Nrsro Summary Report 2020
summary
The U.S. Securities and Exchange Commission's staff examined nationally recognized statistical rating organizations under Section 15E(p)(3) of the Securities Exchange Act of 1934, finding non-compliance with policies and procedures related to conflicts of interest, ethics, internal controls, governance, and post-employment activities.
paragraph
This report summarizes the findings of the U.S. Securities and Exchange Commission's staff examinations of nationally recognized statistical rating organizations (NRSROs) under Section 15E(p)(3) of the Securities Exchange Act of 1934. The report covers the regulatory framework, registered NRSROs, and the examination overview, highlighting responses to previous recommendations and notable improvements. It outlines regulations for credit rating agencies, including record-keeping, conflict of interest management, and disclosure requirements. The document also details the examination process by the Office of Credit Ratings and Examination, focusing on adherence to Section 15E and related rules, with a focus on conflicts of interest, ethics, internal controls, governance, and post-employment activities. The report discusses the findings of the Office of Credit Ratings' examinations of NRSROs in 2020, highlighting several issues, including non-compliance with policies and procedures related to conflicts of interest, ethics, internal controls, governance, and post-employment activities.
narrative
This report summarizes the findings of the U.S. Securities and Exchange Commission's staff examinations of nationally recognized statistical rating organizations (NRSROs) under Section 15E(p)(3) of the Securities Exchange Act of 1934. The report covers the regulatory framework, registered NRSROs, and the examination overview, highlighting responses to previous recommendations and notable improvements. It outlines regulations for credit rating agencies, including record-keeping, conflict of interest management, and disclosure requirements. The document also details the examination process by the Office of Credit Ratings and Examination, focusing on adherence to Section 15E and related rules, with a focus on conflicts of interest, ethics, internal controls, governance, and post-employment activities. The report discusses the findings of the Office of Credit Ratings' examinations of NRSROs in 2020, highlighting several issues, including non-compliance with policies and procedures related to conflicts of interest, ethics, internal controls, governance, and post-employment activities. The report is a result of the Commission's regulatory regime for NRSROs, established by the Credit Rating Agency Reform Act of 2006 and amended by the Dodd-Frank Act. The Office of Credit Ratings is responsible for oversight of credit rating agencies registered with the Commission as NRSROs. The report outlines regulations for credit rating agencies, including record-keeping, conflict of interest management, and disclosure requirements. The document also details the examination process by the Office of Credit Ratings and Examination, focusing on adherence to Section 15E and related rules, with a focus on conflicts of interest, ethics, internal controls, governance, and post-employment activities. The report discusses the findings of the Office of Credit Ratings' examinations of NRSROs in 2020, highlighting several issues, including non-compliance with policies and procedures related to conflicts of interest, ethics, internal controls, governance, and post-employment activities.
Classified non-corporate(confidence 100%). No EDGAR filing fingerprint (criminal/DOJ-side scheme). detection rule →
Statutes
Section 15E(p)(3)(C) of the Securities Exchange ActSection 15E(p)(3)(C) of the Securities Exchange ActRule 17g-1Rule 17g-1(e)Rule 17g-1(i)Rule 17g-2(b)Rule 17g-8(d)Rule 17g-3(a)Rule 17g-3(b)Rule 17g-8(a)Rule 17g-8(b)Rule 17g-7(a)Rule 17g-5(a)Rule 17g-2(a)Rule 17g-2Rule 17g-4Rule 17g-5Rule 17g-5(c)Rule 17g-5(b)Rule 17g-6Rule 17g-9Rule 17g-8(c)Rule 17g-1(a)Rule 17g-9(a)Rule 17g-9(c)
Parties
Securities and Exchange Commission
Keywords
nrsro summarysummary reportnrsrosummaryreporttimeout
Extracted insights
Entities 1
- organization Securities and Exchange Commission
Triples 7
- U.S. Securities and Exchange Commission made Staff Report public
- U.S. Securities and Exchange Commission required Section 15E(p)(3)(C) of the Exchange Act
- Staff summarized examinations conducted by staff
- Section 15E(p)(3) of the Exchange Act governs registration and oversight program for credit rating agencies
- Credit Rating Agency Reform Act of 2006 established regulatory regime
- Dodd-Frank Act amended regulatory regime
- Dodd-Frank Act mandated creation of the Office of Credit Ratin
Text layers
Extracted body text (76,287c)
E X A M S U M M A R Y R E P O R T |
OFFICE OF CREDIT RATINGS
2020
Summary
Report
ON
COMMISSION STAFF’S
EXAMINATIONS OF EACH
NATIONALLY RECOGNIZED
STATISTICAL RATING
ORGANIZATION
As Required by Section 15E(p)(3)(C)
of the Securities Exchange Act of 1934
December 2020
i
U . S . S E C U R I T I E S A N D E X C H A N G E C O M M I S S I O N
THIS IS A REPORT OF THE STAFF OF THE U.S. SECURITIES AND EXCHANGE COMMISSION.
THE COMMISSION HAS EXPRESSED NO VIEW REGARDING THE ANALYSIS, FINDINGS, OR CONCLUSIONS CONTAINED HEREIN.
Table of Contents
I. REGULATORY AND NRSRO OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
A. Statutory Framework and Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
B. Registered NRSROs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
A. Examinations under Section 15E(p)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
B. Examination Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
A. Responses to Recommendations from the 2019 Section 15E Examinations . . . . . . 9
B. Notable Improvements Over the Course of the Examinations . . . . . . . . . . . . . 10
A. Review Area: Adherence to Policies, Procedures, and Methodologies . . . . . . . . . 11
B. Review Area: Management of Conficts of Interest . . . . . . . . . . . . . . . . . . . . .14
C. Review Area: Implementation of Ethics Policies . . . . . . . . . . . . . . . . . . . . . .15
D. Review Area: Internal Supervisory Controls . . . . . . . . . . . . . . . . . . . . . . . . .15
E. Review Area: Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
F. Review Area: DCO Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
G. Review Area: Complaints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
H. Review Area: Post-Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
II. OFFICE OF CREDIT RATINGS AND EXAMINATION OVERVIEW . . . . . . . . . . . . . . . 6
III. SUMMARY OF RESPONSES TO RECOMMENDATIONS FROM PREVIOUS
EXAMINATIONS AND NOTABLE IMPROVEMENTS OVER THE COURSE
OF THE EXAMINATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
IV. SUMMARY OF ESSENTIAL FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
V. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
E X A M S U M M A R Y R E P O R T | i
I. Regulatory and NRSRO
Overview
T
his report (“Report”) summarizes the
examinations conducted by staff from the
U.S. Securities and Exchange Commission
(the “Staff”) under Section 15E(p)(3) of
the Securities Exchange Act of 1934 (“Exchange
Act”).1 This is a report of the Staff and, as such,
reflects solely the Staff’s views. The U.S. Securities
and Exchange Commission (“Commission” or
“SEC”) is making this Staff Report public as
required by Section 15E(p)(3)(C) of the
Exchange Act.
A. STATUTORY FRAMEWORK
AND RULES
Section 15E of the Exchange Act (“Section 15E”)
and Exchange Act Rules 17g-1 through
17g-10 govern the registration and oversight
program for credit rating agencies that are regis-
tered with the Commission as nationally recognized
statistical rating organizations (“NRSROs”). This
regulatory regime was established by the Credit
Rating Agency Reform Act of 2006 (the “Rating
Agency Act”)2 and amended by the Dodd-Frank
Wall Street Reform and Consumer Protection Act
of 2010 (the “Dodd-Frank Act”).3
The Dodd-Frank Act mandated the creation of
the Office of Credit Ratings (“OCR”), which is
responsible for oversight of credit rating agencies
registered with the Commission as NRSROs.
Pursuant to the Commission’s regulatory regime for
NRSROs, an NRSRO is required to, among other
things:
§ File with the Commission annual certifications
of its Form NRSRO registrations,4 promptly
update its filing in certain circumstances,5 and
make its current Form NRSRO filing and most
of its current Form NRSRO Exhibits available
on its public website.6
§ Disclose certain information, including
information concerning the NRSRO’s
performance measurement statistics and its
procedures and methodologies to determine
ratings.7
1 Exchange Act Section 15E(p)(3)(C). Unless otherwise noted, all Section and Rule references in this report are to the Exchange Act
and rules under the Exchange Act.
2 Credit Rating Agency Reform Act of 2006, Pub. L. No. 109-291, 120 Stat. 1327 (2006).
3 The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 932, 124 Stat. 1376, 1872-83 (2010).
4 Exchange Act Section 15E(b)(2) and Exchange Act Rule 17g-1(f ).
5 Exchange Act Section 15E(b)(1) and Exchange Act Rule 17g-1(e).
6 Exchange Act Section 15E(a)(3) and Exchange Act Rule 17g-1(i).
7 Exchange Act Section 15E(a)(1)(B)(i) and Exchange Act Section 15E(a)(1)(B)(ii).
E X A M S U M M A R Y R E P O R T | 1
§ Establish, maintain, enforce, and document an
effective internal control structure governing the
implementation of and adherence to policies,
procedures, and methodologies for determining
credit ratings,8 and retain records of its internal
control structure.9
§ Consider certain factors with respect to its
establishment, maintenance, enforcement, and
documentation of an effective internal control
structure.10
§ File an unaudited report containing an
assessment by management of the effectiveness
during the fiscal year of the NRSRO’s internal
control structure governing the implementation
of and adherence to policies, procedures, and
methodologies for determining credit ratings.11
The report must be accompanied by a signed
statement by the NRSRO’s chief executive officer
or an individual performing similar functions.12
§ Establish, maintain, enforce, and document
policies and procedures reasonably designed to
achieve certain objectives concerning its
development and application of, and disclosures
related to, methodologies and models.13
§ Establish, maintain, enforce, and document
policies and procedures that are reasonably
designed to: assess the probability that an issuer
of a security or money market instrument will
default or fail to make required payments to
investors,14 and ensure that it applies any rating
symbol, number, or score in a manner that is
consistent for all types of obligors, securities,
and money market instruments for which the
symbol, number, or score is used.15
§ Publish an information disclosure form when
taking a rating action with respect to a rating
assigned to an obligor, security, or money-
market instrument in a class for which it is
registered as an NRSRO.16 The information
form must disclose certain information with
respect to the particular rating action.17
In addition, the NRSRO must attach to
the information disclosure form a signed
statement by a person within the NRSRO with
responsibility for the rating action.18
8 Exchange Act Section 15E(c)(3)(A).
9 Exchange Act Rule 17g-2(b)(12).
10 See, e.g., Exchange Act Rule 17g-8(d)(1) through (4).
11 Exchange Act Rule 17g-3(a)(7)(i).
12 Exchange Act Rule 17g-3(b)(2).
13 See, e.g., Exchange Act Rule 17g-8(a)(2) through (5).
14 Exchange Act Rule 17g-8(b)(1).
15 Exchange Act Rule 17g-8(b)(3).
16 Exchange Act Rule 17g-7(a). Rule 17g-7(a) defines rating action to include an expected or preliminary rating, an initial rating,
an upgrade or downgrade of an existing rating (including a downgrade to, or assignment of, default), and an affirmation or
withdrawal of an existing rating if the affirmation or withdrawal is the result of the NRSRO’s review of the rating using applicable
procedures and methodologies for determining credit ratings. Pursuant to Rule 17g-7(a)(3), an NRSRO is exempt from publishing
an information disclosure form for a particular rating if: (i) the rated obligor or issuer of the rated security or money market
instrument is not a U.S. person; and (ii) the 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; or (B) with respect to a rated security or money market
instrument, all offers and sales by any issuer, sponsor, or underwriter linked to a security or money market instrument will occur
outside the United States.
17 Exchange Act Rule 17g-7(a)(1)(ii)(A)-(N) specifies the information that must be disclosed in the information disclosure form.
These required disclosures include: the version of the procedure or methodology used to determine the credit rating; disclosures
concerning the uncertainty of the rating, including regarding the reliability, accuracy, quality, and accessibility of data related to
the rating; a statement containing an overall assessment of the quality of information available and considered in determining the
credit rating for the obligor, security, or money market instrument; and information on the sensitivity of the rating to assumptions
made by the NRSRO. In addition, an NRSRO must attach to the information disclosure form any executed Form ABS Due
Diligence-15E containing information about the security or money market instrument subject to the rating action that is received
by the NRSRO or obtained by the NRSRO through a Rule 17g-5(a)(3) website.
18 Exchange Act Rule 17g-7(a)(1)(iii).
2 | O F F I C E O F C R E D I T R A T I N G S
https://action.18
https://action.17
https://NRSRO.16
https://models.13
https://functions.12
https://ratings.11
https://structure.10
§ Make and retain, or retain, certain records,
including a record documenting its established
procedures and methodologies used to
determine credit ratings19 and records related
to its ratings.20 An NRSRO must promptly
furnish to the Commission or its representatives
copies of required records, including English
translations of those records, upon request.21
§ Establish, maintain, and enforce written policies
and procedures reasonably designed to prevent
the misuse of material non-public information
(“MNPI”), including the inappropriate
dissemination of MNPI both within and outside
the NRSRO, the inappropriate trading of securities
using MNPI by a person within the NRSRO, and
the inappropriate dissemination of pending credit
rating actions within and outside the NRSRO
before issuing the rating on the Internet or through
another readily accessible means.22
§ Establish, maintain, and enforce written policies
and procedures reasonably designed to address
and manage conflicts of interest.23 Certain
conflicts of interest are expressly prohibited,24 and
for other types of conflicts of interest, the NRSRO
must disclose the conflicts and have policies and
procedures in place to manage them.25
§ Refrain from engaging in specified unfair,
coercive, or abusive practices.26
§ Provide information on whether it has in effect a
code of ethics, and if not, the reasons it does not
have a code of ethics.27
§ Establish procedures for the receipt, retention,
and treatment of complaints regarding credit
ratings, models, methodologies, and compliance
with the securities laws and its policies and
procedures developed under this regulatory
regime, and of confidential, anonymous
complaints.28
§ Designate a compliance officer (the “DCO”)
responsible for administering policies and
procedures related to MNPI and conflicts
of interest, ensuring compliance with the
securities laws and regulations, and establishing
procedures for handling complaints by
employees or users of credit ratings.29 The DCO
must submit an annual report to the NRSRO
on the compliance of the NRSRO with the
securities laws and the NRSRO’s policies and
procedures, and the NRSRO must file the report
with the Commission.30
19 Exchange Act Rule 17g-2(a)(6).
20 Exchange Act Rule 17g-2(a)(2)(i), (ii), and (iii); Exchange Act Rule 17g-2(b)(2) and (b)(7). The records that an NRSRO must make
and retain, or retain, with respect to its ratings include the identity of certain persons who participated in determining or approving
the rating, records used to form the basis of a rating, external and internal communications received or sent by the NRSRO and
its employees related to a rating, and for ABS ratings, a record of the rationale for any material difference between the final rating
assigned and the rating implied by a quantitative model that was a substantial component in determining the rating.
21 Exchange Act Section 15E(a) and (b) and Exchange Act Rule 17g-2(f ).
22 Exchange Act Section 15E(g) and Exchange Act Rule 17g-4.
23 Exchange Act Section 15E(h) and Exchange Act Rule 17g-5.
24 Exchange Act Rule 17g-5(c).
25 Exchange Act Rule 17g-5(a)(1) and (a)(2); Exchange Act Rule 17g-5(b). Moreover, Exchange Act Rule 17g-5(a)(3) prohibits an
NRSRO from having a conflict of interest related to a rating for a security or money market instrument issued by an asset pool or
as part of any ABS transaction unless the NRSRO, among other things, maintains and provides access to a password-protected
Internet Web site containing a list of each such security or money market instrument for which it is currently in the process of
determining an initial credit rating, and obtains certain written representations from the issuer, sponsor, or underwriter of each
such security or money market instrument.
