[Federal Register Volume 62, Number 249 (Tuesday, December 30, 1997)]
[Proposed Rules]
[Pages 68018-68024]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33402]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-39457; File No. S7-33-97]
RIN 3235-AH28
Capital Requirements for Brokers or Dealers Under the Securities
Exchange Act of 1934
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing for comment amendments to Rule 15c3-1 under the Securities
Exchange Act of 1934. The proposed amendments would define the term
``nationally recognized statistical rating organization'' (``NRSRO'').
The proposed definition sets forth a list of attributes to be
considered by the Commission in designating rating organizations as
NRSROs and the process for applying for NRSRO designation.
DATES: Comments must be received on or before March 2, 1998.
ADDRESSES: Persons wishing to submit written comments should file three
copies with Jonathan G. Katz, Secretary, Securities and Exchange
Commission, 450 Fifth Street, N.W., Stop 6-9, Washington, D.C. 20549.
Comments also may be submitted electronically at the following E-mail
address: rule-comments@sec.gov. All comment letters should refer to
File No. S7-33-97. This file number should be included on the subject
line if E-mail is used. All comments received will be available for
public inspection and copying in the Commission's Public Reference
Room, 450 Fifth Street, N.W., Washington, D.C., 20549. Electronically
submitted comment letters will be posted on the Commission's Internet
web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate
Director, 202/942-0131, Peter R. Geraghty, Assistant Director, 202/942-
0177, Louis A. Randazzo, Special Counsel, 202/942-0191, or Michael E.
Greene, Staff Attorney, 202/942-4169, Division of Market Regulation,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549.
SUPPLEMENTARY INFORMATION:
I. Introduction
A. The Commission's Concept Release
In August 1994, the Commission issued a concept release soliciting
public comment on the Commission's role in using the ratings of
NRSROs.1 In the Concept Release, the Commission specifically
solicited comments on: (1) Whether it should continue to use the NRSRO
concept, and, if so, whether it should define the term ``NRSRO''; and
(2) whether the current no-action letter process for designating a
rating organization an NRSRO is satisfactory, and, if not, whether the
Commission should establish an alternative procedure. The Commission is
now
[[Page 68019]]
proposing to amend the net capital rule to provide a definition of the
term ``NRSRO'' that sets forth the criteria that a rating organization
must satisfy to be an NRSRO.
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\1\ Securities Exchange Act Release No. 34616 (August 31 1994),
59 FR 46314 (September 7, 1994) (``Concept Release'').
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B. Summary of the Comments
The Commission received 25 comment letters in response to the
Concept Release. The comments generally supported the continued use of
the NRSRO concept, but recommended that the Commission adopt a
formalized process for designating NRSROs. A few commenters set forth
criteria that the Commission should consider to determine whether a
rating organization is an NRSRO. In addition, commenters generally
opposed formal regulatory oversight of NRSROs. These issues are
discussed in greater detail in Sections III and IV below.
C. The Development and Expanded Use of the NRSRO Concept
The term ``NRSRO'' was initially adopted by the Commission in 1975
for the narrow purpose of distinguishing different grades of debt
securities under the Commission's net capital rule, Rule 15c3-
1.2 Rule 15c3-1 requires a broker-dealer to reduce the value
of the securities positions that it owns by specified percentages
(``haircuts'') when calculating its net capital. Broker-dealers that
own commercial paper, nonconvertible debt securities, and
nonconvertible preferred stock are allowed to reduce their haircuts for
these instruments when calculating net capital if the instruments are
rated investment grade by at least two NRSROs.3
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\2\ 17 CFR 240.15c3-1.
\3\ See 17 CFR 240.15c3-1(c)(2)(vi)(E) (haircuts applicable to
commercial paper that has been rated in one of the three highest
categories by at least two NRSROs); 17 CFR 240.15c3-1(c)(2)(vi)(F)
(haircuts applicable to nonconvertible debt securities that are
rated in one of the four highest rating categories by at least two
NRSROs); 17 CFR 240.15c3-1(c)(2)(vi)(H) (haircuts applicable to
cumulative, nonconvertible preferred stock rated in one of the four
highest rating categories by at least two NRSROs).
