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115th Congress   }                                      {       Report
                        HOUSE OF REPRESENTATIVES
 1st Session     }                                      {      115-384

======================================================================



 
                   RISK-BASED CREDIT EXAMINATION ACT

                                _______
                                

November 3, 2017.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Hensarling, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 3911]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 3911) to amend the Securities Exchange Act of 
1934 with respect to risk-based examinations of Nationally 
Recognized Statistical Rating Organizations, having considered 
the same, report favorably thereon without amendment and 
recommend that the bill do pass.

                          Purpose and Summary

    On October 2, 2017, Representatives Ann Wagner and Bill 
Foster introduced H.R. 3911, the ``Risk-Based Credit 
Examinations Act of 2017'', which amends the Securities 
Exchange Act of 1934 (Exchange Act) to make risk-based the 
annual reporting requirements of the Nationally Recognized 
Statistical Rating Organizations (NRSROs).

                  Background and Need for Legislation

    The credit rating agencies--NRSROs--have received a healthy 
and deserved dose of criticism for their failures in both 
precipitating and accelerating the financial crisis. In the 
years leading up to the crisis, the government adopted a series 
of policies that had the effect of conferring a ``Good 
Housekeeping'' seal of approval on the credit rating agencies 
and their products, including designating certain agencies as 
``nationally recognized'' and hard-wiring references to their 
ratings into numerous Federal statutes and regulations. These 
regulatory privileges and the perception that the government 
had placed its imprimatur on the rating agencies' assessments 
bred a sense of complacency among investors and a failure of 
private-sector due diligence that contributed to mispriced risk 
and a collapse of market confidence when ratings of certain 
asset-backed securities were called into question during the 
subprime melt-down of 2007 and 2008. As economist Lawrence J. 
White observed:

        There is little question that the three major credit 
        rating agencies were central parties in the subprime 
        mortgage lending boom. Subprime lending was fueled 
        importantly by the ability of the mortgage originators 
        to sell their loans to ``packagers'' (or securitizers), 
        who pooled the loans into securities and sold the 
        securities to institutional investors, or who combined 
        the securities with other debt instruments into yet-
        more-complicated securities, . . . that were sold to 
        institutional investors. And crucial to the ability of 
        these packagers to sell the securities was the process 
        of obtaining favorable ratings on the securities.

    To address the failures exposed by the financial crisis, 
Subtitle C of Title IX of the Dodd-Frank Act includes many 
credit rating agency reforms. While some of these provisions 
may be constructive, several create new barriers to entry and 
further entrench the type of rating agency oligopoly that has 
not served investors or the economy well and was the reason 
that Congress first passed credit agency legislation in 2006.
    The new SEC Authorities in Subtitle C of Title IX of the 
Dodd-Frank Act enhances the SEC's regulatory regime for NRSROs. 
The NRSRO framework established by the Credit Rating Agency 
Reform Act of 2006 was based on registration--not regulation. 
Under this model, the SEC does not dictate the methodologies 
used by the rating agencies or evaluate the accuracy of those 
methodologies. The Dodd-Frank Act follows the 2006 Act's 
``registration not regulation'' approach: while it does not 
require the SEC to regulate or evaluate the rating agencies' 
methodologies or models, it does seek to ensure that ratings 
are based on an objective application of those methodologies 
and that commercial considerations do not influence rating 
decisions.
    Section 932 creates an Office of Credit Ratings in the SEC, 
imposes more stringent conflict-of-interest regulation on 
credit rating agencies, and gives the compliance officers at 
rating agencies additional responsibilities, including filing 
annual reports with the SEC. The annual reports are 
comprehensive and require that the OCR travels to the credit 
rating agency and conduct on-sight interviews with management 
and staff. Specifically, the Commission is required to examine 
each NRSRO annually on eight review areas designated in the 
Exchange Act, which are resource intensive and often redundant 
when no material issues have been identified. Those eight 
review areas are: (i) whether the NRSRO conducts business in 
accordance with its policies, procedures, and rating 
methodologies; (ii) the management of conflicts of interest by 
the NRSRO; (iii) the implementation of ethics policies by the 
NRSRO; (iv) the internal supervisory controls of the NRSRO; (v) 
the governance of the NRSRO; (vi) the activities of the NRSRO's 
Designated Compliance Officer; (vii) the processing of 
complaints of the NRSRO; and (viii) the policies of the NRSRO 
governing the post-employment activities of its former 
personnel.
    While credit rating agencies must be held accountable, the 
Dodd-Frank Act's increased reporting requirements are a burden 
for small credit rating agencies and have ultimately hurt 
investors who bear the cost of the new rules. Small credit 
rating agencies were not the cause of the financial crisis but 
now are bearing the cost of rigid and in some cases blunt 
legislative provisions that did not consider that not all 
NRSROs are the same. Competition breeds innovation and 
efficiency but Dodd-Frank's credit rating agencies' provisions 
further cements the domination of large, well-established 
NRSROs that can afford the costs of regulation.
    The NRSRO legal and regulatory regime is complex and the 
Dodd-Frank Act requirements prevent new credit rating agencies 
from entering the market, and thereby chill innovation and 
competition among credit rating agencies, and further 
consolidate power in the very largest credit rating agencies.
    On May 15, 2013, former SEC Chair Mary Jo White, on behalf 
of a unanimous Commission, wrote a letter to Chairman 
Hensarling to request that Congress amend the Exchange Act and 
provide the SEC with the authority contained in H.R. 3911.

                                Hearings

    The Committee on Financial Services held a hearing 
examining matters relating to H.R. 3911 on April 26, 2017.

                        Committee Consideration

    The Committee on Financial Services met in open session on 
October 11, 2017, and October 12, 2017, and ordered H.R. 3911 
to be reported favorably to the House without amendment by a 
recorded vote of 60 yeas to 0 nays (Record vote no. FC-85), a 
quorum being present.

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. The 
sole recorded vote was on a motion by Chairman Hensarling to 
report the bill favorably to the House without amendment. The 
motion was agreed to by a recorded vote of 60 yeas to 0 nays 
(Record vote no. FC-85), a quorum being present.


                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the findings and recommendations of 
the Committee based on oversight activities under clause 
2(b)(1) of rule X of the Rules of the House of Representatives, 
are incorporated in the descriptive portions of this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that H.R. 3911 
will eliminate the one-size fits all annual reporting 
requirements currently placed on NRSROs and alleviate the 
unnecessary burdens and disproportionate costs on small credit 
rating agencies by amending the Securities Exchange Act of 1934 
to make the criteria required in annual reporting by NRSROs 
risk-based.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                 Congressional Budget Office Estimates

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                  Washington, DC, November 1, 2017.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 3911, the Risk-
Based Credit Examination Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Stephen 
Rabent.
            Sincerely,
                                                Keith Hall,
                                                          Director.
    Enclosure.