26 Exchange Act Rule 17g-6.
27 Exchange Act Section 15E(a)(1)(B)(v).
28 Exchange Act Section 15E(j)(3).
29 Exchange Act Section 15E(j)(1) and (3).
30 Exchange Act Section 15E(j)(5).
E X A M S U M M A R Y R E P O R T | 3
https://Commission.30
https://ratings.29
https://complaints.28
https://ethics.27
https://practices.26
https://interest.23
https://means.22
https://request.21
https://ratings.20
§ Have a board of directors or similar governing
body (collectively, the “Board”), certain of
whose members must be independent from
the NRSRO.31 An NRSRO’s Board, or
members thereof, are responsible for exercising
oversight of specified subjects related to the
NRSRO’s rating business and for approving
the procedures and methodologies, including
qualitative and quantitative data and models,
that the NRSRO uses to determine ratings.32
§ Establish, maintain, enforce, and document
standards of training, experience, and
competence for the individuals it employs to
participate in the determination of credit ratings
that are reasonably designed to achieve the
objective that the NRSRO produces accurate
credit ratings, and retain a record of these
standards.33
§ Establish policies and procedures regarding
post-employment activities of certain former
personnel.34
B. REGISTERED NRSROs
In 2007, the Commission began granting registra-
tions to credit rating agencies that applied to be
registered as an NRSRO. Credit rating agencies
seeking to register with the Commission as an
NRSRO must file a completed application on Form
NRSRO, including related Exhibits.35 A credit
rating agency may apply to be registered with
respect to one or more of the following five classes
of credit ratings:
i. Financial institutions, brokers, or dealers
(“financial institutions”);
ii. Insurance companies;
iii. Corporate issuers;
iv. Issuers of asset-backed securities (“ABS”); and
v. Issuers of government securities, municipal
securities, or securities issued by a foreign
government (“government securities”).36
31 Exchange Act Section 15E(t)(2).
32 Exchange Act Section 15E(t)(3) and Exchange Act Rule 17g-8(a)(1).
33 Exchange Act Rule 17g-9.
34 Exchange Act Section 15E(h)(4) and (5); Exchange Act Rule 17g-8(c).
35 Exchange Act Section 15E(a) and Exchange Act Rule 17g-1(a) and (b).
36 Exchange Act Section 3(a)(62)(A).
4 | O F F I C E O F C R E D I T R A T I N G S
https://securities�).36
https://Exhibits.35
https://personnel.34
https://standards.33
https://ratings.32
https://NRSRO.31
NRSRO Date of Initial Registration
A.M. Best Rating Services, Inc. (“AMB”) September 24, 2007
DBRS, Inc. (“DBRS”)37 September 24, 2007
Egan-Jones Ratings Company (“EJR”) December 21, 2007
Fitch Ratings, Inc. (“Fitch”) September 24, 2007
HR Ratings de México, S.A. de C.V. (“HR”) November 5, 2012
Japan Credit Rating Agency, Ltd. (“JCR”) September 24, 2007
Kroll Bond Rating Agency, Inc. (“KBRA”) February 11, 2008
Moody’s Investors Service, Inc. (“MIS”) September 24, 2007
S&P Global Ratings (“S&P”) September 24, 2007
The nine credit rating agencies registered as
NRSROs as of November 30, 2020, and dates of
their initial registrations, are listed above. More
information on NRSRO registration applications
and the state of competition, transparency, and
conflicts of interest among NRSROs is included
in the Annual Report to Congress under Section 6
of the Rating Agency Act.38
For purposes of this Report only, we refer to Fitch,
MIS, and S&P as “larger NRSROs” and the six
other NRSROs (AMB, DBRS, EJR, HR, JCR,
and KBRA) as “smaller NRSROs.”
37 On July 2, 2019, Morningstar, Inc., the parent company of Morningstar Credit Ratings, LLC (“MCR”), completed an acquisition
of DBRS. On November 15, 2019, MCR furnished a notice of withdrawal from registration to the Commission (which became
effective on December 30, 2019), and DBRS filed an update to Form NRSRO to add MCR as a credit rating affiliate. On
November 23, 2020, DBRS filed an update to Form NRSRO to remove MCR as a credit rating affiliate.
38 The annual reports can be found under “Summary Examination Reports” in the “Reports and Studies” section of the OCR
webpage, available at https://www.sec.gov/ocr/ocr-reports-and-studies.html.
E X A M S U M M A R Y R E P O R T | 5
https://www.sec.gov/ocr/ocr-reports-and-studies.html
II. Office of Credit Ratings and
Examination Overview
A. EXAMINATIONS UNDER SECTION
15E(p)(3)
Generally, the purpose of NRSRO examinations
is to:
§ Monitor compliance with applicable federal
securities laws and rules;
§ Identify conduct, insufficient policies and
procedures, or ineffective internal controls that
potentially violate such laws and rules; and
§ Encourage remedial action.
To facilitate such remedial action, the Staff sends
each NRSRO an examination summary letter
that identifies and explains its findings related
to that NRSRO and recommends remedial
measures. Examinations also serve to inform
the Commission and the NRSROs’ compliance
personnel of regulatory obligations and noteworthy
industry developments. When appropriate, OCR
staff may refer potential violations of the federal
securities laws to the Commission’s Division of
Enforcement for further investigation. The Division
of Enforcement investigates potential violations of
the federal securities laws and litigates the Commis-
sion’s enforcement actions.
Section 15E(p)(3)(B) provides that each NRSRO
examination shall include a review of the following
eight topic areas (“Section 15E Review Areas”):
i. Whether the NRSRO conducts business in accor-
dance with its policies, procedures, and rating
methodologies;
ii. Management of conflicts of interest by the
NRSRO;
iii. Implementation of ethics policies by the NRSRO;
iv. Internal supervisory controls of the NRSRO;
v. Governance of the NRSRO;
vi. Activities of the DCO of the NRSRO;
vii. Processing of complaints by the NRSRO; and
viii. Policies of the NRSRO governing the post-
employment activities of its former staff.
Section 15E(p)(3)(C) requires the Commission
to make available to the public an annual report
summarizing:
i. Essential findings of all Section 15E
examinations, as deemed appropriate by
the Commission;
ii. NRSROs’ responses to any material
regulatory deficiencies identified by the
Commission; and
iii. Whether the NRSROs have appropriately
addressed the recommendations of the
Commission contained in previous annual
reports on examinations.
6 | O F F I C E O F C R E D I T R A T I N G S
B. EXAMINATION OVERVIEW
The 2020 Section 15E examinations generally
focused on the NRSROs’ activities for the period
covering January 1, 2019 through December 31,
2019 (the “Review Period”). Examinations also
reviewed certain activities or credit rating actions
from outside the Review Period.39
The 2020 Section 15E examinations reviewed the
Section 15E Review Areas and examined each
NRSRO’s adherence to Section 15E and Rules
17g-1 through 17g-10. Each of the NRSRO
examinations encompassed all of the statutorily
required Section 15E Review Areas. Within each
of the Section 15E Review Areas, the Staff deter-
mined areas of emphasis and issues of focus for
each NRSRO based upon an NRSRO-specific
risk assessment performed by the Staff, while also
considering how to limit the amount of personal
data collected in the examination process. The
NRSRO-specific risk assessments considered a
number of factors, including, but not limited to:
§ NRSRO’s rating activities and operations;
§ Staff’s findings, recommendations, and general
observations from prior examinations;
§ Impact of a potential or actual internal control
or compliance failure by the NRSRO;
§ Recent industry developments affecting
NRSROs and the asset classes in which the
NRSRO is registered;
§ NRSRO’s filings with the Commission and
public disclosures;
§ NRSRO’s self-identified weaknesses; and
§ Relevant TCRs received by the Commission.
The 2020 Section 15E examinations also focused
on certain subjects and activities that the Staff,
through its general risk assessment process,
identified as relevant to certain NRSROs, as
summarized below.
§ NRSRO Response to COVID-19: The Staff
examined the effects of the pandemic on credit
ratings and NRSROs. Specifically, the Staff
reviewed: NRSRO methodology changes;
changes to macro-economic forecasts and
assumptions, including meeting with NRSRO
senior economists; and business continuity plans
and operational updates, including workflow
decisions that NRSROs made. The Staff also
examined certain NRSRO methodology
deviations, including adherence to relevant
policies and procedures, and rating files for
NRSRO activities with respect to certain asset
classes and rating changes, including rating
downgrades from investment-grade to sub
investment-grade, also known as “fallen angels.”
§ ESG Factors and Products: Certain NRSROs
consider environmental, social, and governance
(“ESG”) factors in their credit rating analysis.
The Staff examined whether such NRSROs
incorporated ESG factors into methodologies or
took any rating actions specifically on account
of ESG factors, as well as sales and marketing
practices and conflicts of interests that may arise
in connection with the NRSROs’ ESG-related
activities.
§ Collateralized Loan Obligations (“CLOs”): The
Staff examined certain NRSRO rating files of
CLOs backed by broadly syndicated corporate
loans and by loans to middle market companies
for, among other things, adherence to relevant
rating policies, procedures, and methodologies.
39 For example, the Staff may review information relating to tips, complaints, and referrals (“TCRs”) in a current examination, even
if the referenced activities occurred outside of the Review Period.
E X A M S U M M A R Y R E P O R T | 7
https://Period.39
§ Conflicts Associated with Investor-Paid
Ratings: The Staff reviewed the scope of
private and investor-paid ratings activity at
certain NRSROs. As appropriate, the Staff also
examined for potential conflicts of interests
created as a result of investor-paid rating activity
at such NRSROs.
§ LIBOR Phase-Out: The Staff reviewed
commentaries from NRSROs, and gathered
information on regular calls with NRSROs,
related to the pending LIBOR phase-out,
including whether assumptions disclosed by
NRSROs have changed and whether NRSROs
have adjusted any relevant policies, procedures,
and methodologies. The Staff also reviewed
NRSRO surveillance processes in light of the
LIBOR transition.
§ Low-Investment Grade-Rated Corporates: The
Staff examined certain NRSRO rating files
for low-investment grade-rated corporates for,
among other things, adherence to relevant rating
policies, procedures, and methodologies.
§ Potential Marketing Conflicts: The Staff
examined relevant rating files and policies and
procedures of NRSROs, including policies
and procedures on the separation of sales
and marketing from analytics. The Staff also
reviewed internal compliance reports and had
relevant discussions with compliance staff.
8 | O F F I C E O F C R E D I T R A T I N G S
III. Summary of Responses to
Recommendations From Previous
Examinations and Notable Improvements
Over the Course of the Examinations
A. RESPONSES TO
RECOMMENDATIONS FROM THE
2019 SECTION 15E EXAMINATIONS
The Staff’s determination that an NRSRO
appropriately addressed a recommendation does
not constitute its endorsement of that NRSRO
or its policies, procedures, internal controls, or
operations. In a future examination, the Staff may
reevaluate the NRSRO’s response to recommenda-
tions that it previously deemed to be appropriately
addressed by, for example, assessing whether the
NRSRO fully implemented remedial measures
and whether those remedial measures appear
to be effective. The Staff may also review and
make recommendations concerning the NRSRO’s
policies, procedures, internal controls, or opera-
tions related to the general subject matter of a
recommendation that it previously deemed to be
appropriately addressed. The determination of
whether an NRSRO appropriately addressed a
recommendation reflects solely the Staff’s view
and does not necessarily reflect the views of the
Commission.
The Staff’s assessment of whether an NRSRO
has appropriately addressed a recommendation
depends on the specific facts and circumstances,
including, but not limited to, the promptness of the
NRSRO’s response, the severity of the conduct at
issue, and whether the remedial action undertaken
by the NRSRO is expected to fully resolve the Staff’s
concerns.
To assess whether NRSROs appropriately
addressed findings from the 2019 Section 15E
examinations, the Staff reviewed each NRSRO’s
written response to the Staff’s examination
summary letter describing its planned remedial
measures, and participated in calls with each
NRSRO to discuss its written response.
During the 2020 Section 15E examinations, the
Staff assessed each NRSRO’s progress in imple-
menting remedial measures such as establishing
new or enhancing existing policies or procedures
or internal controls, or adding personnel and other
resources in areas such as compliance, information
technology, or analytics. In assessing the effec-
tiveness of NRSROs’ remedial measures, the Staff
is cognizant that NRSROs may not be able to
fully implement remedial measures before the Staff
commences its Section 15E examinations for the
subsequent year, and the Staff may not be able to
fully assess the effectiveness of these measures in its
Section 15E examinations for that subsequent year.
Based on the Staff’s 2020 Section 15E examinations,
the Staff has determined that all recommenda-
tions from the 2019 Section 15E examinations
have been appropriately addressed. In general,
NRSROs addressed 2019 recommendations by
taking remedial measures such as adopting new or
enhancing existing policies or procedures, internal
controls, or systems and processes, and by adding
personnel and other resources.
E X A M S U M M A R Y R E P O R T | 9
B. NOTABLE IMPROVEMENTS OVER
THE COURSE OF THE EXAMINATIONS
Since they were first conducted in 2010, the Staff’s
Section 15E examinations have identified certain
improvements at one or more of the NRSROs.
Generally, NRSRO personnel at all levels of
seniority and responsibility have continued to
display greater awareness of applicable laws and
their obligations as regulated entities. Moreover, the
Staff’s summary reports covering the Section 15E
examinations since 2012 mention specific improve-
ments by certain NRSROs, and the NRSROs
generally have maintained or augmented those
improvements by further enhancing the measures
undertaken and embedding them in their opera-
tions and culture.
During the 2020 Section 15E examinations, the Staff
observed that most NRSROs have continued to
refine, as needed, and maintain, as appropriate, their
policies, procedures, and controls related to NRSRO
rules and the Staff’s recommendations from Section
15E examinations. The Staff also observed that
generally, most NRSROs’ personnel have continued
to gain and display a better understanding of these
rules and the NRSROs’ policies, procedures, and
controls for implementing these rules.
Additionally, the Staff observed that, in general,
most NRSROs continue to improve their
compliance monitoring and internal audit
functions. In recent years, and continuing in the
2020 Section 15E examinations, the Staff has
observed that this improvement has resulted in
a number of NRSROs becoming proactive in
reporting to the Staff issues or potential issues
of non-compliance with legal requirements or
weaknesses in policies and procedures that could
potentially lead to such non-compliance.
10 | O F F I C E O F C R E D I T R A T I N G S
IV. Summary of
Essential Findings
Section 15E(p)(3)(C)(i) requires this Report to
contain a summary of the essential findings of the
annual examinations, as deemed appropriate by
the Commission.
For purposes of this Report, “essential findings” are
Staff findings from the 2020 Section 15E examina-
tions and were included with one or more recom-
mendations in an examination summary letter sent
to an NRSRO. “Essential findings” do not include,
for example, the Staff’s general observations. In this
Report, essential findings are organized by the appli-
cable Section 15E Review Areas. This Report uses the
phrases “significant,” “numerous,” “several,”and
“some” to describe and distinguish the frequency of
conduct or instances underlying certain findings. The
particular phrase used generally reflects the number
of instances during the Review Period, recognizing
that the number of instances may be reflective of a
test sample and not necessarily an NRSRO’s compre-
hensive activities during the Review Period. The
Commission has not determined whether any finding
discussed in this Report constitutes a “material
regulatory deficiency,”40 but may do so in the future.
In the following Sections of this Report, the
numbered headers identify in general terms the Staff’s
findings concerning one or more NRSROs, and
the paragraph(s) following each numbered header
provide additional detail concerning these findings
and the Staff’s corresponding recommendations.
A. REVIEW AREA: ADHERENCE
TO POLICIES, PROCEDURES, AND
METHODOLOGIES
The Staff reviewed a sample of rating actions of
each NRSRO in certain asset classes for which it
is registered and for certain issuers and obligors
to determine whether the NRSRO operated in
accordance with its policies, procedures, and
rating methodologies. The Staff also reviewed a
sample of rating files and documentation of other
ratings-related activities to evaluate whether each
NRSRO adhered to recordkeeping requirements.