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Since its adoption in 1975, the NRSRO concept has expanded beyond
its originally intended use under the net capital rule. For example,
Congress, in certain mortgage related legislation,4 and the
Commission, in its regulations pursuant to the Securities Act of
1933,5 the Securities Exchange Act of 1934 (``Exchange
Act''),6 and the Investment Company Act of 1940,7
use the ratings of NRSROs as proxies to distinguish ``investment
grade'' from ``non-investment grade'' debt securities. These references
are to an NRSRO as that term is used in Rule 15c3-1; however, the term
``NRSRO'' has not been defined for purposes of the federal securities
laws.
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\4\ Pub. L. 98-440, Section 101, 98 Stat. 1689 (1984). See 15
U.S.C. 78c(a)(41).
\5\ See, e.g., Regulation S-K (17 CFR 229.10) (a registrant may
include NRSRO ratings in its registration statements and periodic
reports); Rule 436 (17 CFR 230.436) (rating assigned to a security
by an NRSRO shall not be considered part of the registration
statement prepared or certified by a person within the meaning of
sections 7 and 11 of the Securities Act of 1933); Form S-3 (17 CFR
239.13) (Form S-3 may be used in primary offerings of non-
convertible securities and asset-backed securities which are rated
investment grade by at least one NRSRO); Forms F-2 and F-3 (17 CFR
239.32, 239.33) (non-convertible securities for purposes of Forms F-
2 and F-3 are investment grade securities if, at the time of sale,
at least one NRSRO has rated the security in one of its generic
rating categories that signifies investment grade).
\6\ See, e.g., Rule 101 (17 CFR 242.101) and Rule 102 (17 CFR
242.102) (non-convertible debt securities, nonconvertible preferred
securities and asset-backed securities which are rated investment
grade by at least one NRSRO are exempt from the provisions of Rule
101 and Rule 102). See also Form 17-H (17 CFR 249.328T) (for each
Material Associated Person of a broker-dealer, the broker-dealer
must include the name of the NRSRO which has rated a Material
Associated Person's commercial paper).
\7\ See, e.g., Rule 2a-7(a)(9) (17 CFR 270.2a-7(a)(9)) (an
``eligible security'' is, among other things, a security that has
received a short-term rating by the requisite NRSROs in one of the
two highest short-term rating categories); Rule 10f-3 (17 CFR
270.10f-3) (municipal securities rated investment grade by at least
one NRSRO are exempt from section 10-f of the Investment Company Act
of 1940, which prohibits registered investment companies from
purchasing certain securities); and Rule 3a-7 (17 CFR 270.3a-7)
(issuers of asset-backed securities may not be deemed investment
companies for purposes of the Investment Company Act of 1940 if,
among other things, fixed-income securities sold by the issuer are
rated in one of the four highest categories by at least one NRSRO).
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D. Current Process for Determining Whether an Entity is an NRSRO
Currently, to determine whether a rating organization is an NRSRO,
the Division of Market Regulation (``Division'') staff first reviews
the rating organization's operations, position in the marketplace, and
other criteria. If the Division staff determines that a rating
organization may properly be labelled an NRSRO, the staff issues a
letter stating that it will not recommend enforcement action to the
Commission if the rating organization is considered by registered
broker-dealers to be an NRSRO for purposes of applying the relevant
portions of the net capital rule.
In determining whether a rating organization may be considered an
NRSRO for purposes of the Commission's rules, the staff considers a
number of criteria. The single most important criterion is that the
rating organization is nationally recognized, which means the rating
organization is recognized in the United States as an issuer of
credible and reliable ratings by the predominant users of securities
ratings. The Division also examines the operational capability and
reliability of each rating organization in conjunction with this
standard of national recognition. Included within this assessment are:
(1) The organizational structure of the rating organization; (2) the
rating organization's financial resources (to determine, among other
things, whether it is able to operate independently of economic
pressures or control from the companies it rates); (3) the size and
quality of the rating organization's staff (to determine if the entity
is capable of thoroughly and competently evaluating an issuer's
credit); (4) the rating organization's independence from the companies
it rates; (5) the rating organization's rating procedures (to determine
whether it has systematic procedures designed to produce credible and
accurate ratings); and (6) whether the rating organization has internal
procedures to prevent the misuse of non-public information and whether
those procedures are followed.