H.R. 3911--Risk-Based Credit Examination Act

    Under current law, the Office of Credit Ratings (OCR) 
within the Securities and Exchange Commission (SEC) conducts an 
annual examination of nationally recognized statistical rating 
organizations (NRSROs) in eight specified review areas and 
produces an annual report on its findings. H.R. 3911 would 
authorize the OCR to include the results from any or all of 
those examinations in its annual reviews.
    Based on an analysis of information from the SEC, CBO 
estimates that implementing H.R. 3911 would not significantly 
affect the costs for the SEC to produce its annual reviews of 
NRSROs. Moreover, the SEC is authorized to collect fees 
sufficient to offset its annual appropriation; therefore, 
assuming appropriation actions consistent with that authority, 
CBO estimates that the net effect of the bill on discretionary 
spending would be negligible.
    Enacting H.R. 3911 would not affect direct spending or 
revenues; therefore, pay-as-you-go procedures do not apply.
    CBO estimates that enacting H.R. 3911 would not increase 
net direct spending or on-budget deficits in any of the four 
consecutive 10-year periods beginning in 2028.
    H.R. 3911 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act.
    The CBO staff contact for this estimate is Stephen Rabent. 
The estimate was approved by H. Samuel Papenfuss, Deputy 
Assistant Director for Budget Analysis.

                       Federal Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995.
    The Committee has determined that the bill does not contain 
Federal mandates on the private sector. The Committee has 
determined that the bill does not impose a Federal 
intergovernmental mandate on State, local, or tribal 
governments.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of the section 
102(b)(3) of the Congressional Accountability Act.

                         Earmark Identification

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 
rule.

                    Duplication of Federal Programs

    In compliance with clause 3(c)(5) of rule XIII of the Rules 
of the House of Representatives, the Committee states that no 
provision of the bill establishes or reauthorizes: (1) a 
program of the Federal Government known to be duplicative of 
another Federal program; (2) a program included in any report 
from the Government Accountability Office to Congress pursuant 
to section 21 of Public Law 111-139; or (3) a program related 
to a program identified in the most recent Catalog of Federal 
Domestic Assistance, published pursuant to the Federal Program 
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No. 
98-169).

                   Disclosure of Directed Rulemaking

    Pursuant to section 3(i) of H. Res. 5, (115th Congress), 
the following statement is made concerning directed 
rulemakings: The Committee estimates that the bill requires no 
directed rulemakings within the meaning of such section.

             Section-by-Section Analysis of the Legislation


Section 1. Short title

    This Section cites H.R. 3911 as the ``Risk-Based Credit 
Examination Act''

Section 2. Risk-based examination of Nationally Recognized Statistical 
        Rating Organizations

    This section amends the Securities Exchange Act of 1934 to 
allow for the SEC to perform risk-based examinations of the 
NRSROs by focusing on those areas designated in Section 
15E(p)(3)(B) of the Exchange Act that the SEC in its discretion 
identifies as appropriate for review for each NRSRO.

         Changes in Existing Law Made by the Bill, as Reported

    In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italics, and existing law in which no 
change is proposed is shown in roman):

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (new matter is 
printed in italics and existing law in which no change is 
proposed is shown in roman):

                    SECURITIES EXCHANGE ACT OF 1934

TITLE I--REGULATION OF SECURITIES EXCHANGES

           *       *       *       *       *       *       *


SEC. 15E. REGISTRATION OF NATIONALLY RECOGNIZED STATISTICAL RATING 
                    ORGANIZATIONS.