To select rating actions and rating files to review,
the Staff used a risk-based sampling process that is
consistent with its overall risk assessment approach
described in this Report. The Staff also considered
factors including, but not limited to, the size of
the rated asset class in the financial markets and
the NRSRO’s business, the NRSRO’s activity in
the rated asset class, the likelihood of impact on
investors if a rating was not determined in accor-
dance with the NRSRO’s methodologies and proce-
dures, news reports and developments concerning
the NRSROs or particular asset classes, TCRs, and
information the Staff learned during examinations.
The Staff’s essential findings regarding NRSROs
conducting ratings-related activities in accordance
with their policies, procedures, and rating method-
ologies are discussed in this Section. The Staff’s
40 Exchange Act Section 15E(p)(3)(C)(ii).
E X A M S U M M A R Y R E P O R T | 11
essential findings regarding the NRSROs’
adherence to policies and procedures related to
other Section 15E Review Areas are generally
discussed in later Sections of this Report. Instances
where policies, procedures, and rating method-
ologies need to be established or improved are also
generally discussed in later Sections of this Report.
The Staff’s essential findings regarding whether
each NRSRO has conducted its business in accor-
dance with its policies, procedures, and method-
ologies are as follows:
1. An NRSRO did not appear to adhere
to its policies and procedures related to
analysts receiving gifts.
A smaller NRSRO received a prohibited gift but
did not send a notification regarding the prohibited
nature of the gift to the sender of the gift, as the
NRSRO’s policies and procedures require. The
Staff recommended that the NRSRO adhere to
such policies and procedures.
2. An NRSRO did not appear to adhere to
its policies and procedures related to
processing and considering comments
when revising rating methodologies.
A larger NRSRO overlooked numerous external
written comments that it received in response to
published requests for comment on a materially
changed methodology and did not consider those
comments prior to implementing the methodology,
as required by its policies and procedures. The Staff
recommended that the NRSRO enhance its internal
controls to ensure that it adheres to its policies
and procedures for processing and considering
comments when revising rating methodologies.
3. Certain NRSROs did not appear to adhere
to their policies and procedures related to
documentation required in rating files.
A smaller NRSRO’s documentation in its rating
files pertaining to conflict of interest checks did
not appear to adhere to the requirements in the
NRSRO’s relevant policies and procedures. The
Staff recommended that the NRSRO adhere to its
policies and procedures for documenting conflict of
interest checks in rating files.
A smaller NRSRO did not retain exception
memoranda used for some credit ratings in the
relevant rating file, as the NRSRO’s policies and
procedures require. The Staff recommended that
the NRSRO enhance its internal controls, including
policies and procedures, with respect to retaining
and producing required rating file documents.
4. An NRSRO did not appear to comply with
the Rule 17g-7(a)(1)(ii)(J)(1) requirements
or adhere to its policies and procedures
related to the disclosure of an unsolicited
credit rating.
A larger NRSRO did not disclose that the NRSRO
was not paid to determine an unsolicited rating in
the related information disclosure form as required
by Rule 17g-7(a)(1)(ii)(J)(1) and the NRSRO’s
policies and procedures. The NRSRO also did
not disclose on its website that such rating was
unsolicited as required by the NRSRO’s policies
and procedures. The Staff recommended that the
NRSRO comply with Rule 17g-7(a)(1)(ii)(J)(1) and
adhere to its policies and procedures related to the
disclosure of unsolicited credit ratings.
12 | O F F I C E O F C R E D I T R A T I N G S
5. An NRSRO did not appear to adhere to
its policies and procedures related to
documenting internal investigations.
A larger NRSRO’s outside counsel conducted an
investigation in response to an allegation from
a former employee of the NRSRO, but did not
prepare a final written report as the NRSRO’s
policies and procedures require. Instead, outside
counsel delivered an oral report to the NRSRO.
The Staff recommended that the NRSRO adhere to
its policies and procedures related to documenting
internal investigations.
6. An NRSRO did not appear to make and
retain accurate records or adhere to
its policies and procedures related to
unsolicited credit ratings.
A smaller NRSRO took an unsolicited rating
action, but did not appear to adhere to its policies
and procedures for such action. Contrary to the
NRSRO’s unsolicited credit ratings policies and
procedures, the rating committee minutes errone-
ously indicated that the rating was solicited, and
the rating press release erroneously stated that
the rated entity participated in the rating process
and that the NRSRO had access to the entity’s
accounts and other internal documents. The Staff
recommended that the NRSRO make and retain
accurate records and adhere to its unsolicited
credit ratings policies and procedures to ensure
that it correctly discloses the solicitation status
and level of the issuer’s participation.
7. An NRSRO did not appear to enforce its
policies and procedures when providing
a draft presale report to an issuer.
A smaller NRSRO’s policies and procedures
provided for release of preliminary credit ratings
to an issuer in a presale report, together with
certain pre-publication information, after a
primary analyst presents a recommendation to
the relevant rating committee. However, the
Staff found that a primary analyst sent to an
issuer preliminary rating recommendations,
together with an incomplete notice, in a draft
presale report on the day before the relevant
rating committee. The Staff recommended that
the NRSRO enforce, and ensure that employees
adhere to, the NRSRO’s policies and procedures
when sending presale reports to an issuer.
8. An NRSRO did not appear to adhere to its
policies and procedures, or the rule require-
ments, related to the NRSRO promptly
publishing on its website notice of a
significant error identified in its credit rating
procedures or methodologies that may
result in a change to current credit ratings.
A smaller NRSRO identified a calculation error in
a model that led the NRSRO to review a significant
number of outstanding ratings that the error
potentially impacted. The NRSRO did not publish
notice of the existence of the error on its website as
required by Rule 17g-8(a)(4)(ii) and the NRSRO’s
policies and procedures. The Staff recommended
that the NRSRO adhere to its policies and proce-
dures regarding Rule 17g-8(a)(4)(ii) and promptly
publish notice of the existence of a significant error
identified in a credit rating procedure or method-
ology that may result in a change to current credit
ratings, in accordance with Rule 17g-8(a)(4)(ii).
9. An NRSRO did not appear to adhere to
its policies and procedures regarding
documentation evidencing the delivery
of indicative ratings.
A smaller NRSRO’s analysts delivered an oral indic-
ative credit rating to a client, which the NRSRO did
not document in the relevant rating file, in violation
of the NRSRO’s policies and procedures. The Staff
recommended that the NRSRO retain documen-
tation evidencing the issuance of indicative ratings,
including oral communication, in accordance with
its policies and procedures.
E X A M S U M M A R Y R E P O R T | 13
10. An NRSRO’s adherence to its policies
and procedures appeared to have
weaknesses relating to Rule 17g-9(a) and
the periodic testing requirements in Rule
17g-9(c)(1).
A smaller NRSRO did not appear to administer
compliance testing to employees in several instances,
or appropriate remedial training to an employee
who failed a test, as the NRSRO’s policies and
procedures require. The Staff recommended that
the NRSRO adhere to its policies and procedures
adopted to comply with the requirements in Rule
17g-9(a) and Rule 17g-9(c)(1).
B. REVIEW AREA: MANAGEMENT OF
CONFLICTS OF INTEREST
The Staff’s essential findings regarding the
management of conflicts of interest are as follows:
1. An NRSRO’s identified conflicts of interest
relating to the issuance of credit ratings
appeared to be inconsistent with the
NRSRO’s policies and procedures to
address and manage conflicts of interest.
A smaller NRSRO identified a certain conflict of
interest relating to the issuance of credit ratings in
Form NRSRO Exhibit 6 and provided policies and
procedures to address and manage that conflict of
interest in Form NRSRO Exhibit 7. However, such
policies and procedures did not apply with respect
to private credit ratings. The Staff recommended
that the NRSRO identify conflicts of interest
relating to the issuance of private credit ratings
consistently with the NRSRO’s policies and proce-
dures to address and manage conflicts of interest.
2. Certain NRSROs’ policies and procedures
did not appear to be reasonably designed
to address prohibited conflicts of interest.
A smaller NRSRO’s policies and procedures
appeared to permit the NRSRO to grant certain
exceptions that would allow NRSRO personnel to
engage in activities that Rule 17g-5(c)(7) and Rule
17g-5(c)(8) prohibit. The Staff recommended that
the NRSRO revise its policies and procedures to
eliminate such weakness.
A smaller NRSRO, despite the specified prohibition
of Rule 17g-5(c)(8), had a person who participated
in multiple capacities in determining credit ratings
and developing and approving procedures and
methodologies used for determining credit ratings.
It also appeared that the person’s involvement in
rating activities was accompanied by sales and
marketing activities. The Staff recommended that
the NRSRO establish, maintain, enforce, and
document policies and procedures reasonably
designed to ensure compliance with, and effective
internal controls to identify and prevent, the conflict
of interest described in Rule 17g-5(c)(8).
3. An NRSRO did not appear to enforce its
policies and procedures to address and
manage the conflict of interest set forth
in Rule 17g-5(b)(6), as required by Rule
17g-5(a).
A smaller NRSRO had, in some instances, missing
or inconsistent documentation related to personal
financial account statements for persons associated
with the NRSRO, as required by the NRSRO’s
policies and procedures. The Staff recommended
that the NRSRO enforce its policies and procedures
to address and manage the conflict of interest set
forth in Rule 17g-5(b)(6).
14 | O F F I C E O F C R E D I T R A T I N G S
4. An NRSRO’s policies and procedures did
not appear to be reasonably designed
to detect and prevent the prohibited
conflicts of interest identified in Rule
17g-5(c)(6) and Rule 17g-5(c)(8).
A smaller NRSRO’s policies and procedures
appeared to have unclear and inconsistent proce-
dures for addressing circumstances in which
analysts are exposed to fee information, and, in
fact, analysts were exposed to fee information in
several instances. The Staff recommended that the
NRSRO ensure that its policies and procedures
are reasonably designed to detect and prevent the
prohibited conflicts of interest identified in Rule
17g-5(c)(6) and Rule 17g-5(c)(8).
C. REVIEW AREA: IMPLEMENTATION
OF ETHICS POLICIES
Each NRSRO has implemented written ethics
policies and procedures. The Staff reviewed each
NRSRO’s ethics policies and procedures. Much
of the content of these policies and procedures
addresses other related Review Areas. The Staff did
not make any findings and recommendations based
solely on an NRSRO’s implementation of ethics
policies and procedures.
D. REVIEW AREA: INTERNAL
SUPERVISORY CONTROLS
The Staff reviewed each NRSRO’s overall control
structure, including the internal control structure
related to determining credit ratings.
The Staff’s essential findings regarding internal
supervisory controls are as follows:
1. An NRSRO did not appear to have
effective internal controls related to its
practice of allowing an analyst to inform
a client of the analyst’s rating recom-
mendation before a rating committee has
determined the client’s rating.
A smaller NRSRO’s analysts regularly informed
clients of a rating recommendation before
the proposed rating was presented to a rating
committee, and the NRSRO’s policies and proce-
dures did not include a requirement for the analysts
to inform the clients that the recommendation is
subject to the outcome of the rating committee
process and determination, which would be
consistent with the NRSRO’s policies and proce-
dures. The Staff recommended that the NRSRO
strengthen its policies and procedures governing its
practice of allowing an analyst to inform a client
of the analyst’s rating recommendation prior to
determination of the rating by a committee.
2. An NRSRO’s standards of training,
experience, and competence for credit
analysts did not appear to include a Rule
17g-9(c) requirement.
A smaller NRSRO’s policies and procedures that
establish its standards of training, experience, and
competence for credit analysts did not require
that at least one individual with an appropriate
level of experience in performing credit analysis,
but not less than three years, participates in the
determination of a credit rating as Rule 17g-9(c)
(2) requires. The Staff recommended that the
NRSRO’s policies and procedures include the
requirement specified in Rule 17g-9(c)(2).
3. An NRSRO did not appear to verify when
certain credit ratings should be discon-
tinued and did not maintain accurate
ratings per its policies and procedures.
A larger NRSRO prematurely discontinued certain
ratings because it was improperly informed that
the entire issuances had been redeemed or repaid.
In fact, the issuances had only been partially
redeemed or repaid. The NRSRO did not always
reinstate the improperly discontinued ratings in a
timely manner, and the reinstatement typically only
E X A M S U M M A R Y R E P O R T | 15
followed an inquiry from an outside party. The
NRSRO also may have improperly discontinued
additional ratings. The Staff recommended that the
NRSRO improve certain internal controls to avoid
the improper discontinuance of credit ratings and
to promptly detect ratings that were erroneously
discontinued.
4. An NRSRO did not appear to maintain
adequate internal controls within a certain
ratings group to detect long-standing
errors and maintain accurate credit ratings.
A larger NRSRO made several errors relating to
applying incorrect criteria for certain credit ratings.
The NRSRO did not detect the errors for several
years before correcting them, resulting in credit
ratings outstanding that did not accurately reflect
the credit risk during that time. Correcting the
errors resulted in one rating downgrade and some
rating upgrades. The Staff recommended that the
NRSRO enhance its internal control structure to
ensure that it accurately determines and maintains
credit ratings, including controls designed to identify
and correct inaccurate credit ratings, in accordance
with its policies, procedures, and methodologies.
5. An NRSRO did not appear to have
policies and procedures that were
reasonably designed with respect to a
prohibited conflict of interest.
A smaller NRSRO did not have reasonably
designed policies and procedures to systematically
determine whether entities that it rates are persons
associated with the NRSRO. The Staff noted facts
and circumstances that raised concerns about a
potential control relationship between a particular
rated entity and the NRSRO, and the NRSRO’s
policies and procedures did not consider that entity’s
potential status as a person associated with the
NRSRO. The Staff recommended that the NRSRO
ensure that it does not issue or maintain ratings
subject to the Rule 17g-5(c)(3) prohibited conflict
of interest and conduct an analysis to ensure that its
rating on such entity, or any other related entity, is
not subject to that conflict of interest.
6. Certain NRSROs did not appear to
comply with Rule 17g-7(a) information
disclosure form requirements when taking
certain credit rating actions.
A larger NRSRO did not require the publication of
an information disclosure form for all rating actions
as Rule 17g-7(a) requires. The NRSRO’s policies
and procedures did not require the production of
such form upon the issuance of a private rating,
and the NRSRO did not require the publication of
the form for certain other ratings actions. The Staff
recommended that the NRSRO adhere to the Rule
17g-7(a) disclosure requirements.
A smaller NRSRO did not provide an infor-
mation disclosure form with respect to private
credit ratings as Rule 17g-7(a) requires. The Staff
recommended that the NRSRO comply with Rule
17g-7(a) disclosure requirements when taking
private rating actions.
A smaller NRSRO’s policies and procedures stated
that a Rule 17g-7(a) information disclosure form is
not required with respect to certain credit ratings in
contravention of Rule 17g-7(a). The Staff recom-
mended that the NRSRO’s policies and proce-
dures ensure compliance with the Rule 17g-7(a)
disclosure requirements.
16 | O F F I C E O F C R E D I T R A T I N G S
A smaller NRSRO published an information
disclosure form for several rating actions that did
not include information required by Rule 17g-7(a)
(1)(ii)(A) and (B) the attestation required by Rule
17g-7(a)(1)(iii). Such form also did not specify the
information that Rule 17g-7(a)(1)(ii)(L) requires.
Second, the NRSRO published an information
disclosure form for a credit rating downgrade that
contained incorrect information that Rule 17g-7(a)
(1)(ii)(J) requires. Third, the NRSRO did not
publish an information disclosure form in accor-
dance with Rule 17g-7(a), and its own policies and
procedures, when downgrading a different credit
rating. The Staff recommended that the NRSRO
comply with the Rule 17g-7(a) disclosure require-
ments, and its own policies and procedures, when
taking credit rating actions and have sufficient
internal controls to ensure such compliance.
A smaller NRSRO produced certain credit ratings
that appeared in substance to be expected credit
ratings but failed to provide information disclosure
forms for such ratings, as required by Rule
17g-7(a). The Staff recommended that the NRSRO
produce information disclosure forms for expected
or preliminary credit ratings, as Rule 17g-7(a)
requires.
7. An NRSRO did not appear to have
documented policies and procedures for
utilizing the Rule 17g-5(a)(3)(iv) and Rule
17g-7(a)(3) exemptions.