The Division's no-action position regarding NRSRO designation is
based on representations made to the staff by the rating organization
during the no-action process. The no-action letter directs the rating
organization to advise the Division of any material change in the facts
that serve as the basis for granting the no-action position. For
example, material changes in an NRSRO's organizational structure or
modifications of its rating practices could affect the NRSRO's standing
as a credible evaluator in the credit market. The Division may withdraw
a no-action letter designating a particular rating organization as an
NRSRO under certain circumstances.
To date, the Commission regards five rating organizations as NRSROs
for purposes of the net capital rule: (1) Standard & Poor's Corporation
(``Standard & Poor's''); (2) Moody's Investors Service, Inc.
(``Moody's''); (3) Fitch IBCA, Inc. (``Fitch IBCA''); 8 (4)
[[Page 68020]]
Duff & Phelps Credit Rating Co. (``Duff & Phelps'');9 and
(5) Thomson BankWatch, Inc. (``Bankwatch'').10
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\8\ When the net capital rule became effective in 1975, Fitch
Investors Service, L.P. (``Fitch''), Standard & Poor's and Moody's
were designated as NRSROs by the Division for purposes of the net
capital rule. Subsequently, based on requests from rating
organizations, the Division provided no-action assurances to Duff &
Phelps, BankWatch, IBCA Limited and IBCA Inc. (IBCA Limited and IBCA
Inc. are collectively referred to as ``IBCA''). IBCA was designated
as an NRSRO for limited purposes. In November 1997, Fitch and IBCA
combined to create Fitch IBCA, a successor rating organization. By
letter dated November 4, 1997, the Division stated that it would not
recommend enforcement action to the Commission if Fitch IBCA
succeeded to the NRSRO designation of Fitch for the purposes of
applying paragraphs (c)(2)(vi) (E), (F), and (H) of the net capital
rule to all debt. Subsequent to the transfer of the ownership of
IBCA to Fitch IBCA, IBCA was no longer considered to be an NRSRO.
See Letter regarding Fitch IBCA Inc. (November 4, 1997).
\9\ See Letter regarding Duff & Phelps, Inc. (February 24,
1982).
\10\ See Letter regarding Thomson BankWatch, Inc. (August 6,
1991). BankWatch is recognized as an NRSRO only for the purposes of
rating debt issued by banks, bank holding companies, non-bank banks,
thrifts, broker-dealers, and broker-dealers' parent companies.
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II. The NRSRO Concept Release
The Concept Release requested comment on whether the Commission
should continue to employ an NRSRO concept to distinguish various types
of debt and other securities for purposes of its rules. Thirteen
commenters discussed the NRSRO concept. Overall, the commenters
generally supported the continued use of the NRSRO concept in the net
capital and other Commission rules. For example, the Securities
Industry Association Capital Committee (``SIA'') believes that the
continued use of the NRSRO concept is an integral part of the net
capital rule. Additionally, the SIA commented that the use of NRSRO
ratings is a vital ingredient of the Commission's efforts to safeguard
the capital markets against risks arising from fluctuations in the
proprietary positions of securities firms.
Some commenters suggested that the Commission discontinue the use
of the NRSRO concept and instead employ statistical models or
historical spreads to determine the level of risk associated with a
particular instrument. As the SIA commented, however, continued use of
the NRSRO concept in the net capital rule would give broker-dealers an
objective, simple standard for determining the capital value of a debt
instrument under the rule. In contrast, a modelling approach involves a
possibly intricate statistical configuration. It is also likely that
modelling will work only where there is a deep and liquid market for
the instrument because of the difficulty in obtaining prices. It would
not be adequate for debt issuers with no previously issued or very old
public debt. In order to assist the Commission in determining whether
statistical modelling may be appropriate in the future for purposes of
the NRSRO concept, the Commission invites comments on practical
approaches to the use of statistical models in the context of
determining the credit risk of individual financial instruments.
