                                                                                                                                                               approximately one hour per transaction for website
                                                 This information could help investors in                2, 74 FR at 63857.                                    maintenance and that an NRSRO would have a
                                                                                                            93 See, e.g., Daniel Covitz and Paul Harrison,     webmaster perform these responsibilities, at a cost
                                                 their decisions to augment the risk
                                                                                                         Testing Conflicts of Interest at Bond Rating          of $244 per hour. The Commission further estimates
                                                 profiles of their portfolios through                    Agencies with Market Anticipation: Evidence that      that each transaction will be rated by approximately
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                                                                                                         Reputation Incentives Dominate, Federal Reserve       two NRSROs (see supra note 63). Therefore, the
                                                    88 Although the Commission regulations are
                                                                                                         Board Working Paper No. 2003–68 (2003), for           estimated annual cost for website maintenance by
                                                 designed to promote competition, efficiency, and        evidence on the role of reputation among credit       NRSROs involved with 267 structured finance
                                                 capital formation in U.S. markets and to protect        rating agencies. However, there is also some          ratings would be $130,296 (267 transactions × 1
                                                 U.S. investors, the Commission recognizes that          evidence to the contrary, wherein the argument is     hour per transaction × $244 per hour × 2 NRSROs
                                                 some of its regulations impact market participants      that if reputation losses are lower in an industry    per transaction). In addition, the Commission
                                                 globally. When applicable, the economic effects to      due to increased competition, then there are lesser   estimates that compliance personnel at an NRSRO
                                                 those market participants are discussed.                incentives to provide accurate ratings. See Bo        will spend, on average, one hour per month to
                                                    89 See Rule 17g–5 Adopting Release, supra note       Becker and Todd Milbourn, How Did Increased           monitor compliance with the requirements of the
                                                 2, 74 FR at 63857.                                      Competition Affect Credit Ratings?, Journal of                                                   Continued




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                                                 50308                    Federal Register / Vol. 83, No. 194 / Friday, October 5, 2018 / Proposed Rules

                                                 an annual increase in costs of $45,924                  basis, the Commission estimates an                        Further, there are potential negative
                                                 for arrangers to post information about                 annual increase in costs of $2,231,453                 economic consequences. Since the
                                                 new structured finance product                          for arrangers to make additional                       global financial crisis there have been
                                                 transactions to the related websites.97                 information about these transactions                   other efforts, in addition to the Dodd-
                                                 Additionally, if certain sponsors do not                available on the related websites each                 Frank Wall Street Reform and Consumer
                                                 also currently issue rated structured                   month and to monitor compliance with                   Protection Act,101 to assess and regulate
                                                 finance products in transactions that                   its obligations over the life of the                   the credit rating industry as well as to
                                                 occur within the United States (which                   structured finance products.100                        encourage market participants to
                                                 are currently subject to the requirements                  In addition to these direct compliance              establish stronger internal credit risk
                                                 of Rule 17g–5(a)(3)), then they may                     costs, expiration of the existing Rule                 assessment practices. As discussed in
                                                 incur one-time costs to set up websites.                17g–5(a)(3) exemption could result in                  Section II.A. of this release, commenters
                                                 The Commission estimates that it would                  costs that are difficult to quantify. For              have expressed concerns that the
                                                 take a sponsor 300 hours to develop a                   instance, an incremental increase in                   requirements of Rule 17g–5(a)(3) could
                                                 system, as well as the policies and                     costs resulting from the applicability of              potentially be duplicative of or conflict
                                                 procedures governing the disclosures,                   the Rule 17g–5 Program may vary                        with regulations applicable to NRSROs
                                                 resulting in a total of up to 41,400 hours              significantly from transaction to                      and arrangers in foreign markets, and
                                                 across 138 sponsors.98 The Commission                   transaction, contributing to the                       thus harm the competitive position of
                                                 estimates that the average one-time cost                difficulty in quantifying such costs. A                NRSROs in those markets.102 Failure to
                                                 to each sponsor would be $81,300, and                   bespoke transaction may require                        provide relief regarding the application
                                                 the total aggregate one-time cost across                significantly more communications                      of Rule 17g–5(a)(3) to transactions
                                                 all sponsors would be up to                             between the arranger and the hired                     offered and sold exclusively outside the
                                                 $11,219,400.99 Finally, on an ongoing                   NRSRO than a transaction by a frequent                 United States may be viewed as
                                                                                                         issuer of similar securities, resulting in             inconsistent with notions of
                                                 Rule 17g–5 Program. Staff estimates a $305 per hour     the incurrence of higher costs to                      international comity.