A smaller NRSRO relied on the exemptions
described in Rule 17g-5(a)(3)(iv) and Rule
17g-7(a)(3) for some transactions without having
policies and procedures related to applying those
exemptions. Without policies and procedures for
applying the exemptions, it is not clear how the
NRSRO established the “reasonable basis”
required for the exemptions to apply. The Staff
recommended that the NRSRO establish policies
and procedures related to applying the Rule
17g-5(a)(3)(iv) and Rule 17g-7(a)(3) exemptions.
8. Certain NRSROs appeared to file with the
Commission an inaccurate or incomplete
annual financial report that Rule 17g-3(a)(5)
requires.
A smaller NRSRO filed with the Commission a
report required by Rule 17g-3(a)(5) that did not
include all required information. Since the report
included certain entries that appeared to be under-
writers, the report should have included more than
20 entries. However, the report listed only 20 entries
and did not identify whether the NRSRO included
each entry as an: (1) issuer or subscriber; or (2)
obligor or underwriter. The Staff recommended that
the NRSRO adhere to the requirements of Rule
17g-3(a)(5) and provide complete information when
filing with the Commission the unaudited financial
report required by the rule.
A smaller NRSRO filed with the Commission a
report required by Rule 17g-3(a)(5) that contained
inaccurate information. Such report did not include
certain entities, including the NRSRO’s largest client
for the fiscal year, and misstated the net revenue for
certain listed entities. The Staff recommended that
the NRSRO ensure the accuracy of Rule 17g-3(a)(5)
financial reports filed with the Commission and file
updated reports to correct any existing inaccuracies.
E X A M S U M M A R Y R E P O R T | 17 9. An NRSRO’s internal controls with
respect to using model inputs in the
rating process appeared to contain
weaknesses.
A larger NRSRO’s analysts made certain model
input errors for several CLO ratings, and secondary
reviewers did not identify the errors. The Staff
recommended that the NRSRO enhance its internal
controls, including with respect to analytical
training and the committee review process, to
ensure the accuracy of model inputs
used in determining ratings.
10. An NRSRO appeared to have weak
internal controls with respect to
conducting periodic compliance
reviews of private credit ratings.
A larger NRSRO did not include private credit
ratings in the sample of ratings actions that a
compliance monitoring group used to test analyst
adherence to the NRSRO’s policies and proce-
dures and that a credit policy control group used
in quarterly random testing samples. The Staff
recommended that the NRSRO enhance its internal
controls with respect to conducting periodic
compliance reviews of private credit ratings.
11. An NRSRO’s internal controls appeared
to contain weaknesses with respect to
assigning certain corporate credit ratings.
A larger NRSRO did not have any documented
policies and procedures governing its practices with
respect to assigning a certain type of corporate
credit ratings. The Staff recommended that the
NRSRO enhance its internal controls with respect
to assigning such ratings.
12. An NRSRO’s internal controls appeared
to contain weaknesses with respect to
oversight of certain process documents
related to determining credit ratings.
A larger NRSRO did not have a framework for
ensuring that the NRSRO’s compliance and control
functions have a full inventory of, and proper
oversight over, certain process documents which
could be integral to the NRSRO’s credit rating
process and address certain regulatory requirements.
The Staff recommended that the NRSRO evaluate
its internal controls framework to ensure that it
appropriately incorporates such documents.
13. An NRSRO’s internal controls with
respect to disclosing methodology
adjustments appeared to be weak.
A smaller NRSRO incorrectly stated in a presale
report certain methodology adjustments that the
NRSRO made. The Staff recommended that the
NRSRO enhance its internal controls, including
policies and procedures, for disclosing methodology
adjustments.
14. Regarding internal controls, certain
NRSROs did not appear to follow
requirements related to, or did not have,
certain credit rating policies, procedures,
or methodologies.
A smaller NRSRO determined credit ratings for
securities issued after previously rated securities,
but did not have written policies or procedures for
determining those ratings. The Staff recommended
that the NRSRO establish and maintain written
policies and procedures for determining, and ensure
that it properly documents, credit ratings for subse-
quently issued securities.
18 | O F F I C E O F C R E D I T R A T I N G S
A smaller NRSRO’s repeated and widespread use
of exceptions memoranda effectively modified the
NRSRO’s established and published methodologies
by replacing defined methodology processes with
more subjective approaches that the NRSRO did
not publish or subject to its internal controls for
methodology updates as, respectively, required
by Rule 17g-8(a)(4)(i) and Rule 17g-8(d)(1)(i) and
(ii). The NRSRO also did not subject exceptions
memoranda to its policies and procedures for
methodology approval by the Board, consistent
application of methodology changes, or disclosure
of the methodology version used when taking
a rating action, as required by, respectively,
Rule 17g-8(a)(1), Rule 17g-8(a)(3)(i), and
Rule 17g-7(a)(1)(ii)(B). The Staff recommended
that the NRSRO use exceptions memoranda in
accordance with its policies, procedures, and
internal controls for modifying methodologies,
or limit the use of exceptions memoranda so that
such use does not effectively modify the NRSRO’s
methodologies and complies with its policies and
procedures. The Staff also recommended that the
NRSRO include in information disclosure forms all
methodologies used to determine credit ratings,
in accordance with Rule 17g-7(a)(1)(ii)(B).
A smaller NRSRO issued several private ratings
without a documented methodology or sufficient
documentation to permit an after-the-fact review or
audit to analyze analyst adherence to the NRSRO’s
methodologies. The NRSRO also did not maintain
in several rating files complete and current records
documenting the established methodologies used to
determine ratings as Rule 17g-2(a)(6) requires, and
factors cited in the rating files as part of the rating
rationale frequently did not appear in the appli-
cable methodology. The Staff recommended that
the NRSRO: (1) maintain a complete and current
record documenting its established credit rating
procedures and methodologies; (2) enhance its
internal control structure governing the implemen-
tation of and adherence to credit rating policies,
procedures, and methodologies; and (3) consider
adopting controls reasonably designed to ensure
that credit analysts adhere to relevant procedures
and methodologies and document the steps taken
in developing ratings with sufficient detail to permit
an after-the-fact review or internal audit of rating
files to analyze whether an analyst adhered to the
NRSRO’s procedures and methodologies.
A smaller NRSRO used a newly developed credit
rating tool to, for the first time, raise a credit rating
for a client after the client provided a written
complaint to the NRSRO about the original rating.
The NRSRO did not refer to such rating tool in
its credit rating procedures or methodologies, and
it did not have documentation as to the analytical
basis for using the tool, which did not comply with
Rule 17g-2(a)(6). The NRSRO’s Board also did not
review or approve such rating tool in accordance
with Rule 17g-8(a)(1) and the NRSRO’s policies
and procedures, and the NRSRO did not review,
validate, and approve the tool as the NRSRO’s
policies and procedures require, resulting in
non-compliance with Rule 17g-8(a)(2). The Staff
recommended that the NRSRO: (1) make and
retain a complete and current record documenting
its established credit rating procedures and method-
ologies; (2) ensure that its Board approves the
NRSRO’s credit rating procedures and method-
ologies, including qualitative and quantitative
data and models; and (3) ensure that the NRSRO
develops and modifies its credit rating procedures
and methodologies, including qualitative and
quantitative data and models, in accordance with
its policies and procedures.
E X A M S U M M A R Y R E P O R T | 19
A smaller NRSRO did not, in several instances,
use the version of a model that was in effect on
the relevant date, and several rating files included
multiple model versions with no indication of
which version was used to assess the rating.
The NRSRO also used more than one model to
determine certain corporate credit ratings, but did
not have policies or procedures, training materials,
or other written documentation to instruct analysts
on which model to use for a particular corporate
rating. The Staff recommended that the NRSRO
establish, maintain, enforce, and document
effective internal controls, including policies and
procedures, to ensure that the NRSRO applies a
current version of its applicable credit rating model
when determining ratings and that the NRSRO
uses the correct credit rating model to determine a
particular corporate rating.
15. An NRSRO did not appear to comply
with Rule 17g-5(c)(1) by issuing and
maintaining credit ratings solicited by
an entity that provided more than 10%
of the NRSRO’s total net revenue for a
fiscal year, the NRSRO delayed recog-
nizing revenue and filed inaccurate Rule
17g-3(a) financial reports in order to
appear compliant with Rule 17g-5(c)(1),
and the NRSRO did not have effective
internal controls related to its revenue
recognition practices.
A smaller NRSRO altered its billing practices to
split the fee billing and revenue recognition for a
client between two consecutive fiscal years and, as
a result, decrease the recognized net revenue from
the client to below 10% of the NRSRO’s total net
revenue for the relevant fiscal year. The NRSRO’s
improper revenue deferral also resulted in the
NRSRO filing incorrect information with the
Commission in two annual Rule 17g-3(a) financial
reports. The Staff recommended that the NRSRO:
(1) establish, maintain, and enforce policies and
procedures, including with respect to its revenue
recognition practices, reasonably designed to
ensure that it does not issue or maintain ratings
subject to the Rule 17g-5(c)(1) prohibited conflict
of interest; (2) maintain and enforce an effective
internal control structure governing the imple-
mentation of policies and procedures to identify,
acknowledge, and remediate potential violations
of statutes or rules; and (3) file accurate Rule
17g-3(a) financial reports.
16. An NRSRO did not appear to promptly
file a Form NRSRO registration update
to designate a DCO.
A smaller NRSRO delayed more than one month
after its DCO resigned and the firm designated
a successor DCO before reflecting that change
on Form NRSRO Item 4 and Exhibit 9. The
Staff recommended that the NRSRO designate a
DCO on Form NRSRO at all times and promptly
amend any materially inaccurate information
on Form NRSRO as Section 15E(b)(1) and Rule
17g-1(e) require.
20 | O F F I C E O F C R E D I T R A T I N G S
17. An NRSRO did not appear to have
effective internal controls governing
the models it used to determine credit
ratings, including model validation and
review, and to ensure that the NRSRO’s
rating models are consistent with its
rating procedures and methodologies,
and the NRSRO’s standards of training,
experience, and competence for the
individuals it employs to participate in
ratings determination are not
reasonably designed.
A smaller NRSRO’s rating model appeared to
contain formulas producing numerous erroneous
results. The model also was inconsistent with the
NRSRO’s methodology related to random sampling
and rating assumptions, and the model provided
instructions that were inaccurate or incomplete
and based on prior model versions. The model
contained internal notes indicating that certain
sections needed to be updated, and the model
had base assumptions and formulas that were not
adequately safeguarded from inadvertent errors.
There were also inconsistencies between a model
and relevant methodology provisions. The Staff
recommended that the NRSRO enhance its internal
controls governing its rating models and ensure
that the models accurately reflect the NRSRO’s
rating procedures and methodologies. The Staff also
recommended that the NRSRO maintain standards
of training, experience, and competence for the
individuals it employs to participate in the deter-
mination of credit ratings that sufficiently consider
the technical expertise necessary to understand
any models and model inputs that are a part of the
procedures and methodologies.
18. An NRSRO appeared to have weak
internal controls governing the timely
receipt of documents used to form the
basis of a credit rating.
A smaller NRSRO issued credit ratings without
receiving and retaining certain documentation
used to form the basis of the rating and which
was requested by the NRSRO’s relevant rating
committee. The Staff recommended that the
NRSRO enhance its internal controls governing the
timely receipt of documents used to form the basis
of a credit rating, including documents that a rating
committee requests.
19. An NRSRO did not appear to have
policies and procedures to address its
business continuity risks to ensure an
effective internal control structure.
A smaller NRSRO did not have policies and
procedures, to address its business continuity risks
to ensure an effective internal control structure.
The Staff recommended that the NRSRO establish,
maintain, enforce, and document policies and
procedures to address its business continuity risks
and ensure an effective internal control structure
governing the implementation of and adherence
to policies, procedures, and methodologies for
determining credit ratings.
E X A M S U M M A R Y R E P O R T | 21
20. An NRSRO did not appear to establish,
maintain, enforce, and document an
effective internal control structure and
did not describe in the report that it
filed with the Commission under Rule
17g-3(a)(7) the material weaknesses in
its internal control structure governing
the implementation of and adherence
to credit rating policies, procedures,
and methodologies.
A smaller NRSRO did not have effective internal
controls related to: (1) compliance with Rule
17g-5(c)(8); (2) the implementation of and
adherence to policies, procedures, and method-
ologies for determining credit ratings; (3) the
receipt on a timely basis of documents used to form
the basis of a credit rating, including documents
requested by a rating committee; (4) analysts fully
documenting their ratings analysis in internal
records; (5) the NRSRO’s Board approving credit
rating procedures and methodologies; (6) devel-
oping credit rating procedures and methodologies
in accordance with its policies and procedures; (7)
the models used to determine credit ratings; (8)
reasonable standards of training, experience, and
competence of its analysts and adherence to its
policies and procedures adopted to comply with the
requirements in Rule 17g-9(a) and Rule 17g-9(c)(1);
and (9) ensuring the establishment, maintenance,
enforcement, and documentation of policies and
procedures to address business continuity risks.
Notwithstanding such internal control weaknesses,
the NRSRO filed with the Commission an internal
controls report under Rule 17g-3(a)(7) concluding
that its internal control structure was effective as
of the relevant fiscal year end and did not describe
any material weaknesses in its internal control
structure. The report was accompanied by a signed
statement of the NRSRO’s CEO to the effect that,
to the individual’s best knowledge, the report fairly
presents, in all material respects, an assessment by
management of the effectiveness of the internal
control structure during the fiscal year. The Staff
recommended that the NRSRO: (1) establish,
maintain, enforce, and document an effective
internal control structure governing the implemen-
tation of and adherence to credit rating policies,
procedures, and methodologies; (2) identify any
material weaknesses in its internal control structure
and include in its annual reports under Rule
17g-3(a)(7) a description of each such material
weakness identified during the fiscal year and a
description, if applicable, of how the NRSRO
addressed each identified material weakness.
E. REVIEW AREA: GOVERNANCE
The Staff interviewed each NRSRO’s Board,
including independent directors. The Staff also
reviewed minutes and other documentation related
to the activities of each NRSRO’s Board.
The Staff’s essential finding relating to corporate
governance and compliance with Section 15E(t) is
as follows:
1. An NRSRO did not appear to adhere to
the Rule 17g-8(a)(1) requirements related
to Board approval of procedures used to
determine credit ratings.
A larger NRSRO’s Board did not approve certain
procedures the NRSRO uses to determine credit
ratings, such as procedures related to rating
committees and rating withdrawal procedures.
The Staff recommended that the NRSRO adhere
to the Rule 17g-8(a)(1) requirements related to
the approval of procedures used to determine
credit ratings.
22 | O F F I C E O F C R E D I T R A T I N G S
F. REVIEW AREA: DCO ACTIVITIES
Each NRSRO has designated an individual to
serve as the NRSRO’s DCO. The Staff reviewed
the role and activities of each NRSRO’s DCO and
interviewed each DCO. Much of the content of
these reviews and interviews relates to other Review
Areas. As such, any Staff findings and recommenda-
tions related to an NRSRO’s DCO activities are
addressed in other sections of this Report.41
G. REVIEW AREA: COMPLAINTS
All of the NRSROs have written policies and proce-
dures to address complaints generally. The Staff’s
essential finding regarding complaints is as follows:
1. An NRSRO appeared to have
inconsistent policies and procedures
concerning complaints.
A smaller NRSRO’s policies and procedures
contained inconsistencies related to the circum-
stances under which a complaint must be reported
to senior management and/or the Board and
inconsistencies in whether analysts are required to
distinguish between normal course conversations
with, and a complaint by, a rated entity. Also, for
a complaint to be registered, the NRSRO’s policies
and procedures required analysts to instruct outside
parties to repeat their complaint to a compliance
officer. The Staff recommended that the NRSRO
revise its complaints policies and procedures so
that they are consistent and so that the NRSRO
adequately addresses all complaints.