III. Description of the Proposed Amendments
As discussed in more detail below, the proposal would amend Rule
15c3-1 by adopting a new subparagraph (c)(13), which would define the
term ``NRSRO.'' As proposed, the definition of NRSRO will include
rating organizations designated as NRSROs by the Commission.
Designation of such rating organizations as NRSROs would be based upon
written application filed with the Director of the Commission's
Division of Market Regulation in Washington, D.C.11 The
Commission would consider the attributes currently assessed by the
Division in the no-action letter process in determining whether a
rating organization is an NRSRO.
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\11\ The Commission understands that a rating organization's
application may contain commercial or financial information that is
confidential. It is the responsibility of the rating organization to
request confidentiality under the appropriate Commission rules. See
17 CFR 200.83. The Commission believes, however, that the cover
letter from the rating organization requesting NRSRO designation and
any response by the Commission would be publicly available.
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IV. Discussion of the Proposed Amendments
A. Proposed Definition of NRSRO in the Net Capital Rule
Having considered the comments received, the Commission proposes to
define NRSRO in the net capital rule to include a list of attributes
that will be considered by the Commission in designating rating
organizations as NRSROs. These attributes are described in more detail
below. Under the proposal, rating organizations that have received no-
action assurances from the Division will retain whatever NRSRO
designation status that they currently possess and will not be required
to reapply for NRSRO designation; however, the Commission will conduct
reviews of the current NRSROs to assure that they meet the requirements
in the proposed definition. In the event the Commission determines that
any such rating organization does not satisfy the requirements set
forth in the proposed rule, the Commission will act to revoke the NRSRO
designation.
The Commission believes that defining the term ``NRSRO'' in the net
capital rule should provide clarity and limit concerns regarding any
perceived arbitrariness in the current process of designating NRSRO
status.
B. Criteria in the Definition of NRSRO
Commenters generally recommended that the Commission adopt
procedures for designating NRSRO status that clearly identify the
criteria a rating organization must possess. Specifically, commenters
recommended that the Commission formalize the current no-action letter
criteria for designating NRSROs in a Commission rule. For example,
various rating organizations recommended including the requirement of
national recognition and market acceptance of the organizations'
ratings.
Consistent with the comment letters received, an NRSRO would
include any rating organization designated by the Commission after
considering a list of attributes similar to the criteria currently
considered by the Division in the no-action letter process. The rating
organization would have to meet each criterion in order to be
designated as an NRSRO. The Commission's designation would apply only
to a rating organization's opinion concerning the creditworthiness of
debt instruments. The Commission notes that other opinions and views of
the rating organization would be outside the scope of the NRSRO
designation.
The attributes the Commission would consider are: (1) National
recognition, which means that the rating organization is recognized as
an issuer of credible and reliable ratings by the predominant users of
securities ratings in the United States; (2) adequate staffing,
financial resources, and organizational structure to ensure that it can
issue credible and reliable ratings of the debt of issuers, including
the ability to operate independently of economic pressures or control
by companies it rates and a sufficient number of staff members
qualified in terms of education and experience to thoroughly and
competently evaluate an issuer's credit; (3) use of systematic rating
procedures that are designed to ensure credible and accurate ratings;
12 (4) extent of contacts with the management of issuers,
including access to senior level management of the issuers;
13 and (5) internal procedures to prevent misuse of non-
public information and compliance with these procedures.14
In addition to
[[Page 68021]]
the attributes noted above, the proposal would require a rating
organization to be registered with the Commission as an investment
adviser under the Investment Advisers Act of 1940 (``Advisers Act'') in
order to be designated as an NRSRO.15
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\12\ The Commission believes that a systematic rating procedure
should help to ensure that the same or similar analysis is conducted
for all issues rated. In addition, the ratings should be structured
in such a way that the different rating categories are easily
identifiable.
\13\ The Commission believes that rating organizations that have
access to senior management are better able to make subjective
opinions regarding the risks associated with the issue.
\14\ The Commission believes that maintaining these procedures
should help ensure that the issuer's management is comfortable with
providing the rating organization all information necessary for the
rating organization to make reliable subjective opinions about the
risks associated with the issue.
