Subtitle C of Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act (NRSRO Amendments) increases the authority of the U.S. Securities and Exchange Commission to regulate nationally recognized statistical rating organizations (NRSROs). This regulation is intended to improve the transparency of procedures and methodologies utilized by NRSROs to rate issuances of debt securities. Such regulation is expected to have a significant effect on capital markets participants, including issuers and underwriters of debt securities.

Credit rating agencies that are designated as NRSROs by the SEC are required to adhere to a number of reporting requirements with the SEC. Recently, credit rating agencies have come under intense scrutiny, in large part due to the fact that they had initially rated a number of asset-backed securities with high ratings before sharply downgrading such securities during the financial crisis of 2008. The NRSRO Amendments follow a number of recent legislative and regulatory initiatives undertaken to provide additional oversight over the activities of credit rating agencies, including the Credit Agency Reform Act of 2006 and the recent amendments to SEC Rule 17g-5(a), which became effective on June 2, 2010.

The following are certain key features of the NRSRO Amendments:

  • Office of Credit Ratings. Establishes a new Office of Credit Ratings (OCR) at the SEC, which will have the authority to impose penalties on NRSROs. The OCR is required to examine NRSROs at least once a year and make key findings public. The OCR is also expected to develop new rules intended to require NRSROs to (1) set up internal controls over the process for determining credit ratings, (2) establish an independent board of directors, (3) make greater disclosures to the public and investors, and (4) develop universal ratings across asset classes and types of issuer. Finally, the OCR will have the authority to deregister an NRSRO for providing bad ratings over time.

  • Information Gathering. Requires NRSROs to consider information in their ratings that comes to their attention from a source other than the organizations being rated if they find it credible. In addition, the NRSRO Amendments provide for the elimination of the credit rating agency exemption from the SEC's Regulation Fair Disclosure, commonly known as Reg FD, which provides that when an issuer, or a person acting on its behalf, selectively discloses material nonpublic information to certain enumerated persons (e.g., securities market professionals and holders of the issuer's securities who might trade on the basis of the information), it must make simultaneous public disclosure of that information. Previously, the SEC had specifically exempted the provision of information by issuers to NRSROs from requirements under Reg FD, which meant that the rating agencies often were in possession of information that an issuer had not disclosed publicly. The change is intended to advance transparency of the rating agency process.

  • Conflicts of Interest. Prohibits compliance officers from working on ratings, methodologies, or sales and prevents other employees from both marketing ratings services and performing the ratings of securities. The NRSRO Amendments also contain additional conflict of interest mitigation provisions, including a new requirement that NRSROs conduct a one-year look-back review when an NRSRO employee goes to work for an obligor or underwriter of a security or money market instrument subject to a rating by that NRSRO and report to the SEC when certain employees of the NRSRO go to work for an entity that the NRSRO has rated in the previous 12 months. Such reports are required to be made publicly available by the SEC.

  • Liability. Permits investors to bring a private right of action against credit rating agencies for an agency's knowing or reckless failure to conduct a reasonable investigation of the facts or to obtain analysis from an independent source in connection with the provision of a rating. Additionally, the NRSRO Amendments remove the exemption in SEC Rule 436(g) for credit ratings provided by NRSROs from being considered a part of the registration statement prepared or certified by a person under the "expert liability" regime of Section 7 and Section 11 of the Securities Act of 1933.

  • Structured Finance. Directs the SEC, after conducting a study and after submission of the report to Congress, to establish a system that prohibits issuers of structured finance products from selecting the NRSRO that will provide the initial credit rating. This is consistent with the intent of the newly effective SEC Rule 17g-5(a), which requires an NRSRO that has been retained to provide a rating to maintain information about ratings on a site that is accessible to other NRSROs that have not been selected to provide a rating so that such other rating agencies have the opportunity to provide an independent rating of the applicable structured finance product.

  • Elimination of Statutory References. To reduce the reliance on credit rating agencies, the NRSRO Amendments amend several statutes to remove all references to credit ratings, credit rating agencies, and NRSROs.

Ballard Spahr's Financial Institutions Reform Task Force will continue to monitor these and other portions of the Dodd-Frank Act, and its members are available to assist clients as they prepare to address the new requirements. If you have questions about how the NRSRO Amendments might affect your business, please feel free to contact Patrick R. Gillard, 215.864.8536 or; Teri M. Guarnaccia, 410.528.5526 or; J. Douglas Rollow III, 215.864.8525 or

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