H. REVIEW AREA: POST-EMPLOYMENT
The Staff reviewed whether each NRSRO’s “look-
back” policies and procedures satisfy the appli-
cable statutory and rule requirements. The Staff’s
essential findings regarding NRSROs’ look-back
policies and procedures are as follows:
1. An NRSRO’s look-back review policies
and procedures did not appear to address
all of the required Rule 17g-7(a)(1)(ii)(J)(3)
disclosures.
A smaller NRSRO’s policies and procedures did
not address the requirements to disclose, for rating
revisions and affirmations, a description of the
impact a conflict had on the prior rating actions
and, for rating affirmations, an explanation of
why no rating action was taken to revise the credit
rating notwithstanding the presence of the conflict.
The Staff recommended that the NRSRO ensure
that its look-back review policies and procedures
are consistent with Rule 17g-7(a)(1)(ii)(J)(3).
2. An NRSRO did not appear to enforce its
policies and procedures when completing
look-back reviews.
A larger NRSRO generated reports incor-
rectly stating that NRSRO personnel completed
look-back reviews without referring the matters
for further review to a certain ratings review group
and/or officer as the NRSRO’s relevant policies and
procedures require. The Staff also observed several
instances where the NRSRO did not complete
look-back reviews within the time period that
such policies and procedures require. The Staff
recommended that the NRSRO enforce its policies
and procedures for conducting look-back reviews
and enhance its internal controls to ensure that
it conducts and documents look-back reviews in
accordance with those policies and procedures.
41 See, e.g., Section IV.D.16.
E X A M S U M M A R Y R E P O R T | 23
https://Report.41
V. Conclusion
This Report summarizes the essential findings
and recommendations for the NRSROs. In future
examinations, the Staff will continue to assess the
NRSROs’ responses to recommendations from
the 2020 Section 15E examinations. The Staff will
continue to evaluate its risk assessment process
to review compliance with laws and regulations
and to identify emerging risk areas. The Staff will
also continue to evaluate examination techniques
to assess and test the NRSROs’ compliance with
applicable laws and rules.
24 | O F F I C E O F C R E D I T R A T I N G S
E X A M S U M M A R Y R E P O R T | 25
U . S . S E C U R I T I E S A N D E X C H A N G E C O M M I S S I O N
Washington, DCOCR text (76,287c · textlayer · 95% conf)
E X A M S U M M A R Y R E P O R T |
OFFICE OF CREDIT RATINGS
2020
Summary
Report
ON
COMMISSION STAFF’S
EXAMINATIONS OF EACH
NATIONALLY RECOGNIZED
STATISTICAL RATING
ORGANIZATION
As Required by Section 15E(p)(3)(C)
of the Securities Exchange Act of 1934
December 2020
i
U . S . S E C U R I T I E S A N D E X C H A N G E C O M M I S S I O N
THIS IS A REPORT OF THE STAFF OF THE U.S. SECURITIES AND EXCHANGE COMMISSION.
THE COMMISSION HAS EXPRESSED NO VIEW REGARDING THE ANALYSIS, FINDINGS, OR CONCLUSIONS CONTAINED HEREIN.
Table of Contents
I. REGULATORY AND NRSRO OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
A. Statutory Framework and Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
B. Registered NRSROs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
A. Examinations under Section 15E(p)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
B. Examination Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
A. Responses to Recommendations from the 2019 Section 15E Examinations . . . . . . 9
B. Notable Improvements Over the Course of the Examinations . . . . . . . . . . . . . 10
A. Review Area: Adherence to Policies, Procedures, and Methodologies . . . . . . . . . 11
B. Review Area: Management of Conficts of Interest . . . . . . . . . . . . . . . . . . . . .14
C. Review Area: Implementation of Ethics Policies . . . . . . . . . . . . . . . . . . . . . .15
D. Review Area: Internal Supervisory Controls . . . . . . . . . . . . . . . . . . . . . . . . .15
E. Review Area: Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
F. Review Area: DCO Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
G. Review Area: Complaints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
H. Review Area: Post-Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
II. OFFICE OF CREDIT RATINGS AND EXAMINATION OVERVIEW . . . . . . . . . . . . . . . 6
III. SUMMARY OF RESPONSES TO RECOMMENDATIONS FROM PREVIOUS
EXAMINATIONS AND NOTABLE IMPROVEMENTS OVER THE COURSE
OF THE EXAMINATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
IV. SUMMARY OF ESSENTIAL FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
V. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
E X A M S U M M A R Y R E P O R T | i
I. Regulatory and NRSRO
Overview
T
his report (“Report”) summarizes the
examinations conducted by staff from the
U.S. Securities and Exchange Commission
(the “Staff”) under Section 15E(p)(3) of
the Securities Exchange Act of 1934 (“Exchange
Act”).1 This is a report of the Staff and, as such,
reflects solely the Staff’s views. The U.S. Securities
and Exchange Commission (“Commission” or
“SEC”) is making this Staff Report public as
required by Section 15E(p)(3)(C) of the
Exchange Act.
A. STATUTORY FRAMEWORK
AND RULES
Section 15E of the Exchange Act (“Section 15E”)
and Exchange Act Rules 17g-1 through
17g-10 govern the registration and oversight
program for credit rating agencies that are regis-
tered with the Commission as nationally recognized
statistical rating organizations (“NRSROs”). This
regulatory regime was established by the Credit
Rating Agency Reform Act of 2006 (the “Rating
Agency Act”)2 and amended by the Dodd-Frank
Wall Street Reform and Consumer Protection Act
of 2010 (the “Dodd-Frank Act”).3
The Dodd-Frank Act mandated the creation of
the Office of Credit Ratings (“OCR”), which is
responsible for oversight of credit rating agencies
registered with the Commission as NRSROs.
Pursuant to the Commission’s regulatory regime for
NRSROs, an NRSRO is required to, among other
things:
§ File with the Commission annual certifications
of its Form NRSRO registrations,4 promptly
update its filing in certain circumstances,5 and
make its current Form NRSRO filing and most
of its current Form NRSRO Exhibits available
on its public website.6
§ Disclose certain information, including
information concerning the NRSRO’s
performance measurement statistics and its
procedures and methodologies to determine
ratings.7
1 Exchange Act Section 15E(p)(3)(C). Unless otherwise noted, all Section and Rule references in this report are to the Exchange Act
and rules under the Exchange Act.
2 Credit Rating Agency Reform Act of 2006, Pub. L. No. 109-291, 120 Stat. 1327 (2006).
3 The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 932, 124 Stat. 1376, 1872-83 (2010).
4 Exchange Act Section 15E(b)(2) and Exchange Act Rule 17g-1(f ).
5 Exchange Act Section 15E(b)(1) and Exchange Act Rule 17g-1(e).
6 Exchange Act Section 15E(a)(3) and Exchange Act Rule 17g-1(i).
7 Exchange Act Section 15E(a)(1)(B)(i) and Exchange Act Section 15E(a)(1)(B)(ii).
E X A M S U M M A R Y R E P O R T | 1
§ Establish, maintain, enforce, and document an
effective internal control structure governing the
implementation of and adherence to policies,
procedures, and methodologies for determining
credit ratings,8 and retain records of its internal
control structure.9
§ Consider certain factors with respect to its
establishment, maintenance, enforcement, and
documentation of an effective internal control
structure.10
§ File an unaudited report containing an
assessment by management of the effectiveness
during the fiscal year of the NRSRO’s internal
control structure governing the implementation
of and adherence to policies, procedures, and
methodologies for determining credit ratings.11
The report must be accompanied by a signed
statement by the NRSRO’s chief executive officer
or an individual performing similar functions.12
§ Establish, maintain, enforce, and document
policies and procedures reasonably designed to
achieve certain objectives concerning its
development and application of, and disclosures
related to, methodologies and models.13
§ Establish, maintain, enforce, and document
policies and procedures that are reasonably
designed to: assess the probability that an issuer
of a security or money market instrument will
default or fail to make required payments to
investors,14 and ensure that it applies any rating
symbol, number, or score in a manner that is
consistent for all types of obligors, securities,
and money market instruments for which the
symbol, number, or score is used.15
§ Publish an information disclosure form when
taking a rating action with respect to a rating
assigned to an obligor, security, or money-
market instrument in a class for which it is
registered as an NRSRO.16 The information
form must disclose certain information with
respect to the particular rating action.17
In addition, the NRSRO must attach to
the information disclosure form a signed
statement by a person within the NRSRO with
responsibility for the rating action.18
8 Exchange Act Section 15E(c)(3)(A).
9 Exchange Act Rule 17g-2(b)(12).
10 See, e.g., Exchange Act Rule 17g-8(d)(1) through (4).
11 Exchange Act Rule 17g-3(a)(7)(i).
12 Exchange Act Rule 17g-3(b)(2).
13 See, e.g., Exchange Act Rule 17g-8(a)(2) through (5).
14 Exchange Act Rule 17g-8(b)(1).
15 Exchange Act Rule 17g-8(b)(3).
16 Exchange Act Rule 17g-7(a). Rule 17g-7(a) defines rating action to include an expected or preliminary rating, an initial rating,
an upgrade or downgrade of an existing rating (including a downgrade to, or assignment of, default), and an affirmation or
withdrawal of an existing rating if the affirmation or withdrawal is the result of the NRSRO’s review of the rating using applicable
procedures and methodologies for determining credit ratings. Pursuant to Rule 17g-7(a)(3), an NRSRO is exempt from publishing
an information disclosure form for a particular rating if: (i) the rated obligor or issuer of the rated security or money market
instrument is not a U.S. person; and (ii) the 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; or (B) with respect to a rated security or money market
instrument, all offers and sales by any issuer, sponsor, or underwriter linked to a security or money market instrument will occur
outside the United States.
17 Exchange Act Rule 17g-7(a)(1)(ii)(A)-(N) specifies the information that must be disclosed in the information disclosure form.
These required disclosures include: the version of the procedure or methodology used to determine the credit rating; disclosures
concerning the uncertainty of the rating, including regarding the reliability, accuracy, quality, and accessibility of data related to
the rating; a statement containing an overall assessment of the quality of information available and considered in determining the
credit rating for the obligor, security, or money market instrument; and information on the sensitivity of the rating to assumptions
made by the NRSRO. In addition, an NRSRO must attach to the information disclosure form any executed Form ABS Due
Diligence-15E containing information about the security or money market instrument subject to the rating action that is received
by the NRSRO or obtained by the NRSRO through a Rule 17g-5(a)(3) website.
18 Exchange Act Rule 17g-7(a)(1)(iii).
2 | O F F I C E O F C R E D I T R A T I N G S
https://action.18
https://action.17
https://NRSRO.16
https://models.13
https://functions.12
https://ratings.11
https://structure.10
§ Make and retain, or retain, certain records,
including a record documenting its established
procedures and methodologies used to
determine credit ratings19 and records related
to its ratings.20 An NRSRO must promptly
furnish to the Commission or its representatives
copies of required records, including English
translations of those records, upon request.21
§ Establish, maintain, and enforce written policies
and procedures reasonably designed to prevent
the misuse of material non-public information
(“MNPI”), including the inappropriate
dissemination of MNPI both within and outside
the NRSRO, the inappropriate trading of securities
using MNPI by a person within the NRSRO, and
the inappropriate dissemination of pending credit
rating actions within and outside the NRSRO
before issuing the rating on the Internet or through
another readily accessible means.22
§ Establish, maintain, and enforce written policies
and procedures reasonably designed to address
and manage conflicts of interest.23 Certain
conflicts of interest are expressly prohibited,24 and
for other types of conflicts of interest, the NRSRO
must disclose the conflicts and have policies and
procedures in place to manage them.25
§ Refrain from engaging in specified unfair,
coercive, or abusive practices.26
§ Provide information on whether it has in effect a
code of ethics, and if not, the reasons it does not
have a code of ethics.27
§ Establish procedures for the receipt, retention,
and treatment of complaints regarding credit
ratings, models, methodologies, and compliance
with the securities laws and its policies and
procedures developed under this regulatory
regime, and of confidential, anonymous
complaints.28
§ Designate a compliance officer (the “DCO”)
responsible for administering policies and
procedures related to MNPI and conflicts
of interest, ensuring compliance with the
securities laws and regulations, and establishing
procedures for handling complaints by
employees or users of credit ratings.29 The DCO
must submit an annual report to the NRSRO
on the compliance of the NRSRO with the
securities laws and the NRSRO’s policies and
procedures, and the NRSRO must file the report
with the Commission.30
19 Exchange Act Rule 17g-2(a)(6).
20 Exchange Act Rule 17g-2(a)(2)(i), (ii), and (iii); Exchange Act Rule 17g-2(b)(2) and (b)(7). The records that an NRSRO must make
and retain, or retain, with respect to its ratings include the identity of certain persons who participated in determining or approving
the rating, records used to form the basis of a rating, external and internal communications received or sent by the NRSRO and
its employees related to a rating, and for ABS ratings, a record of the rationale for any material difference between the final rating
assigned and the rating implied by a quantitative model that was a substantial component in determining the rating.
21 Exchange Act Section 15E(a) and (b) and Exchange Act Rule 17g-2(f ).
22 Exchange Act Section 15E(g) and Exchange Act Rule 17g-4.
23 Exchange Act Section 15E(h) and Exchange Act Rule 17g-5.
24 Exchange Act Rule 17g-5(c).
25 Exchange Act Rule 17g-5(a)(1) and (a)(2); Exchange Act Rule 17g-5(b). Moreover, Exchange Act Rule 17g-5(a)(3) prohibits an
NRSRO from having a conflict of interest related to a rating for a security or money market instrument issued by an asset pool or
as part of any ABS transaction unless the NRSRO, among other things, maintains and provides access to a password-protected
Internet Web site containing a list of each such security or money market instrument for which it is currently in the process of
determining an initial credit rating, and obtains certain written representations from the issuer, sponsor, or underwriter of each
such security or money market instrument.
26 Exchange Act Rule 17g-6.
27 Exchange Act Section 15E(a)(1)(B)(v).
28 Exchange Act Section 15E(j)(3).
29 Exchange Act Section 15E(j)(1) and (3).
30 Exchange Act Section 15E(j)(5).
E X A M S U M M A R Y R E P O R T | 3
https://Commission.30
https://ratings.29
https://complaints.28
https://ethics.27
https://practices.26
https://interest.23
https://means.22
https://request.21
https://ratings.20
§ Have a board of directors or similar governing
body (collectively, the “Board”), certain of
whose members must be independent from
the NRSRO.31 An NRSRO’s Board, or
members thereof, are responsible for exercising
oversight of specified subjects related to the
NRSRO’s rating business and for approving
the procedures and methodologies, including
qualitative and quantitative data and models,
that the NRSRO uses to determine ratings.32
§ Establish, maintain, enforce, and document
standards of training, experience, and
competence for the individuals it employs to
participate in the determination of credit ratings
that are reasonably designed to achieve the
objective that the NRSRO produces accurate
credit ratings, and retain a record of these
standards.33
§ Establish policies and procedures regarding
post-employment activities of certain former
personnel.34
B. REGISTERED NRSROs
In 2007, the Commission began granting registra-
tions to credit rating agencies that applied to be
registered as an NRSRO. Credit rating agencies
seeking to register with the Commission as an
NRSRO must file a completed application on Form
NRSRO, including related Exhibits.35 A credit
rating agency may apply to be registered with
respect to one or more of the following five classes
of credit ratings:
i. Financial institutions, brokers, or dealers
(“financial institutions”);
ii. Insurance companies;
iii. Corporate issuers;
iv. Issuers of asset-backed securities (“ABS”); and
v. Issuers of government securities, municipal
securities, or securities issued by a foreign
government (“government securities”).36
31 Exchange Act Section 15E(t)(2).
32 Exchange Act Section 15E(t)(3) and Exchange Act Rule 17g-8(a)(1).
33 Exchange Act Rule 17g-9.
34 Exchange Act Section 15E(h)(4) and (5); Exchange Act Rule 17g-8(c).
35 Exchange Act Section 15E(a) and Exchange Act Rule 17g-1(a) and (b).
36 Exchange Act Section 3(a)(62)(A).
4 | O F F I C E O F C R E D I T R A T I N G S
https://securities�).36
https://Exhibits.35
https://personnel.34
https://standards.33
https://ratings.32
https://NRSRO.31
NRSRO Date of Initial Registration
A.M. Best Rating Services, Inc. (“AMB”) September 24, 2007
DBRS, Inc. (“DBRS”)37 September 24, 2007
Egan-Jones Ratings Company (“EJR”) December 21, 2007
Fitch Ratings, Inc. (“Fitch”) September 24, 2007
HR Ratings de México, S.A. de C.V. (“HR”) November 5, 2012
Japan Credit Rating Agency, Ltd. (“JCR”) September 24, 2007
Kroll Bond Rating Agency, Inc. (“KBRA”) February 11, 2008
Moody’s Investors Service, Inc. (“MIS”) September 24, 2007
S&P Global Ratings (“S&P”) September 24, 2007
The nine credit rating agencies registered as
NRSROs as of November 30, 2020, and dates of
their initial registrations, are listed above. More
information on NRSRO registration applications
and the state of competition, transparency, and
conflicts of interest among NRSROs is included
in the Annual Report to Congress under Section 6
of the Rating Agency Act.38
For purposes of this Report only, we refer to Fitch,
MIS, and S&P as “larger NRSROs” and the six
other NRSROs (AMB, DBRS, EJR, HR, JCR,
and KBRA) as “smaller NRSROs.”