                                                 figure for a compliance manager. Therefore, the
                                                 estimated annual compliance cost would be               arrangers. Moreover, the Rule 17g–5                       The expiration of the existing Rule
                                                 $25,620 (12 months per year × 1 hour per month          Program requires that information must                 17g–5(a)(3) exemption may lead to
                                                 × $305 per hour × 7 NRSROs registered to rate asset-    be posted to the arranger’s website at the             losses for NRSROs if, as commenters
                                                 backed securities). As a result, the total estimated    same time such information is provided                 suggest, conflicts exist between the
                                                 annual cost for NRSROs would be $155,916
                                                 ($130,296 website maintenance cost + $25,620            to a hired NRSRO. If the exemption                     requirements of the Rule 17g–5 Program
                                                 compliance cost).                                       were to expire, information that may                   and foreign laws that limit the
                                                    97 The Commission estimates that it will take an     have previously been communicated                      information available to NRSROs. Some
                                                 arranger approximately one hour per transaction to      verbally to a hired NRSRO may need to                  NRSROs could be precluded from rating
                                                 post the information it provides to a hired NRSRO
                                                 to the related website. The Commission believes
                                                                                                         be memorialized in writing. In certain                 structured finance products in such
                                                 that an arranger would have a junior business           cases, an arranger may enlist outside                  jurisdictions, which could lead to loss
                                                 analyst perform these responsibilities, at a cost of    counsel to draft or review materials to                of revenue associated with credit ratings
                                                 $172 per hour. Therefore, based on the estimate of      be provided to a hired NRSRO, resulting                that NRSROs currently provide under
                                                 267 rated transactions per year, the estimated
                                                 annual cost for arrangers to make such information
                                                                                                         in additional costs.                                   the existing Exemptive Order. NRSROs
                                                 available on the related website would be $45,924                                                              may also experience losses as a result of
                                                 (267 transactions × 1 hour per transaction × $172       costs in connection with U.S.-based issuances. In      the expiration of the existing Rule 17g–
                                                 per hour).                                              addition, it is plausible that sponsors will obtain    5(a)(3) exemption due to competitive
                                                    98 Total hours to develop systems would be           these services for a much lower cost from web          pressures in the foreign markets from
                                                 41,400 (138 sponsors × 300 hours per sponsor). The      service providers.
                                                 number of sponsors was estimated using                     100 The Commission estimates that it will take an   credit rating agencies that are not
                                                 information as of September 5, 2018 from the Asset-     arranger approximately half an hour per month for      registered as NRSROs (‘‘non-NRSRO
                                                 Backed Alert and Commercial Mortgage Alert              each transaction to make such information available    rating agencies’’) and therefore not
                                                 databases. Isolating the transactions coded in the      on the related website. The hourly burden per          subject to Rule 17g–5(a)(3). Expiration
                                                 database as ‘‘Non-U.S.’’ offerings and sorting the      transaction for a year is 6 hours (0.5 hours per
                                                 data by sponsor (in the case of the Asset-Backed        month × 12 months). The Commission believes that
                                                                                                                                                                of the existing Rule 17g–5(a)(3)
                                                 Alert database) or seller (in the case of the           an arranger would have a junior business analyst       exemption may also lead to new
                                                 Commercial Mortgage Alert database) enables an          perform these responsibilities at a rate of $172.      compliance costs for NRSROs and
                                                 estimate of the number of separate sponsors that        Further, we relied on the Rule 17g–5 Adopting          arrangers relating to posting information
                                                 would be eligible for the exemption. The estimate       Release to infer the total number of outstanding
                                                 represents the average number of such sponsors for      deals under surveillance. In that release, the
                                                                                                                                                                on the websites with respect to credit
                                                 the years ended December 31, 2015, 2016, and            Commission indicated that, on average, an arranger     ratings maintained by NRSROs that had
                                                 2017. We note that the estimate of the aggregate        will issue 20 new deals a year and will have 125       previously been subject to the