\15\ All currently designated NRSROs are registered with the
Commission under the Advisers Act. Although section 203A of the
Advisers Act prohibits investment advisers that have less than $25
million of assets under management to register with the Commission,
the Commission has exempted investment advisers that are designated
as NRSROs from this prohibition. See rule 203A-2 [17 CFR 275.203A-
2].
As proposed, a rating organization must be registered as an
investment adviser under the Advisers Act and maintain such
registration as a condition of receiving and retaining its NRSRO
designation. A rating organization applying for designation as an
NRSRO that is not registered as an investment adviser, because, for
example, it does not have $25 million of assets under management,
would have to register under rule 203A-2(d) under the Advisers Act,
which permits an investment adviser that reasonably expects to be
eligible for Commission registration within 120 days of registering
with the Commission to register with the Commission even though it
may not otherwise meet the criteria for Commission registration
under section 203A of the Advisers Act. Once a rating organization
is registered as an investment adviser, it must maintain its
registration. Otherwise, its NRSRO designation will void
automatically.
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By specifying required criteria in the definition of NRSRO, the
Commission will be able to promulgate the characteristics that are
necessary for NRSRO designation, thereby assuring rating organizations
that if they possess such characteristics, they will likely be
designated, and will remain, NRSROs. Similar to the no-action letter
process, however, the Commission is reserving the ability to withdraw
designation if a rating organization fails to maintain the requisite
criteria. Accordingly, a rating organization designated as an NRSRO
would be required to notify the Commission when it experiences material
changes that may affect its ability to continue to meet any of the
requisite criteria. For example, material changes in an NRSRO's
organizational structure or modifications of its rating practices could
affect the NRSRO's standing in the credit market that could warrant
withdrawing NRSRO designation. Codifying the current NRSRO designation
would ensure that the process is transparent and applied consistently.
C. Application Process
A rating organization seeking NRSRO designation would be required
to file an application with the Director of the Commission's Division
of Market Regulation in Washington, D.C. The rating organization would
be required to include in the application detailed information
explaining how the rating organization satisfies the attributes
necessary for NRSRO designation. The rating organization also would be
required to file any additional information subsequently requested by
the Division.
D. Delegation of Authority to the Division
The Commission proposes to delegate authority to the Division to
examine rating organizations' applications and to designate a rating
organization as an NRSRO or to deny such designation.16
Under the proposed amendments, the Division would not have delegated
authority to revoke or withdraw any previously granted designation.
Delegating authority to the Division will allow rating organizations
that receive an adverse decision from the Division to seek Commission
review. Pursuant to the Commission's Rules of Practice, any person
aggrieved by an action made by delegated authority may seek Commission
review of the action by filing a petition for review with the
Commission.17 The Commission may preside over or, if it so
orders, designate a hearing officer to preside over any proceeding
instituted to review a determination made pursuant to delegated
authority. The Commission may, at its discretion, designate an
administrative law judge as the hearing officer presiding over such
proceedings.18
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\16\ The Commission proposes to amend Rule 200.30-3, which
provides for delegation of authority to the Director of the Division
of Market Regulation, to include the designation of NRSROs. See 17
CFR 200.30-3.
\17\ See 17 CFR 201.430.
\18\ See 17 CFR 201.110.
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E. Charging Fees Based on the Size of the Transaction
In the Concept Release, the Commission requested comments on the
practice of NRSROs charging issuers for ratings and whether it is
appropriate for an NRSRO to charge an issuer fees based on the size of
the transaction being rated.
Fourteen commenters offered views on this practice. As a general
matter, they did not oppose NRSROs charging issuers for ratings.
Various commenters expressed concern, however, regarding charging fees
based upon the size of the transaction. For example, one rating
organization commented that it is not appropriate for rating
organizations to charge issuers based upon the size of the transaction
because the large fees received may cause the rating organization to
have an interest in whether the issue is successful or unsuccessful. In
addition, the rating organization commented that basing fees on the
size of an issue may compromise the rating organization's objectivity
in rating the issue.
In particular, the Commission is concerned that a rating
organization may be tempted to give a more favorable rating to a large
issue because of the large fee and to encourage the issuer to submit
future large issues to the rating organization. The Commission invites
further comment on whether the use of this practice should be added as
a criterion in the definition of an NRSRO.