37 On July 2, 2019, Morningstar, Inc., the parent company of Morningstar Credit Ratings, LLC (“MCR”), completed an acquisition
of DBRS. On November 15, 2019, MCR furnished a notice of withdrawal from registration to the Commission (which became
effective on December 30, 2019), and DBRS filed an update to Form NRSRO to add MCR as a credit rating affiliate. On
November 23, 2020, DBRS filed an update to Form NRSRO to remove MCR as a credit rating affiliate.
38 The annual reports can be found under “Summary Examination Reports” in the “Reports and Studies” section of the OCR
webpage, available at https://www.sec.gov/ocr/ocr-reports-and-studies.html.
E X A M S U M M A R Y R E P O R T | 5
https://www.sec.gov/ocr/ocr-reports-and-studies.html
II. Office of Credit Ratings and
Examination Overview
A. EXAMINATIONS UNDER SECTION
15E(p)(3)
Generally, the purpose of NRSRO examinations
is to:
§ Monitor compliance with applicable federal
securities laws and rules;
§ Identify conduct, insufficient policies and
procedures, or ineffective internal controls that
potentially violate such laws and rules; and
§ Encourage remedial action.
To facilitate such remedial action, the Staff sends
each NRSRO an examination summary letter
that identifies and explains its findings related
to that NRSRO and recommends remedial
measures. Examinations also serve to inform
the Commission and the NRSROs’ compliance
personnel of regulatory obligations and noteworthy
industry developments. When appropriate, OCR
staff may refer potential violations of the federal
securities laws to the Commission’s Division of
Enforcement for further investigation. The Division
of Enforcement investigates potential violations of
the federal securities laws and litigates the Commis-
sion’s enforcement actions.
Section 15E(p)(3)(B) provides that each NRSRO
examination shall include a review of the following
eight topic areas (“Section 15E Review Areas”):
i. Whether the NRSRO conducts business in accor-
dance with its policies, procedures, and rating
methodologies;
ii. Management of conflicts of interest by the
NRSRO;
iii. Implementation of ethics policies by the NRSRO;
iv. Internal supervisory controls of the NRSRO;
v. Governance of the NRSRO;
vi. Activities of the DCO of the NRSRO;
vii. Processing of complaints by the NRSRO; and
viii. Policies of the NRSRO governing the post-
employment activities of its former staff.
Section 15E(p)(3)(C) requires the Commission
to make available to the public an annual report
summarizing:
i. Essential findings of all Section 15E
examinations, as deemed appropriate by
the Commission;
ii. NRSROs’ responses to any material
regulatory deficiencies identified by the
Commission; and
iii. Whether the NRSROs have appropriately
addressed the recommendations of the
Commission contained in previous annual
reports on examinations.
6 | O F F I C E O F C R E D I T R A T I N G S
B. EXAMINATION OVERVIEW
The 2020 Section 15E examinations generally
focused on the NRSROs’ activities for the period
covering January 1, 2019 through December 31,
2019 (the “Review Period”). Examinations also
reviewed certain activities or credit rating actions
from outside the Review Period.39
The 2020 Section 15E examinations reviewed the
Section 15E Review Areas and examined each
NRSRO’s adherence to Section 15E and Rules
17g-1 through 17g-10. Each of the NRSRO
examinations encompassed all of the statutorily
required Section 15E Review Areas. Within each
of the Section 15E Review Areas, the Staff deter-
mined areas of emphasis and issues of focus for
each NRSRO based upon an NRSRO-specific
risk assessment performed by the Staff, while also
considering how to limit the amount of personal
data collected in the examination process. The
NRSRO-specific risk assessments considered a
number of factors, including, but not limited to:
§ NRSRO’s rating activities and operations;
§ Staff’s findings, recommendations, and general
observations from prior examinations;
§ Impact of a potential or actual internal control
or compliance failure by the NRSRO;
§ Recent industry developments affecting
NRSROs and the asset classes in which the
NRSRO is registered;
§ NRSRO’s filings with the Commission and
public disclosures;
§ NRSRO’s self-identified weaknesses; and
§ Relevant TCRs received by the Commission.
The 2020 Section 15E examinations also focused
on certain subjects and activities that the Staff,
through its general risk assessment process,
identified as relevant to certain NRSROs, as
summarized below.
§ NRSRO Response to COVID-19: The Staff
examined the effects of the pandemic on credit
ratings and NRSROs. Specifically, the Staff
reviewed: NRSRO methodology changes;
changes to macro-economic forecasts and
assumptions, including meeting with NRSRO
senior economists; and business continuity plans
and operational updates, including workflow
decisions that NRSROs made. The Staff also
examined certain NRSRO methodology
deviations, including adherence to relevant
policies and procedures, and rating files for
NRSRO activities with respect to certain asset
classes and rating changes, including rating
downgrades from investment-grade to sub
investment-grade, also known as “fallen angels.”
§ ESG Factors and Products: Certain NRSROs
consider environmental, social, and governance
(“ESG”) factors in their credit rating analysis.
The Staff examined whether such NRSROs
incorporated ESG factors into methodologies or
took any rating actions specifically on account
of ESG factors, as well as sales and marketing
practices and conflicts of interests that may arise
in connection with the NRSROs’ ESG-related
activities.
§ Collateralized Loan Obligations (“CLOs”): The
Staff examined certain NRSRO rating files of
CLOs backed by broadly syndicated corporate
loans and by loans to middle market companies
for, among other things, adherence to relevant
rating policies, procedures, and methodologies.
39 For example, the Staff may review information relating to tips, complaints, and referrals (“TCRs”) in a current examination, even
if the referenced activities occurred outside of the Review Period.
E X A M S U M M A R Y R E P O R T | 7
https://Period.39
§ Conflicts Associated with Investor-Paid
Ratings: The Staff reviewed the scope of
private and investor-paid ratings activity at
certain NRSROs. As appropriate, the Staff also
examined for potential conflicts of interests
created as a result of investor-paid rating activity
at such NRSROs.
§ LIBOR Phase-Out: The Staff reviewed
commentaries from NRSROs, and gathered
information on regular calls with NRSROs,
related to the pending LIBOR phase-out,
including whether assumptions disclosed by
NRSROs have changed and whether NRSROs
have adjusted any relevant policies, procedures,
and methodologies. The Staff also reviewed
NRSRO surveillance processes in light of the
LIBOR transition.
§ Low-Investment Grade-Rated Corporates: The
Staff examined certain NRSRO rating files
for low-investment grade-rated corporates for,
among other things, adherence to relevant rating
policies, procedures, and methodologies.
§ Potential Marketing Conflicts: The Staff
examined relevant rating files and policies and
procedures of NRSROs, including policies
and procedures on the separation of sales
and marketing from analytics. The Staff also
reviewed internal compliance reports and had
relevant discussions with compliance staff.
8 | O F F I C E O F C R E D I T R A T I N G S
III. Summary of Responses to
Recommendations From Previous
Examinations and Notable Improvements
Over the Course of the Examinations
A. RESPONSES TO
RECOMMENDATIONS FROM THE
2019 SECTION 15E EXAMINATIONS
The Staff’s determination that an NRSRO
appropriately addressed a recommendation does
not constitute its endorsement of that NRSRO
or its policies, procedures, internal controls, or
operations. In a future examination, the Staff may
reevaluate the NRSRO’s response to recommenda-
tions that it previously deemed to be appropriately
addressed by, for example, assessing whether the
NRSRO fully implemented remedial measures
and whether those remedial measures appear
to be effective. The Staff may also review and
make recommendations concerning the NRSRO’s
policies, procedures, internal controls, or opera-
tions related to the general subject matter of a
recommendation that it previously deemed to be
appropriately addressed. The determination of
whether an NRSRO appropriately addressed a
recommendation reflects solely the Staff’s view
and does not necessarily reflect the views of the
Commission.
The Staff’s assessment of whether an NRSRO
has appropriately addressed a recommendation
depends on the specific facts and circumstances,
including, but not limited to, the promptness of the
NRSRO’s response, the severity of the conduct at
issue, and whether the remedial action undertaken
by the NRSRO is expected to fully resolve the Staff’s
concerns.
To assess whether NRSROs appropriately
addressed findings from the 2019 Section 15E
examinations, the Staff reviewed each NRSRO’s
written response to the Staff’s examination
summary letter describing its planned remedial
measures, and participated in calls with each
NRSRO to discuss its written response.
During the 2020 Section 15E examinations, the
Staff assessed each NRSRO’s progress in imple-
menting remedial measures such as establishing
new or enhancing existing policies or procedures
or internal controls, or adding personnel and other
resources in areas such as compliance, information
technology, or analytics. In assessing the effec-
tiveness of NRSROs’ remedial measures, the Staff
is cognizant that NRSROs may not be able to
fully implement remedial measures before the Staff
commences its Section 15E examinations for the
subsequent year, and the Staff may not be able to
fully assess the effectiveness of these measures in its
Section 15E examinations for that subsequent year.
Based on the Staff’s 2020 Section 15E examinations,
the Staff has determined that all recommenda-
tions from the 2019 Section 15E examinations
have been appropriately addressed. In general,
NRSROs addressed 2019 recommendations by
taking remedial measures such as adopting new or
enhancing existing policies or procedures, internal
controls, or systems and processes, and by adding
personnel and other resources.
E X A M S U M M A R Y R E P O R T | 9
B. NOTABLE IMPROVEMENTS OVER
THE COURSE OF THE EXAMINATIONS
Since they were first conducted in 2010, the Staff’s
Section 15E examinations have identified certain
improvements at one or more of the NRSROs.
Generally, NRSRO personnel at all levels of
seniority and responsibility have continued to
display greater awareness of applicable laws and
their obligations as regulated entities. Moreover, the
Staff’s summary reports covering the Section 15E
examinations since 2012 mention specific improve-
ments by certain NRSROs, and the NRSROs
generally have maintained or augmented those
improvements by further enhancing the measures
undertaken and embedding them in their opera-
tions and culture.
During the 2020 Section 15E examinations, the Staff
observed that most NRSROs have continued to
refine, as needed, and maintain, as appropriate, their
policies, procedures, and controls related to NRSRO
rules and the Staff’s recommendations from Section
15E examinations. The Staff also observed that
generally, most NRSROs’ personnel have continued
to gain and display a better understanding of these
rules and the NRSROs’ policies, procedures, and
controls for implementing these rules.
Additionally, the Staff observed that, in general,
most NRSROs continue to improve their
compliance monitoring and internal audit
functions. In recent years, and continuing in the
2020 Section 15E examinations, the Staff has
observed that this improvement has resulted in
a number of NRSROs becoming proactive in
reporting to the Staff issues or potential issues
of non-compliance with legal requirements or
weaknesses in policies and procedures that could
potentially lead to such non-compliance.
10 | O F F I C E O F C R E D I T R A T I N G S
IV. Summary of
Essential Findings
Section 15E(p)(3)(C)(i) requires this Report to
contain a summary of the essential findings of the
annual examinations, as deemed appropriate by
the Commission.
For purposes of this Report, “essential findings” are
Staff findings from the 2020 Section 15E examina-
tions and were included with one or more recom-
mendations in an examination summary letter sent
to an NRSRO. “Essential findings” do not include,
for example, the Staff’s general observations. In this
Report, essential findings are organized by the appli-
cable Section 15E Review Areas. This Report uses the
phrases “significant,” “numerous,” “several,”and
“some” to describe and distinguish the frequency of
conduct or instances underlying certain findings. The
particular phrase used generally reflects the number
of instances during the Review Period, recognizing
that the number of instances may be reflective of a
test sample and not necessarily an NRSRO’s compre-
hensive activities during the Review Period. The
Commission has not determined whether any finding
discussed in this Report constitutes a “material
regulatory deficiency,”40 but may do so in the future.
In the following Sections of this Report, the
numbered headers identify in general terms the Staff’s
findings concerning one or more NRSROs, and
the paragraph(s) following each numbered header
provide additional detail concerning these findings
and the Staff’s corresponding recommendations.
A. REVIEW AREA: ADHERENCE
TO POLICIES, PROCEDURES, AND
METHODOLOGIES
The Staff reviewed a sample of rating actions of
each NRSRO in certain asset classes for which it
is registered and for certain issuers and obligors
to determine whether the NRSRO operated in
accordance with its policies, procedures, and
rating methodologies. The Staff also reviewed a
sample of rating files and documentation of other
ratings-related activities to evaluate whether each
NRSRO adhered to recordkeeping requirements.
To select rating actions and rating files to review,
the Staff used a risk-based sampling process that is
consistent with its overall risk assessment approach
described in this Report. The Staff also considered
factors including, but not limited to, the size of
the rated asset class in the financial markets and
the NRSRO’s business, the NRSRO’s activity in
the rated asset class, the likelihood of impact on
investors if a rating was not determined in accor-
dance with the NRSRO’s methodologies and proce-
dures, news reports and developments concerning
the NRSROs or particular asset classes, TCRs, and
information the Staff learned during examinations.
The Staff’s essential findings regarding NRSROs
conducting ratings-related activities in accordance
with their policies, procedures, and rating method-
ologies are discussed in this Section. The Staff’s
40 Exchange Act Section 15E(p)(3)(C)(ii).
E X A M S U M M A R Y R E P O R T | 11
essential findings regarding the NRSROs’
adherence to policies and procedures related to
other Section 15E Review Areas are generally
discussed in later Sections of this Report. Instances
where policies, procedures, and rating method-
ologies need to be established or improved are also
generally discussed in later Sections of this Report.
The Staff’s essential findings regarding whether
each NRSRO has conducted its business in accor-
dance with its policies, procedures, and method-
ologies are as follows:
1. An NRSRO did not appear to adhere
to its policies and procedures related to
analysts receiving gifts.
A smaller NRSRO received a prohibited gift but
did not send a notification regarding the prohibited
nature of the gift to the sender of the gift, as the
NRSRO’s policies and procedures require. The
Staff recommended that the NRSRO adhere to
such policies and procedures.
2. An NRSRO did not appear to adhere to
its policies and procedures related to
processing and considering comments
when revising rating methodologies.
A larger NRSRO overlooked numerous external
written comments that it received in response to
published requests for comment on a materially
changed methodology and did not consider those
comments prior to implementing the methodology,
as required by its policies and procedures. The Staff
recommended that the NRSRO enhance its internal
controls to ensure that it adheres to its policies
and procedures for processing and considering
comments when revising rating methodologies.
3. Certain NRSROs did not appear to adhere
to their policies and procedures related to
documentation required in rating files.
A smaller NRSRO’s documentation in its rating
files pertaining to conflict of interest checks did
not appear to adhere to the requirements in the
NRSRO’s relevant policies and procedures. The
Staff recommended that the NRSRO adhere to its
policies and procedures for documenting conflict of
interest checks in rating files.