                                                 hours across all sponsors represents upper bounds,      outstanding deals, or 6.25 outstanding deals for       exemption. From the point of view of
                                                 as it is plausible that some sponsors also issue        every new deal. Combining this with our estimate
                                                 structured finance products in U.S.-based               of 267 new transactions per year yields an estimate
                                                                                                                                                                arrangers, additional costs of
                                                 transactions and would have already incurred any        of 6.25 × 267 = 1,669 outstanding deals. Combining     compliance could result in a decline in
                                                 such one-time costs.                                    these estimates, the annual cost for arrangers to      their issuances of structured finance
                                                    99 As discussed in the Rule 17g–5 Adopting           provide information on ongoing deals is $1,722,408     products if alternative non-NRSRO
                                                 Release, the Commission believes that a sponsor         (1,669 outstanding transactions × $172 per hour ×
                                                 would use a compliance manager and a programmer         6 hours per year). In addition, the Commission
                                                                                                                                                                rating agencies are unavailable or
                                                 analyst to perform these functions, and each would      estimates that compliance personnel at an arranger     unacceptable to arrangers or investors.
                                                 spend 50% of the estimated hours conducting these       will spend, for each outstanding transaction, one         Finally, if the existing Rule 17g–
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                                                 tasks. The average hourly cost for a compliance         hour per year to monitor compliance with its
                                                 manager is $305 and the average hourly cost for a       requirements in connection with the Rule 17g–5
                                                                                                                                                                5(a)(3) exemption were allowed to
                                                 programmer analyst is $237. Therefore, the average      Program. The Commission estimates a $305 per           expire, this could also raise legal
                                                 one-time cost to a sponsor would be $81,300 ([150       hour figure for a compliance manager. Therefore,       barriers to entry for smaller NRSROs
                                                 hours × $305 per hour] + [150 hours × $237 per          the estimated annual compliance cost would be          that may be planning to expand their
                                                 hour]). The aggregate cost across all sponsors would    $509,045 (1 hour per transaction, per year × $305
                                                 be up to $11,219,400 (138 sponsors × $81,300 per        per hour × 1,669 outstanding transactions). As a
                                                                                                                                                                   101 Public Law 111–203, 124 Stat. 1376, H.R. 4173
                                                 sponsor). We note that these estimates represent        result, the total estimated annual ongoing cost for
                                                 upper bounds. As noted in note 98, some sponsors        arrangers would be $2,231,453 ($1,722,408 website      (July 21, 2010).
                                                 may have already incurred any one-time set up           maintenance cost + $509,045 compliance cost).             102 See supra notes 26–33 and accompanying text.




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                                                                          Federal Register / Vol. 83, No. 194 / Friday, October 5, 2018 / Proposed Rules                                                   50309

                                                 foreign ratings business.103 The                        exemption from the requirements of                      adopted, have a significant economic
                                                 increased set-up costs may lower such                   paragraphs (i) through (iii) of Rule 17g–               impact on a substantial number of
                                                 NRSROs’ incentives to rate structured                   5(a)(3) with respect to credit ratings if               ‘‘small entities’’ as defined by the RFA.
                                                 finance products in those foreign                       the issuer of the structured finance                    The proposed amendment to Rule 17g–
                                                 markets.                                                product is not a U.S. person, and the                   5(a)(3) applies exclusively to rated
                                                                                                         NRSRO has a reasonable basis to                         structured finance products and the
                                                 VI. Small Business Regulatory
                                                                                                         conclude that all offers and sales of the               NRSROs that are considered small
                                                 Enforcement Fairness Act
                                                                                                         structured finance product by any                       under the above definition are not
                                                    Under the Small Business Regulatory                  arranger linked to the structured finance               currently registered for the class of
                                                 Enforcement Fairness Act of 1996, or                    product will occur outside the United                   credit ratings for issuers of asset-backed
                                                 ‘‘SBREFA,’’ 104 the Commission must                     States. The proposed amendments to                      securities.