  (a) Registration Procedures.--
          (1) Application for registration.--
                  (A) In general.--A credit rating agency that 
                elects to be treated as a nationally recognized 
                statistical rating organization for purposes of 
                this title (in this section referred to as the 
                ``applicant''), shall furnish to the Commission 
                an application for registration, in such form 
                as the Commission shall require, by rule or 
                regulation issued in accordance with subsection 
                (n), and containing the information described 
                in subparagraph (B).
                  (B) Required information.--An application for 
                registration under this section shall contain 
                information regarding--
                          (i) credit ratings performance 
                        measurement statistics over short-term, 
                        mid-term, and long-term periods (as 
                        applicable) of the applicant;
                          (ii) the procedures and methodologies 
                        that the applicant uses in determining 
                        credit ratings;
                          (iii) policies or procedures adopted 
                        and implemented by the applicant to 
                        prevent the misuse, in violation of 
                        this title (or the rules and 
                        regulations hereunder), of material, 
                        nonpublic information;
                          (iv) the organizational structure of 
                        the applicant;
                          (v) whether or not the applicant has 
                        in effect a code of ethics, and if not, 
                        the reasons therefor;
                          (vi) any conflict of interest 
                        relating to the issuance of credit 
                        ratings by the applicant;
                          (vii) the categories described in any 
                        of clauses (i) through (v) of section 
                        3(a)(62)(B) with respect to which the 
                        applicant intends to apply for 
                        registration under this section;
                          (viii) on a confidential basis, a 
                        list of the 20 largest issuers and 
                        subscribers that use the credit rating 
                        services of the applicant, by amount of 
                        net revenues received therefrom in the 
                        fiscal year immediately preceding the 
                        date of submission of the application;
                          (ix) on a confidential basis, as to 
                        each applicable category of obligor 
                        described in any of clauses (i) through 
                        (v) of section 3(a)(62)(B), written 
                        certifications described in 
                        subparagraph (C), except as provided in 
                        subparagraph (D); and
                          (x) any other information and 
                        documents concerning the applicant and 
                        any person associated with such 
                        applicant as the Commission, by rule, 
                        may prescribe as necessary or 
                        appropriate in the public interest or 
                        for the protection of investors.
                  (C) Written certifications.--Written 
                certifications required by subparagraph 
                (B)(ix)--
                          (i) shall be provided from not fewer 
                        than 10 qualified institutional buyers, 
                        none of which is affiliated with the 
                        applicant;
                          (ii) may address more than one 
                        category of obligors described in any 
                        of clauses (i) through (v) of section 
                        3(a)(62)(B);
                          (iii) shall include not fewer than 2 
                        certifications for each such category 
                        of obligor; and
                          (iv) shall state that the qualified 
                        institutional buyer--
                                  (I) meets the definition of a 
                                qualified institutional buyer 
                                under section 3(a)(64); and
                                  (II) has used the credit 
                                ratings of the applicant for at 
                                least the 3 years immediately 
                                preceding the date of the 
                                certification in the subject 
                                category or categories of 
                                obligors.
                  (D) Exemption from certification 
                requirement.--A written certification under 
                subparagraph (B)(ix) is not required with 
                respect to any credit rating agency which has 
                received, or been the subject of, a no-action 
                letter from the staff of the Commission prior 
                to August 2, 2006, stating that such staff 
                would not recommend enforcement action against 
                any broker or dealer that considers credit 
                ratings issued by such credit rating agency to 
                be ratings from a nationally recognized 
                statistical rating organization.
                  (E) Limitation on liability of qualified 
                institutional buyers.--No qualified 
                institutional buyer shall be liable in any 
                private right of action for any opinion or 
                statement expressed in a certification made 
                pursuant to subparagraph (B)(ix).
          (2) Review of application.--
                  (A) Initial determination.--Not later than 90 
                days after the date on which the application 
                for registration is furnished to the Commission 
                under paragraph (1) (or within such longer 
                period as to which the applicant consents) the 
                Commission shall--
                          (i) by order, grant such registration 
                        for ratings in the subject category or 
                        categories of obligors, as described in 
                        clauses (i) through (v) of section 
                        3(a)(62)(B); or
                          (ii) institute proceedings to 
                        determine whether registration should 
                        be denied.
                  (B) Conduct of proceedings.--
                          (i) Content.--Proceedings referred to 
                        in subparagraph (A)(ii) shall--
                                  (I) include notice of the 
                                grounds for denial under 
                                consideration and an 
                                opportunity for hearing; and
                                  (II) be concluded not later 
                                than 120 days after the date on 
                                which the application for 
                                registration is furnished to 
                                the Commission under paragraph 
                                (1).
                          (ii) Determination.--At the 
                        conclusion of such proceedings, the 
                        Commission, by order, shall grant or 
                        deny such application for registration.
                          (iii) Extension authorized.--The 
                        Commission may extend the time for 
                        conclusion of such proceedings for not 
                        longer than 90 days, if it finds good 
                        cause for such extension and publishes 
                        its reasons for so finding, or for such 
                        longer period as to which the applicant 
                        consents.
                  (C) Grounds for decision.--The Commission 
                shall grant registration under this 
                subsection--
                          (i) if the Commission finds that the 
                        requirements of this section are 
                        satisfied; and
                          (ii) unless the Commission finds (in 
                        which case the Commission shall deny 
                        such registration) that--
                                  (I) the applicant does not 
                                have adequate financial and 
                                managerial resources to 
                                consistently produce credit 
                                ratings with integrity and to 
                                materially comply with the 
                                procedures and methodologies 
                                disclosed under paragraph 
                                (1)(B) and with subsections 
                                (g), (h), (i), and (j); or
                                  (II) if the applicant were so 
                                registered, its registration 
                                would be subject to suspension 
                                or revocation under subsection 
                                (d).
          (3) Public availability of information.--Subject to 
        section 24, the Commission shall, by rule, require a 
        nationally recognized statistical rating organization, 
        upon the granting of registration under this section, 
        to make the information and documents submitted to the 
        Commission in its completed application for 
        registration, or in any amendment submitted under 
        paragraph (1) or (2) of subsection (b), publicly 
        available on its website, or through another 
        comparable, readily accessible means, except as 
        provided in clauses (viii) and (ix) of paragraph 
        (1)(B).
  (b) Update of Registration.--
          (1) Update.--Each nationally recognized statistical 
        rating organization shall promptly amend its 
        application for registration under this section if any 
        information or document provided therein becomes 
        materially inaccurate, except that a nationally 
        recognized statistical rating organization is not 
        required to amend--
                  (A) the information required to be filed 
                under subsection (a)(1)(B)(i) by filing 
                information under this paragraph, but shall 
                amend such information in the annual submission 
                of the organization under paragraph (2) of this 
                subsection; or
                  (B) the certifications required to be 
                provided under subsection (a)(1)(B)(ix) by 
                filing information under this paragraph.
          (2) Certification.--Not later than 90 days after the 
        end of each calendar year, each nationally recognized 
        statistical rating organization shall file with the 
        Commission an amendment to its registration, in such 
        form as the Commission, by rule, may prescribe as 
        necessary or appropriate in the public interest or for 
        the protection of investors--
                  (A) certifying that the information and 
                documents in the application for registration 
                of such nationally recognized statistical 
                rating organization (other than the 
                certifications required under subsection 
                (a)(1)(B)(ix)) continue to be accurate; and