A smaller NRSRO did not retain exception
memoranda used for some credit ratings in the
relevant rating file, as the NRSRO’s policies and
procedures require. The Staff recommended that
the NRSRO enhance its internal controls, including
policies and procedures, with respect to retaining
and producing required rating file documents.
4. An NRSRO did not appear to comply with
the Rule 17g-7(a)(1)(ii)(J)(1) requirements
or adhere to its policies and procedures
related to the disclosure of an unsolicited
credit rating.
A larger NRSRO did not disclose that the NRSRO
was not paid to determine an unsolicited rating in
the related information disclosure form as required
by Rule 17g-7(a)(1)(ii)(J)(1) and the NRSRO’s
policies and procedures. The NRSRO also did
not disclose on its website that such rating was
unsolicited as required by the NRSRO’s policies
and procedures. The Staff recommended that the
NRSRO comply with Rule 17g-7(a)(1)(ii)(J)(1) and
adhere to its policies and procedures related to the
disclosure of unsolicited credit ratings.
12 | O F F I C E O F C R E D I T R A T I N G S
5. An NRSRO did not appear to adhere to
its policies and procedures related to
documenting internal investigations.
A larger NRSRO’s outside counsel conducted an
investigation in response to an allegation from
a former employee of the NRSRO, but did not
prepare a final written report as the NRSRO’s
policies and procedures require. Instead, outside
counsel delivered an oral report to the NRSRO.
The Staff recommended that the NRSRO adhere to
its policies and procedures related to documenting
internal investigations.
6. An NRSRO did not appear to make and
retain accurate records or adhere to
its policies and procedures related to
unsolicited credit ratings.
A smaller NRSRO took an unsolicited rating
action, but did not appear to adhere to its policies
and procedures for such action. Contrary to the
NRSRO’s unsolicited credit ratings policies and
procedures, the rating committee minutes errone-
ously indicated that the rating was solicited, and
the rating press release erroneously stated that
the rated entity participated in the rating process
and that the NRSRO had access to the entity’s
accounts and other internal documents. The Staff
recommended that the NRSRO make and retain
accurate records and adhere to its unsolicited
credit ratings policies and procedures to ensure
that it correctly discloses the solicitation status
and level of the issuer’s participation.
7. An NRSRO did not appear to enforce its
policies and procedures when providing
a draft presale report to an issuer.
A smaller NRSRO’s policies and procedures
provided for release of preliminary credit ratings
to an issuer in a presale report, together with
certain pre-publication information, after a
primary analyst presents a recommendation to
the relevant rating committee. However, the
Staff found that a primary analyst sent to an
issuer preliminary rating recommendations,
together with an incomplete notice, in a draft
presale report on the day before the relevant
rating committee. The Staff recommended that
the NRSRO enforce, and ensure that employees
adhere to, the NRSRO’s policies and procedures
when sending presale reports to an issuer.
8. An NRSRO did not appear to adhere to its
policies and procedures, or the rule require-
ments, related to the NRSRO promptly
publishing on its website notice of a
significant error identified in its credit rating
procedures or methodologies that may
result in a change to current credit ratings.
A smaller NRSRO identified a calculation error in
a model that led the NRSRO to review a significant
number of outstanding ratings that the error
potentially impacted. The NRSRO did not publish
notice of the existence of the error on its website as
required by Rule 17g-8(a)(4)(ii) and the NRSRO’s
policies and procedures. The Staff recommended
that the NRSRO adhere to its policies and proce-
dures regarding Rule 17g-8(a)(4)(ii) and promptly
publish notice of the existence of a significant error
identified in a credit rating procedure or method-
ology that may result in a change to current credit
ratings, in accordance with Rule 17g-8(a)(4)(ii).
9. An NRSRO did not appear to adhere to
its policies and procedures regarding
documentation evidencing the delivery
of indicative ratings.
A smaller NRSRO’s analysts delivered an oral indic-
ative credit rating to a client, which the NRSRO did
not document in the relevant rating file, in violation
of the NRSRO’s policies and procedures. The Staff
recommended that the NRSRO retain documen-
tation evidencing the issuance of indicative ratings,
including oral communication, in accordance with
its policies and procedures.
E X A M S U M M A R Y R E P O R T | 13
10. An NRSRO’s adherence to its policies
and procedures appeared to have
weaknesses relating to Rule 17g-9(a) and
the periodic testing requirements in Rule
17g-9(c)(1).
A smaller NRSRO did not appear to administer
compliance testing to employees in several instances,
or appropriate remedial training to an employee
who failed a test, as the NRSRO’s policies and
procedures require. The Staff recommended that
the NRSRO adhere to its policies and procedures
adopted to comply with the requirements in Rule
17g-9(a) and Rule 17g-9(c)(1).
B. REVIEW AREA: MANAGEMENT OF
CONFLICTS OF INTEREST
The Staff’s essential findings regarding the
management of conflicts of interest are as follows:
1. An NRSRO’s identified conflicts of interest
relating to the issuance of credit ratings
appeared to be inconsistent with the
NRSRO’s policies and procedures to
address and manage conflicts of interest.
A smaller NRSRO identified a certain conflict of
interest relating to the issuance of credit ratings in
Form NRSRO Exhibit 6 and provided policies and
procedures to address and manage that conflict of
interest in Form NRSRO Exhibit 7. However, such
policies and procedures did not apply with respect
to private credit ratings. The Staff recommended
that the NRSRO identify conflicts of interest
relating to the issuance of private credit ratings
consistently with the NRSRO’s policies and proce-
dures to address and manage conflicts of interest.
2. Certain NRSROs’ policies and procedures
did not appear to be reasonably designed
to address prohibited conflicts of interest.
A smaller NRSRO’s policies and procedures
appeared to permit the NRSRO to grant certain
exceptions that would allow NRSRO personnel to
engage in activities that Rule 17g-5(c)(7) and Rule
17g-5(c)(8) prohibit. The Staff recommended that
the NRSRO revise its policies and procedures to
eliminate such weakness.
A smaller NRSRO, despite the specified prohibition
of Rule 17g-5(c)(8), had a person who participated
in multiple capacities in determining credit ratings
and developing and approving procedures and
methodologies used for determining credit ratings.
It also appeared that the person’s involvement in
rating activities was accompanied by sales and
marketing activities. The Staff recommended that
the NRSRO establish, maintain, enforce, and
document policies and procedures reasonably
designed to ensure compliance with, and effective
internal controls to identify and prevent, the conflict
of interest described in Rule 17g-5(c)(8).
3. An NRSRO did not appear to enforce its
policies and procedures to address and
manage the conflict of interest set forth
in Rule 17g-5(b)(6), as required by Rule
17g-5(a).
A smaller NRSRO had, in some instances, missing
or inconsistent documentation related to personal
financial account statements for persons associated
with the NRSRO, as required by the NRSRO’s
policies and procedures. The Staff recommended
that the NRSRO enforce its policies and procedures
to address and manage the conflict of interest set
forth in Rule 17g-5(b)(6).
14 | O F F I C E O F C R E D I T R A T I N G S
4. An NRSRO’s policies and procedures did
not appear to be reasonably designed
to detect and prevent the prohibited
conflicts of interest identified in Rule
17g-5(c)(6) and Rule 17g-5(c)(8).
A smaller NRSRO’s policies and procedures
appeared to have unclear and inconsistent proce-
dures for addressing circumstances in which
analysts are exposed to fee information, and, in
fact, analysts were exposed to fee information in
several instances. The Staff recommended that the
NRSRO ensure that its policies and procedures
are reasonably designed to detect and prevent the
prohibited conflicts of interest identified in Rule
17g-5(c)(6) and Rule 17g-5(c)(8).
C. REVIEW AREA: IMPLEMENTATION
OF ETHICS POLICIES
Each NRSRO has implemented written ethics
policies and procedures. The Staff reviewed each
NRSRO’s ethics policies and procedures. Much
of the content of these policies and procedures
addresses other related Review Areas. The Staff did
not make any findings and recommendations based
solely on an NRSRO’s implementation of ethics
policies and procedures.
D. REVIEW AREA: INTERNAL
SUPERVISORY CONTROLS
The Staff reviewed each NRSRO’s overall control
structure, including the internal control structure
related to determining credit ratings.
The Staff’s essential findings regarding internal
supervisory controls are as follows:
1. An NRSRO did not appear to have
effective internal controls related to its
practice of allowing an analyst to inform
a client of the analyst’s rating recom-
mendation before a rating committee has
determined the client’s rating.
A smaller NRSRO’s analysts regularly informed
clients of a rating recommendation before
the proposed rating was presented to a rating
committee, and the NRSRO’s policies and proce-
dures did not include a requirement for the analysts
to inform the clients that the recommendation is
subject to the outcome of the rating committee
process and determination, which would be
consistent with the NRSRO’s policies and proce-
dures. The Staff recommended that the NRSRO
strengthen its policies and procedures governing its
practice of allowing an analyst to inform a client
of the analyst’s rating recommendation prior to
determination of the rating by a committee.
2. An NRSRO’s standards of training,
experience, and competence for credit
analysts did not appear to include a Rule
17g-9(c) requirement.
A smaller NRSRO’s policies and procedures that
establish its standards of training, experience, and
competence for credit analysts did not require
that at least one individual with an appropriate
level of experience in performing credit analysis,
but not less than three years, participates in the
determination of a credit rating as Rule 17g-9(c)
(2) requires. The Staff recommended that the
NRSRO’s policies and procedures include the
requirement specified in Rule 17g-9(c)(2).
3. An NRSRO did not appear to verify when
certain credit ratings should be discon-
tinued and did not maintain accurate
ratings per its policies and procedures.
A larger NRSRO prematurely discontinued certain
ratings because it was improperly informed that
the entire issuances had been redeemed or repaid.
In fact, the issuances had only been partially
redeemed or repaid. The NRSRO did not always
reinstate the improperly discontinued ratings in a
timely manner, and the reinstatement typically only
E X A M S U M M A R Y R E P O R T | 15
followed an inquiry from an outside party. The
NRSRO also may have improperly discontinued
additional ratings. The Staff recommended that the
NRSRO improve certain internal controls to avoid
the improper discontinuance of credit ratings and
to promptly detect ratings that were erroneously
discontinued.
4. An NRSRO did not appear to maintain
adequate internal controls within a certain
ratings group to detect long-standing
errors and maintain accurate credit ratings.
A larger NRSRO made several errors relating to
applying incorrect criteria for certain credit ratings.
The NRSRO did not detect the errors for several
years before correcting them, resulting in credit
ratings outstanding that did not accurately reflect
the credit risk during that time. Correcting the
errors resulted in one rating downgrade and some
rating upgrades. The Staff recommended that the
NRSRO enhance its internal control structure to
ensure that it accurately determines and maintains
credit ratings, including controls designed to identify
and correct inaccurate credit ratings, in accordance
with its policies, procedures, and methodologies.
5. An NRSRO did not appear to have
policies and procedures that were
reasonably designed with respect to a
prohibited conflict of interest.
A smaller NRSRO did not have reasonably
designed policies and procedures to systematically
determine whether entities that it rates are persons
associated with the NRSRO. The Staff noted facts
and circumstances that raised concerns about a
potential control relationship between a particular
rated entity and the NRSRO, and the NRSRO’s
policies and procedures did not consider that entity’s
potential status as a person associated with the
NRSRO. The Staff recommended that the NRSRO
ensure that it does not issue or maintain ratings
subject to the Rule 17g-5(c)(3) prohibited conflict
of interest and conduct an analysis to ensure that its
rating on such entity, or any other related entity, is
not subject to that conflict of interest.
6. Certain NRSROs did not appear to
comply with Rule 17g-7(a) information
disclosure form requirements when taking
certain credit rating actions.
A larger NRSRO did not require the publication of
an information disclosure form for all rating actions
as Rule 17g-7(a) requires. The NRSRO’s policies
and procedures did not require the production of
such form upon the issuance of a private rating,
and the NRSRO did not require the publication of
the form for certain other ratings actions. The Staff
recommended that the NRSRO adhere to the Rule
17g-7(a) disclosure requirements.
A smaller NRSRO did not provide an infor-
mation disclosure form with respect to private
credit ratings as Rule 17g-7(a) requires. The Staff
recommended that the NRSRO comply with Rule
17g-7(a) disclosure requirements when taking
private rating actions.
A smaller NRSRO’s policies and procedures stated
that a Rule 17g-7(a) information disclosure form is
not required with respect to certain credit ratings in
contravention of Rule 17g-7(a). The Staff recom-
mended that the NRSRO’s policies and proce-
dures ensure compliance with the Rule 17g-7(a)
disclosure requirements.
16 | O F F I C E O F C R E D I T R A T I N G S
A smaller NRSRO published an information
disclosure form for several rating actions that did
not include information required by Rule 17g-7(a)
(1)(ii)(A) and (B) the attestation required by Rule
17g-7(a)(1)(iii). Such form also did not specify the
information that Rule 17g-7(a)(1)(ii)(L) requires.
Second, the NRSRO published an information
disclosure form for a credit rating downgrade that
contained incorrect information that Rule 17g-7(a)
(1)(ii)(J) requires. Third, the NRSRO did not
publish an information disclosure form in accor-
dance with Rule 17g-7(a), and its own policies and
procedures, when downgrading a different credit
rating. The Staff recommended that the NRSRO
comply with the Rule 17g-7(a) disclosure require-
ments, and its own policies and procedures, when
taking credit rating actions and have sufficient
internal controls to ensure such compliance.
A smaller NRSRO produced certain credit ratings
that appeared in substance to be expected credit
ratings but failed to provide information disclosure
forms for such ratings, as required by Rule
17g-7(a). The Staff recommended that the NRSRO
produce information disclosure forms for expected
or preliminary credit ratings, as Rule 17g-7(a)
requires.
7. An NRSRO did not appear to have
documented policies and procedures for
utilizing the Rule 17g-5(a)(3)(iv) and Rule
17g-7(a)(3) exemptions.
A smaller NRSRO relied on the exemptions
described in Rule 17g-5(a)(3)(iv) and Rule
17g-7(a)(3) for some transactions without having
policies and procedures related to applying those
exemptions. Without policies and procedures for
applying the exemptions, it is not clear how the
NRSRO established the “reasonable basis”
required for the exemptions to apply. The Staff
recommended that the NRSRO establish policies
and procedures related to applying the Rule
17g-5(a)(3)(iv) and Rule 17g-7(a)(3) exemptions.
8. Certain NRSROs appeared to file with the
Commission an inaccurate or incomplete
annual financial report that Rule 17g-3(a)(5)
requires.
A smaller NRSRO filed with the Commission a
report required by Rule 17g-3(a)(5) that did not
include all required information. Since the report
included certain entries that appeared to be under-
writers, the report should have included more than
20 entries. However, the report listed only 20 entries
and did not identify whether the NRSRO included
each entry as an: (1) issuer or subscriber; or (2)
obligor or underwriter. The Staff recommended that
the NRSRO adhere to the requirements of Rule
17g-3(a)(5) and provide complete information when
filing with the Commission the unaudited financial
report required by the rule.
A smaller NRSRO filed with the Commission a
report required by Rule 17g-3(a)(5) that contained
inaccurate information. Such report did not include
certain entities, including the NRSRO’s largest client
for the fiscal year, and misstated the net revenue for
certain listed entities. The Staff recommended that
the NRSRO ensure the accuracy of Rule 17g-3(a)(5)
financial reports filed with the Commission and file
updated reports to correct any existing inaccuracies.
E X A M S U M M A R Y R E P O R T | 17 9. An NRSRO’s internal controls with
respect to using model inputs in the
rating process appeared to contain
weaknesses.
A larger NRSRO’s analysts made certain model
input errors for several CLO ratings, and secondary
reviewers did not identify the errors. The Staff
recommended that the NRSRO enhance its internal
controls, including with respect to analytical
training and the committee review process, to
ensure the accuracy of model inputs
used in determining ratings.
10. An NRSRO appeared to have weak
internal controls with respect to
conducting periodic compliance
reviews of private credit ratings.