V. Request for Comments
In response to the Concept Release, some commenters suggested using
objective criteria in the definition of NRSRO. The Commission's
concerns about using objective criteria is that it could lead to
unintended results and possible manipulation of the NRSRO designation
process. A rating organization may meet the basic objective criteria
standard, but have no credibility in the marketplace. For example,
using the number of persons employed by a rating organization as one of
the criteria would not take into consideration qualifications of the
employees with respect to rating issuer's securities. On the other
hand, a rating organization may have a solid reputation for publishing
reliable ratings, but may not meet an objective criteria, such as a
minimum number of employees. The Commission, however, invites comment
on whether objective criteria should be used to determine NRSRO
designation and the types of objective criteria that should be
considered.
The Commission also invites comment on whether a specific time
period should be established for the Commission to act on an
application. If such a period is considered appropriate, the Commission
also seeks comment on whether a time period in the range of 180 to 365
calendar days would be appropriate.
In addition, concerns have been raised to the Commission about the
fact that some ratings may not be generally available to the public and
may be restricted only to subscribers. Because the Commission is
proposing to provide rating organizations with the NRSRO designation,
the Commission invites comment on whether NRSROs should be required to
provide their ratings to the public. The Commission also invites
interested persons to submit written data, views, arguments and/or
comments on the other aspects of the proposed amendments.
[[Page 68022]]
VI. Costs and Benefits of the Proposed Amendments and Their Effects on
Competition
To assist the Commission in its evaluation of the costs and
benefits that may result from the proposed rule amendments, commenters
are requested to provide analyses and data relating to the costs and
benefits associated with any of the proposals herein. The Commission
believes the benefit of the proposed definition will be to make its
current practice of designating NRSROs more transparent and formalized.
The Commission preliminarily believes that the proposed amendments will
benefit all market participants by clarifying the basis for designating
NRSROs and making the designation process more transparent. The
amendments also will provide an appeal process for rating organizations
that have been denied NRSRO designation. The amendments will impose no
additional compliance burdens on broker-dealers and will not impede
efficiency, competition, and capital formation, because they merely
codify the current criteria a credit rating organization must meet in
order to be designated as an NRSRO. The costs associated with the rule
proposal would not differ significantly from those incurred under the
current no-action letter process.19 The proposed amendments
would not change the basis by which broker-dealers determine the
deductions applicable to their proprietary securities. Section 23(a) of
the Exchange Act, 15 U.S.C. 78w(a)(2), requires the Commission, in
adopting rules under the Exchange Act, to consider the anti-competitive
effect of the rule, if any. The Commission has considered the proposed
amendments in light of this standard and believes, preliminarily, that
if adopted, they would not likely impose any significant burden on
competition that is not necessary or appropriate in furtherance of the
Exchange Act. The Commission solicits comment on this preliminary view.
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\19\ The average time to complete an application is estimated to
be 100 hours. See infra section VIII D.
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VII. Summary of Initial Regulatory Flexibility Analysis
In accordance with 5 U.S.C. 603, the Commission has prepared an
Initial Regulatory Flexibility Analysis (``IRFA'') concerning the
proposed amendments. The IRFA notes that the purpose of the proposed
amendments is to make the NRSRO designation process open and
transparent by defining the term ``NRSRO'' for purposes of the net
capital rule to provide a list of attributes that would be considered
by the Commission in designating rating organizations as NRSROs. The
IRFA indicates that the proposed amendments would apply to all credit
rating organizations that request NRSRO designation.
The IRFA further indicates that in the past, the Commission has
only designated seven credit rating organizations as NRSROs. In
addition, only seven other credit rating organizations have requested
designation as an NRSRO. Because the Commission cannot determine the
number of entities that may request NRSRO designation in the future, it
is difficult to estimate the number of small entities that may be
subject to the proposed amendments. However, due to the fact that only
seven credit rating organizations have been designated as NRSROs and
only seven other entities have requested NRSRO designation, the IRFA
adds that it appears that very few small entities, if any, as
contemplated by the Regulatory Flexibility Act 20, will be
subject to the proposed amendments. In addition, the IRFA states that
the proposed amendments require the filing of an application and
notification of any material changes in the NRSROs business and that no
federal rules duplicate, overlap, or conflict with, the proposed
amendments. Furthermore, the IRFA states that the Commission does not
believe that any less burdensome alternatives are available to
accomplish the objectives of the proposed amendments.