                  (B) listing any material change that occurred 
                to such information or documents during the 
                previous calendar year.
  (c) Accountability for Ratings Procedures.--
          (1) Authority.--The Commission shall have exclusive 
        authority to enforce the provisions of this section in 
        accordance with this title with respect to any 
        nationally recognized statistical rating organization, 
        if such nationally recognized statistical rating 
        organization issues credit ratings in material 
        contravention of those procedures relating to such 
        nationally recognized statistical rating organization, 
        including procedures relating to the prevention of 
        misuse of nonpublic information and conflicts of 
        interest, that such nationally recognized statistical 
        rating organization--
                  (A) includes in its application for 
                registration under subsection (a)(1)(B)(ii); or
                  (B) makes and disseminates in reports 
                pursuant to section 17(a) or the rules and 
                regulations thereunder.
          (2) Limitation.--The rules and regulations that the 
        Commission may prescribe pursuant to this title, as 
        they apply to nationally recognized statistical rating 
        organizations, shall be narrowly tailored to meet the 
        requirements of this title applicable to nationally 
        recognized statistical rating organizations. 
        Notwithstanding any other provision of this section, or 
        any other provision of law, neither the Commission nor 
        any State (or political subdivision thereof) may 
        regulate the substance of credit ratings or the 
        procedures and methodologies by which any nationally 
        recognized statistical rating organization determines 
        credit ratings. Nothing in this paragraph may be 
        construed to afford a defense against any action or 
        proceeding brought by the Commission to enforce the 
        antifraud provisions of the securities laws.
          (3) Internal controls over processes for determining 
        credit ratings.--
                  (A) In general.--Each nationally recognized 
                statistical rating organization shall 
                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, taking into 
                consideration such factors as the Commission 
                may prescribe, by rule.
                  (B) Attestation requirement.--The Commission 
                shall prescribe rules requiring each nationally 
                recognized statistical rating organization to 
                submit to the Commission an annual internal 
                controls report, which shall contain--
                          (i) a description of the 
                        responsibility of the management of the 
                        nationally recognized statistical 
                        rating organization in establishing and 
                        maintaining an effective internal 
                        control structure under subparagraph 
                        (A);
                          (ii) an assessment of the 
                        effectiveness of the internal control 
                        structure of the nationally recognized 
                        statistical rating organization; and
                          (iii) the attestation of the chief 
                        executive officer, or equivalent 
                        individual, of the nationally 
                        recognized statistical rating 
                        organization.
  (d) Censure, Denial, or Suspension of Registration; Notice 
and Hearing.--
          (1) In general.--The Commission, by order, shall 
        censure, place limitations on the activities, 
        functions, or operations of, suspend for a period not 
        exceeding 12 months, or revoke the registration of any 
        nationally recognized statistical rating organization, 
        or with respect to any person who is associated with, 
        who is seeking to become associated with, or, at the 
        time of the alleged misconduct, who was associated or 
        was seeking to become associated with a nationally 
        recognized statistical rating organization, the 
        Commission, by order, shall censure, place limitations 
        on the activities or functions of such person, suspend 
        for a period not exceeding 1 year, or bar such person 
        from being associated with a nationally recognized 
        statistical rating organization, if the Commission 
        finds, on the record after notice and opportunity for 
        hearing, that such censure, placing of limitations, 
        suspension, bar or revocation is necessary for the 
        protection of investors and in the public interest and 
        that such nationally recognized statistical rating 
        organization, or any person associated with such an 
        organization, whether prior to or subsequent to 
        becoming so associated--
                  (A) has committed or omitted any act, or is 
                subject to an order or finding, enumerated in 
                subparagraph (A), (D), (E), (H), or (G) of 
                section 15(b)(4), has been convicted of any 
                offense specified in section 15(b)(4)(B), or is 
                enjoined from any action, conduct, or practice 
                specified in subparagraph (C) of section 
                15(b)(4), during the 10-year period preceding 
                the date of commencement of the proceedings 
                under this subsection, or at any time 
                thereafter;
                  (B) has been convicted during the 10-year 
                period preceding the date on which an 
                application for registration is filed with the 
                Commission under this section, or at any time 
                thereafter, of--
                          (i) any crime that is punishable by 
                        imprisonment for 1 or more years, and 
                        that is not described in section 
                        15(b)(4)(B); or
                          (ii) a substantially equivalent crime 
                        by a foreign court of competent 
                        jurisdiction;
                  (C) is subject to any order of the Commission 
                barring or suspending the right of the person 
                to be associated with a nationally recognized 
                statistical rating organization;
                  (D) fails to file the certifications required 
                under subsection (b)(2);
                  (E) fails to maintain adequate financial and 
                managerial resources to consistently produce 
                credit ratings with integrity;
                  (F) has failed reasonably to supervise, with 
                a view to preventing a violation of the 
                securities laws, an individual who commits such 
                a violation, if the individual is subject to 
                the supervision of that person.
          (2) Suspension or revocation for particular class of 
        securities.--
                  (A) In general.--The Commission may 
                temporarily suspend or permanently revoke the 
                registration of a nationally recognized 
                statistical rating organization with respect to 
                a particular class or subclass of securities, 
                if the Commission finds, on the record after 
                notice and opportunity for hearing, that the 
                nationally recognized statistical rating 
                organization does not have adequate financial 
                and managerial resources to consistently 
                produce credit ratings with integrity.
                  (B) Considerations.--In making any 
                determination under subparagraph (A), the 
                Commission shall consider--
                          (i) whether the nationally recognized 
                        statistical rating organization has 
                        failed over a sustained period of time, 
                        as determined by the Commission, to 
                        produce ratings that are accurate for 
                        that class or subclass of securities; 
                        and
                          (ii) such other factors as the 
                        Commission may determine.
  (e) Termination of Registration.--
          (1) Voluntary withdrawal.--A nationally recognized 
        statistical rating organization may, upon such terms 
        and conditions as the Commission may establish as 
        necessary in the public interest or for the protection 
        of investors, withdraw from registration by furnishing 
        a written notice of withdrawal to the Commission.
          (2) Commission authority.--In addition to any other 
        authority of the Commission under this title, if the 
        Commission finds that a nationally recognized 
        statistical rating organization is no longer in 
        existence or has ceased to do business as a credit 
        rating agency, the Commission, by order, shall cancel 
        the registration under this section of such nationally 
        recognized statistical rating organization.
  (f) Representations.--
          (1) Ban on representations of sponsorship by united 
        states or agency thereof.--It shall be unlawful for any 
        nationally recognized statistical rating organization 
        to represent or imply in any manner whatsoever that 
        such nationally recognized statistical rating 
        organization has been designated, sponsored, 
        recommended, or approved, or that the abilities or 
        qualifications thereof have in any respect been passed 
        upon, by the United States or any agency, officer, or 
        employee thereof.
          (2) Ban on representation as nrsro of unregistered 
        credit rating agencies.--It shall be unlawful for any 
        credit rating agency that is not registered under this 
        section as a nationally recognized statistical rating 
        organization to state that such credit rating agency is 
        a nationally recognized statistical rating organization 
        registered under this title.
          (3) Statement of registration under securities 
        exchange act of 1934 provisions.--No provision of 
        paragraph (1) shall be construed to prohibit a 
        statement that a nationally recognized statistical 
        rating organization is a nationally recognized 
        statistical rating organization under this title, if 
        such statement is true in fact and if the effect of 
        such registration is not misrepresented.
  (g) Prevention of Misuse of Nonpublic Information.--
          (1) Organization policies and procedures.--Each 
        nationally recognized statistical rating organization 
        shall establish, maintain, and enforce written policies 
        and procedures reasonably designed, taking into 
        consideration the nature of the business of such 
        nationally recognized statistical rating organization, 
        to prevent the misuse in violation of this title, or 
        the rules or regulations hereunder, of material, 
        nonpublic information by such nationally recognized 
        statistical rating organization or any person 
        associated with such nationally recognized statistical 
        rating organization.
          (2) Commission authority.--The Commission shall issue 
        final rules in accordance with subsection (n) to 
        require specific policies or procedures that are 
        reasonably designed to prevent misuse in violation of 
        this title (or the rules or regulations hereunder) of 