                                                 advise OMB as to whether the proposed                   Rule 17g–7(a) and Rule 15Ga–2 conform                      The Commission preliminarily
                                                 regulation constitutes a ‘‘major rule.’’                the existing exemptions with respect to                 believes that the proposed amendments
                                                 Under SBREFA, a rule is considered                      such rules to the proposed amendment                    to Rule 17g–7(a) would not, if adopted,
                                                 ‘‘major’’ where, if adopted, it results or              to Rule 17g–5(a)(3) in order to reflect                 have a significant economic impact on
                                                 is likely to result in: (i) An annual effect            certain clarifying changes to the                       a substantial number of ‘‘small entities’’
                                                 on the economy of $100 million or more                  conditions thereof.                                     as defined by the RFA. Although Rule
                                                 (either in the form of an increase or a                    The Commission’s rules do not define                 17g–7(a) applies to all NRSROs,
                                                 decrease); (ii) a major increase in costs               ‘‘small business’’ or ‘‘small                           including the two NRSROs that qualify
                                                 or prices for consumers or individual                   organization’’ with respect to NRSROs.                  as ‘‘small’’ for purposes of the RFA, the
                                                 industries; or (iii) a significant adverse              However, 17 CFR 240.0–10(a) provides                    Commission preliminarily believes that
                                                 effect on competition, investment, or                   that, for purposes of the RFA, a small                  the economic impact of the proposed
                                                 innovation. If a rule is ‘‘major,’’ its                 entity ‘‘[w]hen used with reference to an               amendments to Rule 17g–7(a) would not
                                                 effective date will generally be delayed                ‘issuer’ or a ‘person’ other than an                    be significant. The Rule 17g–7(a)
                                                 for 60 days pending Congressional                       investment company’’ means ‘‘an                         exemption is already included as part of
                                                 review.                                                 ‘issuer’ or ‘person’ that, on the last day              the rule text, and the proposed
                                                    The Commission requests comment                      of its most recent fiscal year, had total               amendments to such exemption are
                                                 on the potential annual economic                        assets of $5 million or less.’’ 107 The                 clarifying in nature.111 The Commission
                                                 impact of the proposed amendments to                    Commission has stated in the past that                  preliminarily believes NRSROs may
                                                 Rule 17g–5(a)(3), Rule 17g–7(a), and                    an NRSRO with total assets of $5                        incur modest one-time costs to modify
                                                 Rule 15Ga–2, any potential increase in                  million or less would qualify as a                      their processes to reflect the proposed
                                                 costs or prices for consumers or                        ‘‘small’’ entity for purposes of the
                                                 individual industries, and any potential                                                                        amendments to the Rule 17g–7(a)
                                                                                                         RFA.108 The Commission continues to                     exemption,112 but that any ongoing
                                                 effect on competition, investment, or                   believe this threshold of total assets of
                                                 innovation. Commenters are requested                                                                            annual costs related to the exemption,
                                                                                                         $5 million or less would qualify an                     amended as proposed, are likely to be
                                                 to provide empirical data and other                     NRSRO as ‘‘small’’ for purposes of the
                                                 factual support for their views to the                                                                          unchanged relative to the existing
                                                                                                         RFA.109                                                 exemption.