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\20\ 5 U.S.C. 601 et seq. The Regulatory Flexibility Act states
that the term ``small entity'' shall have the same meaning as the
term ``small business'' under the Regulatory Flexibility Act.
According to section 601(3) under the Regulatory Flexibility Act,
``the term `small business' has the same meaning as the term `small
business concern'' under section 3 of the Small Business Act (15
U.S.C. 632), unless an agency, after consultation with 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''. If the agency has not
defined the term for a particular purpose, the Small Business Act
states that ``a small business concern, * * *, shall be deemed to be
one which is independently owned and operated and which is not
dominant in its field of operation.'' Because the Commission has not
defined the term ``small entity'' in the context of NRSROs for
purposes of the Regulatory Flexibility Act, for purposes of this
rulemaking, the Commission is using the broader definition of
``small business concern'' as defined in the Small Business Act.
Furthermore, based on this broader definition, it appears that none
of the current NRSROs would be considered small entities for
purposes of the Regulatory Flexibility Act.
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The Commission encourages the submission of comments with respect
to any aspect of the IRFA. Comment specifically is requested on the
number of small entities that would be affected by the proposed rules.
Such comments will be considered in the preparation of the Final
Regulatory Flexibility Analysis, if the proposed rules are adopted, and
will be placed in the same public file as comments on the proposed
rules themselves. Comment letters should be submitted in triplicate to
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450
Fifth Street, N.W., Stop 6-9, Washington, D.C. 20549. Comments also may
be submitted electronically at the following E-Mail address: comments@sec.gov. All comment letters should refer to File No. S7-33-
97. This file number should be included on the subject line if E-mail
is used. All comments received will be available for public inspection
and copying in the Commission's Public Reference Room, 450 Fifth
Street, N.W., Washington, D.C., 20549. Electronically submitted comment
letters will be posted on the Commission's Internet web site (http://
www.sec.gov). A copy of the IRFA may be obtained by contacting Michael
E. Greene, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Mail Stop 2-2, Washington, D.C. 20549.
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''), the Commission is also requesting information
regarding the potential impact of the proposed rule on the economy on
an annual basis. The Commission preliminarily believes that the
proposed amendments do not constitute a ``major rule'' for purposes of
SBREFA based on the criteria used to determine what constitutes a
``major rule'' under SBREFA. Commenters should provide empirical data
to support their views.
VIII. Paperwork Reduction Act
Certain provisions of the proposed amendments contain ``collection
of information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA''),21 and the Commission has
submitted them to the Office of Management and Budget for review in
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for the
collection of information is: ``Net Capital Requirements for Brokers or
Dealers: Definitions: NRSRO.''
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\21\ 44 U.S.C. 3501 et seq.
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A. Collection of Information Under Proposed Amendments
The proposed amendments would require credit rating organizations
that desire designation as NRSROs to submit certain information to the
Commission in order to obtain such designation and to report to the
Commission in the event of any material change in their status.
[[Page 68023]]
B. Proposed Use of Information
The information collected pursuant to the proposed amendments would
be used only by the Commission. No other governmental agency or third
party would regularly receive any of the information described above.
The Commission would use the information required by the proposed
amendments in determining whether to designate a credit rating
organization as an NRSRO.
C. Respondents
The proposed amendments would apply to those credit rating
organizations that desire designation as an NRSRO by the Commission.
D. Total Annual Reporting and Recordkeeping Burden
The proposed amendments require a one-time application process,
which includes any amendments to the initial application. Therefore,
there is no recurring reporting or recordkeeping requirement and thus
no annual reporting or recordkeeping requirement. However, it is
estimated that on an annual basis there will be ten respondents to this
collection of information. It is also estimated that the time to
complete the proposed collection of information is 100 hours.