        material, nonpublic information.
  (h) Management of Conflicts of Interest.--
          (1) Organization policies and procedures.--Each 
        nationally recognized statistical rating organization 
        shall establish, maintain, and enforce written policies 
        and procedures reasonably designed, taking into 
        consideration the nature of the business of such 
        nationally recognized statistical rating organization 
        and affiliated persons and affiliated companies 
        thereof, to address and manage any conflicts of 
        interest that can arise from such business.
          (2) Commission authority.--The Commission shall issue 
        final rules in accordance with subsection (n) to 
        prohibit, or require the management and disclosure of, 
        any conflicts of interest relating to the issuance of 
        credit ratings by a nationally recognized statistical 
        rating organization, including, without limitation, 
        conflicts of interest relating to--
                  (A) the manner in which a nationally 
                recognized statistical rating organization is 
                compensated by the obligor, or any affiliate of 
                the obligor, for issuing credit ratings or 
                providing related services;
                  (B) the provision of consulting, advisory, or 
                other services by a nationally recognized 
                statistical rating organization, or any person 
                associated with such nationally recognized 
                statistical rating organization, to the 
                obligor, or any affiliate of the obligor;
                  (C) business relationships, ownership 
                interests, or any other financial or personal 
                interests between a nationally recognized 
                statistical rating organization, or any person 
                associated with such nationally recognized 
                statistical rating organization, and the 
                obligor, or any affiliate of the obligor;
                  (D) any affiliation of a nationally 
                recognized statistical rating organization, or 
                any person associated with such nationally 
                recognized statistical rating organization, 
                with any person that underwrites the securities 
                or money market instruments that are the 
                subject of a credit rating; and
                  (E) any other potential conflict of interest, 
                as the Commission deems necessary or 
                appropriate in the public interest or for the 
                protection of investors.
          (3) Separation of ratings from sales and marketing.--
                  (A) Rules required.--The Commission shall 
                issue rules to prevent the sales and marketing 
                considerations of a nationally recognized 
                statistical rating organization from 
                influencing the production of ratings by the 
                nationally recognized statistical rating 
                organization.
                  (B) Contents of rules.--The rules issued 
                under subparagraph (A) shall provide for--
                          (i) exceptions for small nationally 
                        recognized statistical rating 
                        organizations with respect to which the 
                        Commission determines that the 
                        separation of the production of ratings 
                        and sales and marketing activities is 
                        not appropriate; and
                          (ii) suspension or revocation of the 
                        registration of a nationally recognized 
                        statistical rating organization, if the 
                        Commission finds, on the record, after 
                        notice and opportunity for a hearing, 
                        that--
                                  (I) the nationally recognized 
                                statistical rating organization 
                                has committed a violation of a 
                                rule issued under this 
                                subsection; and
                                  (II) the violation of a rule 
                                issued under this subsection 
                                affected a rating.
          (4) Look-back requirement.--
                  (A) Review by the nationally recognized 
                statistical rating organization.--Each 
                nationally recognized statistical rating 
                organization shall establish, maintain, and 
                enforce policies and procedures reasonably 
                designed to ensure that, in any case in which 
                an employee of a person subject to a credit 
                rating of the nationally recognized statistical 
                rating organization or the issuer, underwriter, 
                or sponsor of a security or money market 
                instrument subject to a credit rating of the 
                nationally recognized statistical rating 
                organization was employed by the nationally 
                recognized statistical rating organization and 
                participated in any capacity in determining 
                credit ratings for the person or the securities 
                or money market instruments during the 1-year 
                period preceding the date an action was taken 
                with respect to the credit rating, the 
                nationally recognized statistical rating 
                organization shall--
                          (i) conduct a review to determine 
                        whether any conflicts of interest of 
                        the employee influenced the credit 
                        rating; and
                          (ii) take action to revise the rating 
                        if appropriate, in accordance with such 
                        rules as the Commission shall 
                        prescribe.
                  (B) Review by commission.--
                          (i) In general.--The Commission shall 
                        conduct periodic reviews of the 
                        policies described in subparagraph (A) 
                        and the implementation of the policies 
                        at each nationally recognized 
                        statistical rating organization to 
                        ensure they are reasonably designed and 
                        implemented to most effectively 
                        eliminate conflicts of interest.
                          (ii) Timing of reviews.--The 
                        Commission shall review the code of 
                        ethics and conflict of interest policy 
                        of each nationally recognized 
                        statistical rating organization--
                                  (I) not less frequently than 
                                annually; and
                                  (II) whenever such policies 
                                are materially modified or 
                                amended.
          (5) Report to commission on certain employment 
        transitions.--
                  (A) Report required.--Each nationally 
                recognized statistical rating organization 
                shall report to the Commission any case such 
                organization knows or can reasonably be 
                expected to know where a person associated with 
                such organization within the previous 5 years 
                obtains employment with any obligor, issuer, 
                underwriter, or sponsor of a security or money 
                market instrument for which the organization 
                issued a credit rating during the 12-month 
                period prior to such employment, if such 
                employee--
                          (i) was a senior officer of such 
                        organization;
                          (ii) participated in any capacity in 
                        determining credit ratings for such 
                        obligor, issuer, underwriter, or 
                        sponsor; or
                          (iii) supervised an employee 
                        described in clause (ii).
                  (B) Public disclosure.--Upon receiving such a 
                report, the Commission shall make such 
                information publicly available.
  (i) Prohibited Conduct.--
          (1) Prohibited acts and practices.--The Commission 
        shall issue final rules in accordance with subsection 
        (n) to prohibit any act or practice relating to the 
        issuance of credit ratings by a nationally recognized 
        statistical rating organization that the Commission 
        determines to be unfair, coercive, or abusive, 
        including any act or practice relating to--
                  (A) conditioning or threatening to condition 
                the issuance of a credit rating on the purchase 
                by the obligor or an affiliate thereof of other 
                services or products, including pre-credit 
                rating assessment products, of the nationally 
                recognized statistical rating organization or 
                any person associated with such nationally 
                recognized statistical rating organization;
                  (B) lowering or threatening to lower a credit 
                rating on, or refusing to rate, securities or 
                money market instruments issued by an asset 
                pool or as part of any asset-backed or 
                mortgage-backed securities transaction, unless 
                a portion of the assets within such pool or 
                part of such transaction, as applicable, also 
                is rated by the nationally recognized 
                statistical rating organization; or
                  (C) modifying or threatening to modify a 
                credit rating or otherwise departing from its 
                adopted systematic procedures and methodologies 
                in determining credit ratings, based on whether 
                the obligor, or an affiliate of the obligor, 
                purchases or will purchase the credit rating or 
                any other service or product of the nationally 
                recognized statistical rating organization or 
                any person associated with such organization.
          (2) Rule of construction.--Nothing in paragraph (1), 
        or in any rules or regulations adopted thereunder, may 
        be construed to modify, impair, or supersede the 
        operation of any of the antitrust laws (as defined in 
        the first section of the Clayton Act, except that such 
        term includes section 5 of the Federal Trade Commission 
        Act, to the extent that such section 5 applies to 
        unfair methods of competition).
  (j) Designation of Compliance Officer.--
          (1) In general.--Each nationally recognized 
        statistical rating organization shall designate an 
        individual responsible for administering the policies 
        and procedures that are required to be established 
        pursuant to subsections (g) and (h), and for ensuring 
        compliance with the securities laws and the rules and 
        regulations thereunder, including those promulgated by 
        the Commission pursuant to this section.
          (2) Limitations.--
                  (A) In general.--Except as provided in 
                subparagraph (B), an individual designated 
                under paragraph (1) may not, while serving in 
                the designated capacity--
                          (i) perform credit ratings;