                                                 extent possible.                                           Currently, there are ten credit rating
                                                                                                                                                                    The adopting release for Rule 15Ga–
                                                 VII. Regulatory Flexibility Act                         agencies registered with the
                                                                                                                                                                 2 certified that Rule 15Ga–2 and the
                                                 Certification                                           Commission as NRSROs and, based on
                                                                                                                                                                 amendments to Form ABS–15G will not
                                                                                                         their most recently filed annual reports
                                                   Section 603(a) of the Regulatory                                                                              have a significant economic impact on
                                                                                                         pursuant to 17 CFR 240.17g–3,110 two
                                                 Flexibility Act of 1980 (‘‘RFA’’) 105                   NRSROs are small entities under the                     a substantial number of small
                                                 requires the Commission to undertake                    above definition. Neither of these two                  entities.113 As is the case with Rule 17g–
                                                 an initial regulatory flexibility analysis              NRSROs is currently registered for the                  7(a), the Rule 15Ga–2 exemption is
                                                 of the proposed rule amendments on                      class of credit ratings for issuers of                  already included as part of the rule text,
                                                 small entities unless the Commission                    asset-backed securities.                                and the proposed amendments to such
                                                 certifies that the proposal, if adopted,                   The Commission preliminarily                         exemption are clarifying in nature.114 In
                                                 would not have a significant economic                   believes that the proposed amendments                   addition, Rule 15Ga–2 relates to an
                                                 impact on a substantial number of small                 to Rule 17g–5(a)(3) would not, if                       obligation of the issuer or underwriter of
                                                 entities.106 Pursuant to 5 U.S.C. 605(b),                                                                       a structured finance product and there
                                                 the Commission hereby certifies that the                  107 See  Rule 0–10(a).                                is no need to obtain information from a
                                                 proposed amendments to Rule 17g–                          108 See,  e.g., Oversight of Credit Rating Agencies   third party to determine if the 15Ga–2
                                                 5(a)(3), Rule 17g–7(a), and Rule 15Ga–                  Registered as Nationally Recognized Statistical         exemption applies. As such, the
                                                 2 would not, if adopted, have a                         Rating Organizations, Exchange Act Release No.          Commission preliminarily believes that
                                                                                                         55857 (June 5, 2007), 72 FR 33564, 33618 (June 18,
                                                 significant economic impact on a                        2007); Amendments to Rules for Nationally
                                                 substantial number of small entities.                   Recognized Statistical Rating Organizations,
                                                                                                                                                                    111 See supra Section II.B. (discussing the

                                                   The proposed amendment to Rule                        Exchange Act Release No. 59342 (Feb. 2, 2009), 74       proposed amendments to Rule 17g–7(a) in more
                                                                                                         FR 6456, 6481 (Feb. 9, 2009); Rule 17g–5 Adopting       detail).
                                                 17g–5(a)(3) would provide an                                                                                       112 The Commission estimates that it will take an
                                                                                                         Release, supra note 2, 74 FR at 63863.
                                                                                                            109 Under Section 601(3) of the RFA, the term        NRSRO approximately 5 hours to modify its
                                                   103 Three of the four smaller NRSROs registered
                                                                                                         ‘‘small business’’ is defined as having ‘‘the same      processes to reflect the proposed amended language
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                                                 in the class of credit ratings for issuers of asset-    meaning as the term ‘small business concern’ under      of the exemption. The Commission believes that the
                                                 backed securities list foreign affiliates as credit     Section 3 of the Small Business Act, unless an          work will likely be completed by a compliance
                                                 rating affiliates on their most recently filed Form     agency, after consultation with the Office of           attorney at $360 per hour, resulting in a cost of
                                                 NRSRO. Form NRSRO filings can be accessed               Advocacy of the Small Business Administration           $1,800 for each NRSRO. See supra note 87 and
                                                 through the Commission’s EDGAR system.                  and after opportunity for public comment,               accompanying text.
                                                   104 123 Public Law 104–121, Title II, 110 Stat. 857                                                              113 See 2014 NRSRO Amendments, supra note 2,
                                                                                                         establishes one or more definitions of such term
                                                 (1996) (codified in various sections of 5 U.S.C. and    which are appropriate to the activities of the agency   79 FR at 55257.
                                                 15 U.S.C., including as a note to 5 U.S.C. 601).        and publishes such definition(s) in the Federal            114 See supra Section II.B. (discussing the
                                                   105 5 U.S.C. 601 et seq.                              Register.’’                                             proposed amendments to Rule 17g–7(a) in more