E. General Information About the Collection of Information
The collection of information under the proposed amendments would
be required in order to obtain NRSRO designation. There would be no
obligation on the NRSRO to retain the information submitted to the
Commission to obtain NRSRO designation. Any information received by the
Commission pursuant to the proposed amendments would be kept
confidential (except the cover letter), subject to the provisions of
the Freedom of Information Act, 5 U.S.C. 552 and the Commission's
regulations thereunder (17 CFR 200.80). The proposed amendments do not
mandate a time period for retaining the information submitted to the
Commission by credit rating organizations applying for NRSRO
designation. Seeking the NRSRO designation is voluntary; however, for
rating organizations that desire the NRSRO designation, the obligation
to respond to the collection of information is mandatory. Persons
should be aware that the Commission 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.
F. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to:
(i) evaluate whether the proposed collection of information is
necessary for the proposed performance of the functions of the agency,
including whether the information shall have practical utility;
(ii) evaluate the accuracy of the Commission's estimate of the
burden of the proposed collection of information;
(iii) enhance the quality, utility, and clarity of the information
to be collected; and
(iv) minimize the burden of collection of information on those who
are to respond, including through the use of automated collection
techniques or other forms of information technology.
Persons desiring to submit comments on the collection of
information requirements should direct them to the Office of Management
and Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
D.C. 20503, and should also send a copy of their comments to Jonathan
G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, and refer to File No. S7-33-97.
OMB is required to make a decision concerning the collections of
information between 30 and 60 days after publication of this release in
the Federal Register, so a comment to OMB is best assured of having its
full effect if OMB receives it within 30 days of this publication.
IX. Statutory Analysis
Pursuant to the Securities Exchange Act of 1934 and particularly
Sections 3(b), 15(c)(3), 17, and 23 thereof, 15 U.S.C. 78c(b),
78o(c)(3), 78q, and 78w, the Commission proposes to amend 240.15c3-1 of
Title 17 of the Code of Federal Regulations in the manner set forth
below.
X. List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
XI. Text of the Proposed Rule Amendments
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulation is proposed to be amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for Part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee,
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78k, 78k-1, 78l,
78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 79q, 79t,
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 80b-11, unless
otherwise noted.
* * * * *
2. Section 240.15c3-1 is amended by adding paragraph (c)(13) to
read as follows:
Sec. 240.15c3-1 Net capital requirements for brokers or dealers.
* * * * *
(c) * * *
* * * * *
(13)(i) The term nationally recognized statistical rating
organization (``NRSRO'') means any entity that:
(A) Issues ratings which are current assessments of the
creditworthiness of obligors with respect to specific securities or
money market instruments and that is registered under the Investment
Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.) and
(B) Is designated as an NRSRO by the Commission.
(ii) The Commission will consider the following attributes in
determining whether to grant NRSRO status:
(A) Recognition of the rating organization in the United States as
an issuer of credible and reliable ratings by users of securities
ratings;
(B) Adequate staffing, financial resources, and organizational
structure to ensure that it can issue credible and reliable ratings of
the debt of issuers, including a sufficient number of qualified staff
members and the ability to operate independently of economic pressures
or control by companies that it rates;
(C) Use of systematic rating procedures that are designed to ensure
credible and accurate ratings;
(D) Extent of contacts with the management of issuers, including
access to senior level management of issuers; and
(E) Internal procedures to prevent misuse of non-public information
and compliance with these procedures.
(iii) A rating organization seeking NRSRO designation shall file an
application with the Director of the Commission's Division of Market
Regulation in Washington, DC. The application should provide detailed
information explaining how the rating organization satisfies the
attributes set forth in paragraph (c)(13)(i) of this section. The
rating organization shall also file any additional information
subsequently requested by the Commission relating to the attributes set
forth in paragraph (c)(13)(i) of this section.
[[Page 68024]]
(iv) An NRSRO shall notify the Director of the Commission's
Division of Market Regulation of any material changes that occur in the
facts and circumstances of this application for an NRSRO designation.
(v) In the event it is determined that an NRSRO no longer satisfies
all of the attributes set forth in (c)(13)(i) of this section, the
Commission may revoke or withdraw NRSRO designation.
* * * * *
Dated: December 17, 1997.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-33402 Filed 12-29-97; 8:45 am]
BILLING CODE 8010-01-P