                          (ii) participate in the development 
                        of ratings methodologies or models;
                          (iii) perform marketing or sales 
                        functions; or
                          (iv) participate in establishing 
                        compensation levels, other than for 
                        employees working for that individual.
                  (B) Exception.--The Commission may exempt a 
                small nationally recognized statistical rating 
                organization from the limitations under this 
                paragraph, if the Commission finds that 
                compliance with such limitations would impose 
                an unreasonable burden on the nationally 
                recognized statistical rating organization.
          (3) Other duties.--Each individual designated under 
        paragraph (1) shall establish procedures for the 
        receipt, retention, and treatment of--
                  (A) complaints regarding credit ratings, 
                models, methodologies, and compliance with the 
                securities laws and the policies and procedures 
                developed under this section; and
                  (B) confidential, anonymous complaints by 
                employees or users of credit ratings.
          (4) Compensation.--The compensation of each 
        compliance officer appointed under paragraph (1) shall 
        not be linked to the financial performance of the 
        nationally recognized statistical rating organization 
        and shall be arranged so as to ensure the independence 
        of the officer's judgment.
          (5) Annual reports required.--
                  (A) Annual reports required.--Each individual 
                designated under paragraph (1) shall submit to 
                the nationally recognized statistical rating 
                organization an annual report on the compliance 
                of the nationally recognized statistical rating 
                organization with the securities laws and the 
                policies and procedures of the nationally 
                recognized statistical rating organization that 
                includes--
                          (i) a description of any material 
                        changes to the code of ethics and 
                        conflict of interest policies of the 
                        nationally recognized statistical 
                        rating organization; and
                          (ii) a certification that the report 
                        is accurate and complete.
                  (B) Submission of reports to the 
                commission.--Each nationally recognized 
                statistical rating organization shall file the 
                reports required under subparagraph (A) 
                together with the financial report that is 
                required to be submitted to the Commission 
                under this section.
  (k) Statements of Financial Condition.--Each nationally 
recognized statistical rating organization shall, on a 
confidential basis, file with the Commission, at intervals 
determined by the Commission, such financial statements, 
certified (if required by the rules or regulations of the 
Commission) by an independent public accountant, and 
information concerning its financial condition, as the 
Commission, by rule, may prescribe as necessary or appropriate 
in the public interest or for the protection of investors.
  (l) Sole Method of Registration.--
          (1) In general.--On and after the effective date of 
        this section, a credit rating agency may only be 
        registered as a nationally recognized statistical 
        rating organization for any purpose in accordance with 
        this section.
          (2) Prohibition on reliance on no-action relief.--On 
        and after the effective date of this section--
                  (A) an entity that, before that date, 
                received advice, approval, or a no-action 
                letter from the Commission or staff thereof to 
                be treated as a nationally recognized 
                statistical rating organization pursuant to the 
                Commission rule at section 240.15c3-1 of title 
                17, Code of Federal Regulations, may represent 
                itself or act as a nationally recognized 
                statistical rating organization only--
                          (i) during Commission consideration 
                        of the application, if such entity has 
                        filed an application for registration 
                        under this section; and
                          (ii) on and after the date of 
                        approval of its application for 
                        registration under this section; and
                  (B) the advice, approval, or no-action letter 
                described in subparagraph (A) shall be void.
          (3) Notice to other agencies.--Not later than 30 days 
        after the date of enactment of this section, the 
        Commission shall give notice of the actions undertaken 
        pursuant to this section to each Federal agency which 
        employs in its rules and regulations the term 
        ``nationally recognized statistical rating 
        organization'' (as that term is used under Commission 
        rule 15c3-1 (17 C.F.R. 240.15c3-1), as in effect on the 
        date of enactment of this section).
  (m) Accountability.--
          (1) In general.--The enforcement and penalty 
        provisions of this title shall apply to statements made 
        by a credit rating agency in the same manner and to the 
        same extent as such provisions apply to statements made 
        by a registered public accounting firm or a securities 
        analyst under the securities laws, and such statements 
        shall not be deemed forward-looking statements for the 
        purposes of section 21E.
          (2) Rulemaking.--The Commission shall issue such 
        rules as may be necessary to carry out this subsection.
  (n) Regulations.--
          (1) New provisions.--Such rules and regulations as 
        are required by this section or are otherwise necessary 
        to carry out this section, including the application 
        form required under subsection (a)--
                  (A) shall be issued by the Commission in 
                final form, not later than 270 days after the 
                date of enactment of this section; and
                  (B) shall become effective not later than 270 
                days after the date of enactment of this 
                section.
          (2) Review of existing regulations.--Not later than 
        270 days after the date of enactment of this section, 
        the Commission shall--
                  (A) review its existing rules and regulations 
                which employ the term ``nationally recognized 
                statistical rating organization'' or ``NRSRO''; 
                and
                  (B) amend or revise such rules and 
                regulations in accordance with the purposes of 
                this section, as the Commission may prescribe 
                as necessary or appropriate in the public 
                interest or for the protection of investors.
  (o) NRSROs Subject to Commission Authority.--
          (1) In general.--No provision of the laws of any 
        State or political subdivision thereof requiring the 
        registration, licensing, or qualification as a credit 
        rating agency or a nationally recognized statistical 
        rating organization shall apply to any nationally 
        recognized statistical rating organization or person 
        employed by or working under the control of a 
        nationally recognized statistical rating organization.
          (2) Limitation.--Nothing in this subsection prohibits 
        the securities commission (or any agency or office 
        performing like functions) of any State from 
        investigating and bringing an enforcement action with 
        respect to fraud or deceit against any nationally 
        recognized statistical rating organization or person 
        associated with a nationally recognized statistical 
        rating organization.
  (p) Regulation of Nationally Recognized Statistical Rating 
Organizations.--
          (1) Establishment of office of credit ratings.--
                  (A) Office established.--The Commission shall 
                establish within the Commission an Office of 
                Credit Ratings (referred to in this subsection 
                as the ``Office'') to administer the rules of 
                the Commission--
                          (i) with respect to the practices of 
                        nationally recognized statistical 
                        rating organizations in determining 
                        ratings, for the protection of users of 
                        credit ratings and in the public 
                        interest;
                          (ii) to promote accuracy in credit 
                        ratings issued by nationally recognized 
                        statistical rating organizations; and
                          (iii) to ensure that such ratings are 
                        not unduly influenced by conflicts of 
                        interest.
                  (B) Director of the office.--The head of the 
                Office shall be the Director, who shall report 
                to the Chairman.
          (2) Staffing.--The Office established under this 
        subsection shall be staffed sufficiently to carry out 
        fully the requirements of this section. The staff shall 
        include persons with knowledge of and expertise in 
        corporate, municipal, and structured debt finance.
          (3) Commission examinations.--
                  (A) Annual examinations required.--The Office 
                shall conduct an examination of each nationally 
                recognized statistical rating organization at 
                least annually.
                  (B) Conduct of examinations.--Each 
                examination under subparagraph (A) shall 
                include, as appropriate, a review of--
                          (i) whether the nationally recognized 
                        statistical rating organization 
                        conducts business in accordance with 
                        the policies, procedures, and rating 
                        methodologies of the nationally 
                        recognized statistical rating 
                        organization;
                          (ii) the management of conflicts of 
                        interest by the nationally recognized 
                        statistical rating organization;
                          (iii) implementation of ethics 
                        policies by the nationally recognized 
                        statistical rating organization;
                          (iv) the internal supervisory 
                        controls of the nationally recognized 
                        statistical rating organization;
                          (v) the governance of the nationally 
                        recognized statistical rating 
                        organization;
                          (vi) the activities of the individual 
                        designated by the nationally recognized 
                        statistical rating organization under 
                        subsection (j)(1);
                          (vii) the processing of complaints by 
                        the nationally recognized statistical 
                        rating organization; and
                          (viii) the policies of the nationally 
                        recognized statistical rating 
                        organization governing the post-