A larger NRSRO did not include private credit
ratings in the sample of ratings actions that a
compliance monitoring group used to test analyst
adherence to the NRSRO’s policies and proce-
dures and that a credit policy control group used
in quarterly random testing samples. The Staff
recommended that the NRSRO enhance its internal
controls with respect to conducting periodic
compliance reviews of private credit ratings.
11. An NRSRO’s internal controls appeared
to contain weaknesses with respect to
assigning certain corporate credit ratings.
A larger NRSRO did not have any documented
policies and procedures governing its practices with
respect to assigning a certain type of corporate
credit ratings. The Staff recommended that the
NRSRO enhance its internal controls with respect
to assigning such ratings.
12. An NRSRO’s internal controls appeared
to contain weaknesses with respect to
oversight of certain process documents
related to determining credit ratings.
A larger NRSRO did not have a framework for
ensuring that the NRSRO’s compliance and control
functions have a full inventory of, and proper
oversight over, certain process documents which
could be integral to the NRSRO’s credit rating
process and address certain regulatory requirements.
The Staff recommended that the NRSRO evaluate
its internal controls framework to ensure that it
appropriately incorporates such documents.
13. An NRSRO’s internal controls with
respect to disclosing methodology
adjustments appeared to be weak.
A smaller NRSRO incorrectly stated in a presale
report certain methodology adjustments that the
NRSRO made. The Staff recommended that the
NRSRO enhance its internal controls, including
policies and procedures, for disclosing methodology
adjustments.
14. Regarding internal controls, certain
NRSROs did not appear to follow
requirements related to, or did not have,
certain credit rating policies, procedures,
or methodologies.
A smaller NRSRO determined credit ratings for
securities issued after previously rated securities,
but did not have written policies or procedures for
determining those ratings. The Staff recommended
that the NRSRO establish and maintain written
policies and procedures for determining, and ensure
that it properly documents, credit ratings for subse-
quently issued securities.
18 | O F F I C E O F C R E D I T R A T I N G S
A smaller NRSRO’s repeated and widespread use
of exceptions memoranda effectively modified the
NRSRO’s established and published methodologies
by replacing defined methodology processes with
more subjective approaches that the NRSRO did
not publish or subject to its internal controls for
methodology updates as, respectively, required
by Rule 17g-8(a)(4)(i) and Rule 17g-8(d)(1)(i) and
(ii). The NRSRO also did not subject exceptions
memoranda to its policies and procedures for
methodology approval by the Board, consistent
application of methodology changes, or disclosure
of the methodology version used when taking
a rating action, as required by, respectively,
Rule 17g-8(a)(1), Rule 17g-8(a)(3)(i), and
Rule 17g-7(a)(1)(ii)(B). The Staff recommended
that the NRSRO use exceptions memoranda in
accordance with its policies, procedures, and
internal controls for modifying methodologies,
or limit the use of exceptions memoranda so that
such use does not effectively modify the NRSRO’s
methodologies and complies with its policies and
procedures. The Staff also recommended that the
NRSRO include in information disclosure forms all
methodologies used to determine credit ratings,
in accordance with Rule 17g-7(a)(1)(ii)(B).
A smaller NRSRO issued several private ratings
without a documented methodology or sufficient
documentation to permit an after-the-fact review or
audit to analyze analyst adherence to the NRSRO’s
methodologies. The NRSRO also did not maintain
in several rating files complete and current records
documenting the established methodologies used to
determine ratings as Rule 17g-2(a)(6) requires, and
factors cited in the rating files as part of the rating
rationale frequently did not appear in the appli-
cable methodology. The Staff recommended that
the NRSRO: (1) maintain a complete and current
record documenting its established credit rating
procedures and methodologies; (2) enhance its
internal control structure governing the implemen-
tation of and adherence to credit rating policies,
procedures, and methodologies; and (3) consider
adopting controls reasonably designed to ensure
that credit analysts adhere to relevant procedures
and methodologies and document the steps taken
in developing ratings with sufficient detail to permit
an after-the-fact review or internal audit of rating
files to analyze whether an analyst adhered to the
NRSRO’s procedures and methodologies.
A smaller NRSRO used a newly developed credit
rating tool to, for the first time, raise a credit rating
for a client after the client provided a written
complaint to the NRSRO about the original rating.
The NRSRO did not refer to such rating tool in
its credit rating procedures or methodologies, and
it did not have documentation as to the analytical
basis for using the tool, which did not comply with
Rule 17g-2(a)(6). The NRSRO’s Board also did not
review or approve such rating tool in accordance
with Rule 17g-8(a)(1) and the NRSRO’s policies
and procedures, and the NRSRO did not review,
validate, and approve the tool as the NRSRO’s
policies and procedures require, resulting in
non-compliance with Rule 17g-8(a)(2). The Staff
recommended that the NRSRO: (1) make and
retain a complete and current record documenting
its established credit rating procedures and method-
ologies; (2) ensure that its Board approves the
NRSRO’s credit rating procedures and method-
ologies, including qualitative and quantitative
data and models; and (3) ensure that the NRSRO
develops and modifies its credit rating procedures
and methodologies, including qualitative and
quantitative data and models, in accordance with
its policies and procedures.
E X A M S U M M A R Y R E P O R T | 19
A smaller NRSRO did not, in several instances,
use the version of a model that was in effect on
the relevant date, and several rating files included
multiple model versions with no indication of
which version was used to assess the rating.
The NRSRO also used more than one model to
determine certain corporate credit ratings, but did
not have policies or procedures, training materials,
or other written documentation to instruct analysts
on which model to use for a particular corporate
rating. The Staff recommended that the NRSRO
establish, maintain, enforce, and document
effective internal controls, including policies and
procedures, to ensure that the NRSRO applies a
current version of its applicable credit rating model
when determining ratings and that the NRSRO
uses the correct credit rating model to determine a
particular corporate rating.
15. An NRSRO did not appear to comply
with Rule 17g-5(c)(1) by issuing and
maintaining credit ratings solicited by
an entity that provided more than 10%
of the NRSRO’s total net revenue for a
fiscal year, the NRSRO delayed recog-
nizing revenue and filed inaccurate Rule
17g-3(a) financial reports in order to
appear compliant with Rule 17g-5(c)(1),
and the NRSRO did not have effective
internal controls related to its revenue
recognition practices.
A smaller NRSRO altered its billing practices to
split the fee billing and revenue recognition for a
client between two consecutive fiscal years and, as
a result, decrease the recognized net revenue from
the client to below 10% of the NRSRO’s total net
revenue for the relevant fiscal year. The NRSRO’s
improper revenue deferral also resulted in the
NRSRO filing incorrect information with the
Commission in two annual Rule 17g-3(a) financial
reports. The Staff recommended that the NRSRO:
(1) establish, maintain, and enforce policies and
procedures, including with respect to its revenue
recognition practices, reasonably designed to
ensure that it does not issue or maintain ratings
subject to the Rule 17g-5(c)(1) prohibited conflict
of interest; (2) maintain and enforce an effective
internal control structure governing the imple-
mentation of policies and procedures to identify,
acknowledge, and remediate potential violations
of statutes or rules; and (3) file accurate Rule
17g-3(a) financial reports.
16. An NRSRO did not appear to promptly
file a Form NRSRO registration update
to designate a DCO.
A smaller NRSRO delayed more than one month
after its DCO resigned and the firm designated
a successor DCO before reflecting that change
on Form NRSRO Item 4 and Exhibit 9. The
Staff recommended that the NRSRO designate a
DCO on Form NRSRO at all times and promptly
amend any materially inaccurate information
on Form NRSRO as Section 15E(b)(1) and Rule
17g-1(e) require.
20 | O F F I C E O F C R E D I T R A T I N G S
17. An NRSRO did not appear to have
effective internal controls governing
the models it used to determine credit
ratings, including model validation and
review, and to ensure that the NRSRO’s
rating models are consistent with its
rating procedures and methodologies,
and the NRSRO’s standards of training,
experience, and competence for the
individuals it employs to participate in
ratings determination are not
reasonably designed.
A smaller NRSRO’s rating model appeared to
contain formulas producing numerous erroneous
results. The model also was inconsistent with the
NRSRO’s methodology related to random sampling
and rating assumptions, and the model provided
instructions that were inaccurate or incomplete
and based on prior model versions. The model
contained internal notes indicating that certain
sections needed to be updated, and the model
had base assumptions and formulas that were not
adequately safeguarded from inadvertent errors.
There were also inconsistencies between a model
and relevant methodology provisions. The Staff
recommended that the NRSRO enhance its internal
controls governing its rating models and ensure
that the models accurately reflect the NRSRO’s
rating procedures and methodologies. The Staff also
recommended that the NRSRO maintain standards
of training, experience, and competence for the
individuals it employs to participate in the deter-
mination of credit ratings that sufficiently consider
the technical expertise necessary to understand
any models and model inputs that are a part of the
procedures and methodologies.
18. An NRSRO appeared to have weak
internal controls governing the timely
receipt of documents used to form the
basis of a credit rating.
A smaller NRSRO issued credit ratings without
receiving and retaining certain documentation
used to form the basis of the rating and which
was requested by the NRSRO’s relevant rating
committee. The Staff recommended that the
NRSRO enhance its internal controls governing the
timely receipt of documents used to form the basis
of a credit rating, including documents that a rating
committee requests.
19. An NRSRO did not appear to have
policies and procedures to address its
business continuity risks to ensure an
effective internal control structure.
A smaller NRSRO did not have policies and
procedures, to address its business continuity risks
to ensure an effective internal control structure.
The Staff recommended that the NRSRO establish,
maintain, enforce, and document policies and
procedures to address its business continuity risks
and ensure an effective internal control structure
governing the implementation of and adherence
to policies, procedures, and methodologies for
determining credit ratings.
E X A M S U M M A R Y R E P O R T | 21
20. An NRSRO did not appear to establish,
maintain, enforce, and document an
effective internal control structure and
did not describe in the report that it
filed with the Commission under Rule
17g-3(a)(7) the material weaknesses in
its internal control structure governing
the implementation of and adherence
to credit rating policies, procedures,
and methodologies.
A smaller NRSRO did not have effective internal
controls related to: (1) compliance with Rule
17g-5(c)(8); (2) the implementation of and
adherence to policies, procedures, and method-
ologies for determining credit ratings; (3) the
receipt on a timely basis of documents used to form
the basis of a credit rating, including documents
requested by a rating committee; (4) analysts fully
documenting their ratings analysis in internal
records; (5) the NRSRO’s Board approving credit
rating procedures and methodologies; (6) devel-
oping credit rating procedures and methodologies
in accordance with its policies and procedures; (7)
the models used to determine credit ratings; (8)
reasonable standards of training, experience, and
competence of its analysts and adherence to its
policies and procedures adopted to comply with the
requirements in Rule 17g-9(a) and Rule 17g-9(c)(1);
and (9) ensuring the establishment, maintenance,
enforcement, and documentation of policies and
procedures to address business continuity risks.
Notwithstanding such internal control weaknesses,
the NRSRO filed with the Commission an internal
controls report under Rule 17g-3(a)(7) concluding
that its internal control structure was effective as
of the relevant fiscal year end and did not describe
any material weaknesses in its internal control
structure. The report was accompanied by a signed
statement of the NRSRO’s CEO to the effect that,
to the individual’s best knowledge, the report fairly
presents, in all material respects, an assessment by
management of the effectiveness of the internal
control structure during the fiscal year. The Staff
recommended that the NRSRO: (1) establish,
maintain, enforce, and document an effective
internal control structure governing the implemen-
tation of and adherence to credit rating policies,
procedures, and methodologies; (2) identify any
material weaknesses in its internal control structure
and include in its annual reports under Rule
17g-3(a)(7) a description of each such material
weakness identified during the fiscal year and a
description, if applicable, of how the NRSRO
addressed each identified material weakness.
E. REVIEW AREA: GOVERNANCE
The Staff interviewed each NRSRO’s Board,
including independent directors. The Staff also
reviewed minutes and other documentation related
to the activities of each NRSRO’s Board.
The Staff’s essential finding relating to corporate
governance and compliance with Section 15E(t) is
as follows:
1. An NRSRO did not appear to adhere to
the Rule 17g-8(a)(1) requirements related
to Board approval of procedures used to
determine credit ratings.
A larger NRSRO’s Board did not approve certain
procedures the NRSRO uses to determine credit
ratings, such as procedures related to rating
committees and rating withdrawal procedures.
The Staff recommended that the NRSRO adhere
to the Rule 17g-8(a)(1) requirements related to
the approval of procedures used to determine
credit ratings.
22 | O F F I C E O F C R E D I T R A T I N G S
F. REVIEW AREA: DCO ACTIVITIES
Each NRSRO has designated an individual to
serve as the NRSRO’s DCO. The Staff reviewed
the role and activities of each NRSRO’s DCO and
interviewed each DCO. Much of the content of
these reviews and interviews relates to other Review
Areas. As such, any Staff findings and recommenda-
tions related to an NRSRO’s DCO activities are
addressed in other sections of this Report.41
G. REVIEW AREA: COMPLAINTS
All of the NRSROs have written policies and proce-
dures to address complaints generally. The Staff’s
essential finding regarding complaints is as follows:
1. An NRSRO appeared to have
inconsistent policies and procedures
concerning complaints.
A smaller NRSRO’s policies and procedures
contained inconsistencies related to the circum-
stances under which a complaint must be reported
to senior management and/or the Board and
inconsistencies in whether analysts are required to
distinguish between normal course conversations
with, and a complaint by, a rated entity. Also, for
a complaint to be registered, the NRSRO’s policies
and procedures required analysts to instruct outside
parties to repeat their complaint to a compliance
officer. The Staff recommended that the NRSRO
revise its complaints policies and procedures so
that they are consistent and so that the NRSRO
adequately addresses all complaints.
H. REVIEW AREA: POST-EMPLOYMENT
The Staff reviewed whether each NRSRO’s “look-
back” policies and procedures satisfy the appli-
cable statutory and rule requirements. The Staff’s
essential findings regarding NRSROs’ look-back
policies and procedures are as follows:
1. An NRSRO’s look-back review policies
and procedures did not appear to address
all of the required Rule 17g-7(a)(1)(ii)(J)(3)
disclosures.
A smaller NRSRO’s policies and procedures did
not address the requirements to disclose, for rating
revisions and affirmations, a description of the
impact a conflict had on the prior rating actions
and, for rating affirmations, an explanation of
why no rating action was taken to revise the credit
rating notwithstanding the presence of the conflict.
The Staff recommended that the NRSRO ensure
that its look-back review policies and procedures
are consistent with Rule 17g-7(a)(1)(ii)(J)(3).
2. An NRSRO did not appear to enforce its
policies and procedures when completing
look-back reviews.
A larger NRSRO generated reports incor-
rectly stating that NRSRO personnel completed
look-back reviews without referring the matters
for further review to a certain ratings review group
and/or officer as the NRSRO’s relevant policies and
procedures require. The Staff also observed several
instances where the NRSRO did not complete
look-back reviews within the time period that
such policies and procedures require. The Staff
recommended that the NRSRO enforce its policies
and procedures for conducting look-back reviews
and enhance its internal controls to ensure that
it conducts and documents look-back reviews in
accordance with those policies and procedures.
41 See, e.g., Section IV.D.16.
E X A M S U M M A R Y R E P O R T | 23
https://Report.41
V. Conclusion
This Report summarizes the essential findings
and recommendations for the NRSROs. In future
examinations, the Staff will continue to assess the
NRSROs’ responses to recommendations from
the 2020 Section 15E examinations. The Staff will
continue to evaluate its risk assessment process
to review compliance with laws and regulations
and to identify emerging risk areas. The Staff will
also continue to evaluate examination techniques
to assess and test the NRSROs’ compliance with
applicable laws and rules.
24 | O F F I C E O F C R E D I T R A T I N G S
E X A M S U M M A R Y R E P O R T | 25
U . S . S E C U R I T I E S A N D E X C H A N G E C O M M I S S I O N
Washington, DC