                                                   106 See 5 U.S.C. 605(b).                                 110 See Rule 17g–3.                                  detail).



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                                                 50310                    Federal Register / Vol. 83, No. 194 / Friday, October 5, 2018 / Proposed Rules

                                                 no costs will be incurred by issuers and                asset-backed security if certain                      §§ 230.901 through 230.905 (Regulation
                                                 underwriters as a result of the proposed                conditions are met, including:                        S) of this chapter); or
                                                 amendment to the Rule 15Ga–2                               (1) The offering is not required to be,               (B) With respect to a rated security or
                                                 exemption.                                              and is not, registered under the                      money market instrument, all offers and
                                                   The Commission encourages written                     Securities Act of 1933;                               sales by any issuer, sponsor, or
                                                 comments regarding this certification.                     (2) The issuer of the rated security is            underwriter linked to the security or
                                                 We solicit comment as to whether the                    not a U.S. person (as defined in                      money market instrument will occur
                                                 proposed amendments to Rule 17g–                        § 230.902(k)); and                                    outside the United States (as that phrase
                                                 5(a)(3), Rule 17g–7(a), and Rule 15Ga–                     (3) All offers and sales of the security           is used in §§ 230.901 through 230.905
                                                 2 could have a significant economic                     by any issuer, sponsor, or underwriter                (Regulation S) of this chapter).
                                                 impact on a substantial number of small                 linked to the security will occur outside             *      *    *    *      *
                                                 entities. The Commission requests that                  the United States (as that phrase is used               By the Commission.
                                                 commenters describe the nature of any                   in §§ 230.901 through 230.905                           Dated: September 26, 2018.
                                                 impact on small entities and provide                    (Regulation S)).
                                                                                                                                                               Brent J. Fields,
                                                 empirical data to support the extent of                 *      *     *     *    *
                                                 such impact.                                                                                                  Secretary.
                                                                                                         ■ 3. Amend § 240.17g–5 by adding
                                                                                                                                                               [FR Doc. 2018–21295 Filed 10–4–18; 8:45 am]
                                                 VIII. Statutory Authority                               paragraph (a)(3)(iv) to read as follows:
                                                                                                                                                               BILLING CODE 8011–01–P
                                                   The Commission is proposing an                        § 240.17g–5       Conflicts of interest.
                                                 amendment to 17 CFR 240.17g–5(a)(3),                       (a) * * *
                                                 17 CFR 240.17g–7(a), and 17 CRF                            (3) * * *                                          DEPARTMENT OF HOMELAND
                                                 240.15Ga–2 pursuant to the authority                       (iv) The provisions of paragraphs                  SECURITY
                                                 conferred by the Exchange Act,                          (a)(3)(i) through (iii) of this section will
                                                 including Sections 15E, 17(a), and 36                   not apply to a nationally recognized                  Coast Guard
                                                 (15 U.S.C. 78o–7, 78q, and 78mm).                       statistical rating organization when
                                                                                                         issuing or maintaining a credit rating for            33 CFR Part 165
                                                 List of Subjects in 17 CFR Part 240
                                                                                                         a security or money market instrument                 [Docket Number USCG–2018–0864]
                                                   Reporting and recordkeeping                           issued by an asset pool or as part of any
                                                 requirements, Securities.                                                                                     RIN 1625–AA00
                                                                                                         asset-backed securities transaction, if:
                                                 Text of Proposed Amendment                                 (A) The issuer of the security or                  Safety Zone; Tumon Bay, Tumon, GU
                                                                                                         money market instrument is not a U.S.
                                                   In accordance with the foregoing, the                                                                       AGENCY:   Coast Guard, DHS.
                                                                                                         person (as defined in § 230.902(k) of this
                                                 Commission proposes that title 17,                                                                            ACTION:   Notice of proposed rulemaking.
                                                                                                         chapter); and
                                                 chapter II of the Code of Federal
                                                                                                            (B) The nationally recognized
                                                 Regulations be amended as follows:                                                                            SUMMARY:   The Coast Guard proposes to
                                                                                                         statistical rating organization has a
                                                                                                                                                               establish a temporary safety zone for
                                                 PART 240—GENERAL RULES AND                              reasonable basis to conclude that all
                                                                                                                                                               navigable waters within a 190 yard
                                                 REGULATIONS, SECURITIES                                 offers and sales of the security or money
                                                                                                                                                               radius of a fireworks barge located in
                                                 EXCHANGE ACT OF 1934                                    market instrument by any issuer,
                                                                                                                                                               Tumon Bay for the New Year’s Eve
                                                                                                         sponsor, or underwriter linked to the
                                                                                                                                                               Fireworks display. The Coast Guard
                                                 ■ 1. The authority citation for part 240                security or money market instrument
                                                                                                                                                               believes this safety zone is necessary to
                                                 continues to read as follows:                           will occur outside the United States (as
                                                                                                                                                               protect the public from potential
                                                    Authority: 15 U.S.C. 77c, 77d, 77g, 77j,             that phrase is used in §§ 230.901
                                                                                                                                                               hazards created by the fireworks display
                                                 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,                 through 230.905 (Regulation S) of this
                                                                                                                                                               fallout. This proposed rulemaking
                                                 77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f,         chapter).