                        employment activities of former staff 
                        of the nationally recognized 
                        statistical rating organization.
                  (C) Inspection reports.--The Commission shall 
                make available to the public, in an easily 
                understandable format, an annual report 
                summarizing--
                          (i) the essential findings of all 
                        examinations conducted under 
                        subparagraph (A), as deemed appropriate 
                        by the Commission;
                          (ii) the responses by the nationally 
                        recognized statistical rating 
                        organizations to any material 
                        regulatory deficiencies identified by 
                        the Commission under clause (i); and
                          (iii) whether the nationally 
                        recognized statistical rating 
                        organizations have appropriately 
                        addressed the recommendations of the 
                        Commission contained in previous 
                        reports under this subparagraph.
          (4) Rulemaking authority.--The Commission shall--
                  (A) establish, by rule, fines, and other 
                penalties applicable to any nationally 
                recognized statistical rating organization that 
                violates the requirements of this section and 
                the rules thereunder; and
                  (B) issue such rules as may be necessary to 
                carry out this section.
  (q) Transparency of Ratings Performance.--
          (1) Rulemaking required.--The Commission shall, by 
        rule, require that each nationally recognized 
        statistical rating organization publicly disclose 
        information on the initial credit ratings determined by 
        the nationally recognized statistical rating 
        organization for each type of obligor, security, and 
        money market instrument, and any subsequent changes to 
        such credit ratings, for the purpose of allowing users 
        of credit ratings to evaluate the accuracy of ratings 
        and compare the performance of ratings by different 
        nationally recognized statistical rating organizations.
          (2) Content.--The rules of the Commission under this 
        subsection shall require, at a minimum, disclosures 
        that--
                  (A) are comparable among nationally 
                recognized statistical rating organizations, to 
                allow users of credit ratings to compare the 
                performance of credit ratings across nationally 
                recognized statistical rating organizations;
                  (B) are clear and informative for investors 
                having a wide range of sophistication who use 
                or might use credit ratings;
                  (C) include performance information over a 
                range of years and for a variety of types of 
                credit ratings, including for credit ratings 
                withdrawn by the nationally recognized 
                statistical rating organization;
                  (D) are published and made freely available 
                by the nationally recognized statistical rating 
                organization, on an easily accessible portion 
                of its website, and in writing, when requested;
                  (E) are appropriate to the business model of 
                a nationally recognized statistical rating 
                organization; and
                  (F) each nationally recognized statistical 
                rating organization include an attestation with 
                any credit rating it issues affirming that no 
                part of the rating was influenced by any other 
                business activities, that the rating was based 
                solely on the merits of the instruments being 
                rated, and that such rating was an independent 
                evaluation of the risks and merits of the 
                instrument.
  (r) Credit Ratings Methodologies.--The Commission shall 
prescribe rules, for the protection of investors and in the 
public interest, with respect to the procedures and 
methodologies, including qualitative and quantitative data and 
models, used by nationally recognized statistical rating 
organizations that require each nationally recognized 
statistical rating organization--
          (1) to ensure that credit ratings are determined 
        using procedures and methodologies, including 
        qualitative and quantitative data and models, that 
        are--
                  (A) approved by the board of the nationally 
                recognized statistical rating organization, a 
                body performing a function similar to that of a 
                board; and
                  (B) in accordance with the policies and 
                procedures of the nationally recognized 
                statistical rating organization for the 
                development and modification of credit rating 
                procedures and methodologies;
          (2) to ensure that when material changes to credit 
        rating procedures and methodologies (including changes 
        to qualitative and quantitative data and models) are 
        made, that--
                  (A) the changes are applied consistently to 
                all credit ratings to which the changed 
                procedures and methodologies apply;
                  (B) to the extent that changes are made to 
                credit rating surveillance procedures and 
                methodologies, the changes are applied to then-
                current credit ratings by the nationally 
                recognized statistical rating organization 
                within a reasonable time period determined by 
                the Commission, by rule; and
                  (C) the nationally recognized statistical 
                rating organization publicly discloses the 
                reason for the change; and
          (3) to notify users of credit ratings--
                  (A) of the version of a procedure or 
                methodology, including the qualitative 
                methodology or quantitative inputs, used with 
                respect to a particular credit rating;
                  (B) when a material change is made to a 
                procedure or methodology, including to a 
                qualitative model or quantitative inputs;
                  (C) when a significant error is identified in 
                a procedure or methodology, including a 
                qualitative or quantitative model, that may 
                result in credit rating actions; and
                  (D) of the likelihood of a material change 
                described in subparagraph (B) resulting in a 
                change in current credit ratings.
  (s) Transparency of Credit Rating Methodologies and 
Information Reviewed.--
          (1) Form for disclosures.--The Commission shall 
        require, by rule, each nationally recognized 
        statistical rating organization to prescribe a form to 
        accompany the publication of each credit rating that 
        discloses--
                  (A) information relating to--
                          (i) the assumptions underlying the 
                        credit rating procedures and 
                        methodologies;
                          (ii) the data that was relied on to 
                        determine the credit rating; and
                          (iii) if applicable, how the 
                        nationally recognized statistical 
                        rating organization used servicer or 
                        remittance reports, and with what 
                        frequency, to conduct surveillance of 
                        the credit rating; and
                  (B) information that can be used by investors 
                and other users of credit ratings to better 
                understand credit ratings in each class of 
                credit rating issued by the nationally 
                recognized statistical rating organization.
          (2) Format.--The form developed under paragraph (1) 
        shall--
                  (A) be easy to use and helpful for users of 
                credit ratings to understand the information 
                contained in the report;
                  (B) require the nationally recognized 
                statistical rating organization to provide the 
                content described in paragraph (3)(B) in a 
                manner that is directly comparable across types 
                of securities; and
                  (C) be made readily available to users of 
                credit ratings, in electronic or paper form, as 
                the Commission may, by rule, determine.
          (3) Content of form.--
                  (A) Qualitative content.--Each nationally 
                recognized statistical rating organization 
                shall disclose on the form developed under 
                paragraph (1)--
                          (i) the credit ratings produced by 
                        the nationally recognized statistical 
                        rating organization;
                          (ii) the main assumptions and 
                        principles used in constructing 
                        procedures and methodologies, including 
                        qualitative methodologies and 
                        quantitative inputs and assumptions 
                        about the correlation of defaults 
                        across underlying assets used in rating 
                        structured products;
                          (iii) the potential limitations of 
                        the credit ratings, and the types of 
                        risks excluded from the credit ratings 
                        that the nationally recognized 
                        statistical rating organization does 
                        not comment on, including liquidity, 
                        market, and other risks;
                          (iv) information on the uncertainty 
                        of the credit rating, including--
                                  (I) information on the 
                                reliability, accuracy, and 
                                quality of the data relied on 
                                in determining the credit 
                                rating; and
                                  (II) a statement relating to 
                                the extent to which data 
                                essential to the determination 
                                of the credit rating were 
                                reliable or limited, 
                                including--
                                          (aa) any limits on 
                                        the scope of historical 
                                        data; and
                                          (bb) any limits in 
                                        accessibility to 
                                        certain documents or 
                                        other types of 
                                        information that would 
                                        have better informed 
                                        the credit rating;
                          (v) whether and to what extent third 
                        party due diligence services have been 
                        used by the nationally recognized 
                        statistical rating organization, a 
                        description of the information that 
                        such third party reviewed in conducting 
                        due diligence services, and a 
                        description of the findings or 
                        conclusions of such third party;
                          (vi) a description of the data about 
                        any obligor, issuer, security, or money 
                        market instrument that were relied upon 
                        for the purpose of determining the 
                        credit rating;
                          (vii) a statement containing an 
                        overall assessment of the quality of 
                        information available and considered in 
                        producing a rating for an obligor, 
                        security, or money market instrument, 
                        in relation to the quality of 
                        information available to the nationally 
                        recognized statistical rating 
                        organization in rating similar 
                        issuances;
                          (viii) information relating to 
                        conflicts of interest of the nationally 
                        recognized statistical rating 
                        organization; and
                          (ix) such additional information as 
                        the Commission may require.
                  (B) Quantitative content.--Each nationally 
                recognized statistical rating organization 
                shall disclose on the form developed under this 
                subsection--
                          (i) an explanation or measure of the 
                        potential volatility of the credit 
                        rating, including--
                                  (I) any factors that might 
                                lead to a change in the credit 
                                ratings; and
                                  (II) the magnitude of the 
                                change that a user can expect 
                                under different market 
                                conditions;
                          (ii) information on the content of 
                        the rating, including--
                                  (I) the historical 
                                performance of the rating; and
                                  (II) the expected probability 
                                of default and the expected 
                                loss in the event of default;
                          (iii) information on the sensitivity 
                        of the rating to assumptions made by 
                        the nationally recognized statistical 
                        rating organization, including--
                                  (I) 5 assumptions made in the 
                                ratings process that, without 
                                accounting for any other 
                                factor, would have the greatest 
                                impact on a rating if the 
                                assumptions were proven false 
                                or inaccurate; and
                                  (II) an analysis, using 
                                specific examples, of how each 
                                of the 5 assumptions identified 
                                under subclause (I) impacts a 
                                rating;
                          (iv) such additional information as 
                        may be required by the Commission.
          (4) Due diligence services for asset-backed 
        securities.--
                  (A) Findings.--The issuer or underwriter of 
                any asset-backed security shall make publicly 
                available the findings and conclusions of any 
                third-party due diligence report obtained by 
                the issuer or underwriter.
                  (B) Certification required.--In any case in 
                which third-party due diligence services are 
                employed by a nationally recognized statistical 
                rating organization, an issuer, or an 
                underwriter, the person providing the due 
                diligence services shall provide to any 
                nationally recognized statistical rating 
                organization that produces a rating to which 
                such services relate, written certification, as 
                provided in subparagraph (C).
                  (C) Format and content.--The Commission shall 
                establish the appropriate format and content 
                for the written certifications required under 
                subparagraph (B), to ensure that providers of 
                due diligence services have conducted a 
                thorough review of data, documentation, and 
                other relevant information necessary for a 
                nationally recognized statistical rating 
                organization to provide an accurate rating.
                  (D) Disclosure of certification.--The 
                Commission shall adopt rules requiring a 
                nationally recognized statistical rating 
                organization, at the time at which the 
                nationally recognized statistical rating 
                organization produces a rating, to disclose the 
                certification described in subparagraph (B) to 
                the public in a manner that allows the public 
                to determine the adequacy and level of due 
                diligence services provided by a third party.
  (t) Corporate Governance, Organization, and Management of 
Conflicts of Interest.--
          (1) Board of directors.--Each nationally recognized 
        statistical rating organization shall have a board of 
        directors.
          (2) Independent directors.--
                  (A) In general.--At least \1/2\ of the board 
                of directors, but not fewer than 2 of the 
                members thereof, shall be independent of the 
                nationally recognized statistical rating 
                agency. A portion of the independent directors 
                shall include users of ratings from a 
                nationally recognized statistical rating 
                organization.
                  (B) Independence determination.--In order to 
                be considered independent for purposes of this 
                subsection, a member of the board of directors 
                of a nationally recognized statistical rating 
                organization--
                          (i) may not, other than in his or her 
                        capacity as a member of the board of 
                        directors or any committee thereof--
                                  (I) accept any consulting, 
                                advisory, or other compensatory 
                                fee from the nationally 
                                recognized statistical rating 
                                organization; or
                                  (II) be a person associated 
                                with the nationally recognized 
                                statistical rating organization 
                                or with any affiliated company 
                                thereof; and
                          (ii) shall be disqualified from any 
                        deliberation involving a specific 
                        rating in which the independent board 
                        member has a financial interest in the 
                        outcome of the rating.
                  (C) Compensation and term.--The compensation 
                of the independent members of the board of 
                directors of a nationally recognized 
                statistical rating organization shall not be 
                linked to the business performance of the 
                nationally recognized statistical rating 
                organization, and shall be arranged so as to 
                ensure the independence of their judgment. The 
                term of office of the independent directors 
                shall be for a pre-agreed fixed period, not to 
                exceed 5 years, and shall not be renewable.
          (3) Duties of board of directors.--In addition to the 
        overall responsibilities of the board of directors, the 
        board shall oversee--
                  (A) the establishment, maintenance, and 
                enforcement of policies and procedures for 
                determining credit ratings;
                  (B) the establishment, maintenance, and 
                enforcement of policies and procedures to 
                address, manage, and disclose any conflicts of 
                interest;
                  (C) the effectiveness of the internal control 
                system with respect to policies and procedures 
                for determining credit ratings; and
                  (D) the compensation and promotion policies 
                and practices of the nationally recognized 
                statistical rating organization.
          (4) Treatment of nrsro subsidiaries.--If a nationally 
        recognized statistical rating organization is a 
        subsidiary of a parent entity, the board of the 
        directors of the parent entity may satisfy the 
        requirements of this subsection by assigning to a 
        committee of such board of directors the duties under 
        paragraph (3), if--
                  (A) at least \1/2\ of the members of the 
                committee (including the chairperson of the 
                committee) are independent, as defined in this 
                section; and
                  (B) at least 1 member of the committee is a 
                user of ratings from a nationally recognized 
                statistical rating organization.
          (5) Exception authority.--If the Commission finds 
        that compliance with the provisions of this subsection 
        present an unreasonable burden on a small nationally 
        recognized statistical rating organization, the 
        Commission may permit the nationally recognized 
        statistical rating organization to delegate such 
        responsibilities to a committee that includes at least 
        one individual who is a user of ratings of a nationally 
        recognized statistical rating organization.
  (u) Duty To Report Tips Alleging Material Violations of 
Law.--
          (1) Duty to report.--Each nationally recognized 
        statistical rating organization shall refer to the 
        appropriate law enforcement or regulatory authorities 
        any information that the nationally recognized 
        statistical rating organization receives from a third 
        party and finds credible that alleges that an issuer of 
        securities rated by the nationally recognized 
        statistical rating organization has committed or is 
        committing a material violation of law that has not 
        been adjudicated by a Federal or State court.
          (2) Rule of construction.--Nothing in paragraph (1) 
        may be construed to require a nationally recognized 
        statistical rating organization to verify the accuracy 
        of the information described in paragraph (1).
  (v) Information From Sources Other Than the Issuer.--In 
producing a credit rating, a nationally recognized statistical 
rating organization shall consider information about an issuer 
that the nationally recognized statistical rating organization 
has, or receives from a source other than the issuer or 
underwriter, that the nationally recognized statistical rating 
organization finds credible and potentially significant to a 
rating decision.

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