                                                                                                                                                               would prohibit persons and vessels
                                                 78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m,             *      *     *     *     *                            from being in the safety zone unless
                                                 78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q,               ■ 4. Amend § 240.17g–7 by revising
                                                 78q–1, 78s, 78u–5, 78w, 78x, 78ll, 78mm,                                                                      authorized by the Captain of the Port
                                                                                                         paragraph (a)(3) to read as follows:                  Guam (COTP). We invite your
                                                 80a–20, 80a–23, 80a–29, 80a–37, 80b–3, 80b–
                                                 4, 80b–11, 7201 et seq.; and 8302; 7 U.S.C.             § 240.17g–7       Disclosure requirements.            comments on this proposed rulemaking.
                                                 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C.                                                                   DATES: Comments and related material
                                                                                                            (a) * * *
                                                 1350; and Pub. L. 111–203, 939A, 124 Stat.                                                                    must be received by the Coast Guard on
                                                 1887 (2010); and secs. 503 and 602, Pub. L.                (3) Exemption. The provisions of
                                                                                                         paragraphs (a)(1) and (2) of this section             or before November 5, 2018.
                                                 112–106, 126 Stat. 326 (2012), unless
                                                                                                         do not apply to a rating action if:                   ADDRESSES: You may submit comments
                                                 otherwise noted.
                                                                                                            (i) The rated obligor or issuer of the             identified by docket number USCG–
                                                 *      *     *       *      *                                                                                 2018–0864 using the Federal
                                                   Section 240.15Ga–2 is also issued under               rated security or money market
                                                 sec. 943, Public Law 111–203, 124 Stat. 1376.           instrument is not a U.S. person (as                   eRulemaking Portal at https://
                                                                                                         defined in § 230.902(k) of this chapter);             www.regulations.gov. See the ‘‘Public
                                                 *      *     *       *      *                                                                                 Participation and Request for
                                                   Section 240.17g–7 is also issued under sec.           and
                                                 943, Public Law 111–203, 124 Stat. 1376.                   (ii) The nationally recognized                     Comments’’ portion of the
                                                                                                         statistical rating organization has a                 SUPPLEMENTARY INFORMATION section for
                                                 *     *    *     *     *
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                                                                                                         reasonable basis to conclude that:                    further instructions on submitting
                                                 ■ 2. Amend § 240.15Ga–2 by revising                                                                           comments.
                                                 paragraph (e) to read as follows:                          (A) With respect to any security or
                                                                                                         money market instrument issued by a                   FOR FURTHER INFORMATION CONTACT: If
                                                 § 240.15Ga–2 Findings and conclusions of                rated obligor, all offers and sales by any            you have questions about this proposed
                                                 third-party due diligence reports.                      issuer, sponsor, or underwriter linked to             rulemaking, call or email Chief Todd
                                                 *    *    *     *    *                                  the security or money market                          Wheeler, Waterways Management, U.S.
                                                  (e) The requirements of this rule                      instrument will occur outside the                     Coast Guard; telephone 671–355–4566,
                                                 would not apply to an offering of an                    United States (as that phrase is used in              email wwmguam@uscg.mil.


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Document Created: 2018-10-05 01:52:33
Document Modified: 2018-10-05 01:52:33
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionProposed Rules
ActionProposed rule.
DatesComments should be received on or before November 5, 2018.
ContactHarriet Orol, Kevin Vasel, or Patrick Boyle, at (212) 336-9080, Office of Credit Ratings, Securities and Exchange Commission, New York Regional Office, 200 Vesey Street, Suite 400, New York, NY 10281.
FR Citation83 FR 50297 
RIN Number3235-AM05
CFR AssociatedReporting and Recordkeeping Requirements and Securities

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