Rule 17g-2 Supporting Statement (2)

SUPPORTING STATEMENT
For the Paperwork Reduction Act
Information Collection Submission
“Rule 17g-2”
A.

Justification
1.

Necessity of Information Collection

The Credit Rating Agency Reform Act of 20061 (“Rating Agency Act”), enacted
on September 29, 2006, defines the term “nationally recognized statistical rating
organization,” or “NRSRO” and provides authority for the Securities and Exchange
Commission (“Commission”) to implement registration, recordkeeping, financial
reporting, and oversight rules with respect to registered credit rating agencies.
Rule 17g-2 contains recordkeeping and disclosure requirements. The collections
of information obligations imposed by the rule are mandatory. The requirements of Rule
17g-2 apply only to credit rating agencies registered with the Commission as NRSROs,
and registration is voluntary.
The Rating Agency Act amended Section 17(a)(1) of the Securities Exchange Act
of 1934 (“Exchange Act”) to add NRSROs to the list of entities required to make and
keep such records, and make and disseminate such reports, as the Commission prescribes
by rule as necessary or appropriate in the public interest, for the protection of investors,
or otherwise in furtherance of the Exchange Act.2 The inclusion of NRSROs on the list
also provides the Commission with authority under Section 17(b)(1) of the Exchange Act
to examine all the records of an NRSRO.3
Rule 17g-2, “Records to be made and retained by nationally recognized statistical
rating organizations,” implements the Commission’s recordkeeping rulemaking authority
under Section 17(a) of the Exchange Act.4 The rule requires an NRSRO to make and
retain certain records relating to its business and to retain certain other business records,
if such records are made. The rule also prescribes the time periods and manner in which
all these records must be retained.
The requirements of Rule 17g-2 are designed to ensure that an NRSRO makes
and retains records that assist the Commission in monitoring, through its examination
authority, whether an NRSRO continues to meet the requirements for registration as an
NRSRO and whether the NRSRO is complying with applicable laws and regulations.

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Pub. L. No. 109-291.
See Section 5 of the Act and 15 U.S.C 78q(a)(1).
See 15 U.S.C 78q(b)(1).
15 U.S.C 78q.

2.

Purpose and Use of the Information Collection

The collections of information in Rule 17g-2 are designed to allow the
Commission to determine whether an NRSRO continues to meet the requirements for
registration and is complying with applicable laws and regulations. In particular, the
collections of information in Rule 17g-2 will assist the Commission in effectively
monitoring, through its examination function, whether an NRSRO is conducting its
activities in accordance with Section 15E of the Exchange Act,5 and applicable Exchange
Act rules under the Rating Agency Act.
3.

Consideration Given to Information Technology

The records that Rule 17g-2 require NRSROs to make and retain could be made
and retained electronically. NRSROs are not prevented by Rule 17g-2 from using
computers or other mechanical devices to generate the records required under the rule.
In addition, Rule 17g-2 also requires an NRSRO to make public, in XBRL format,
the ratings action information required under paragraph (a)(8) for a random sample of
10% of the issuer paid credit ratings for each ratings class for which it has issued 500 or
more issuer-paid credit ratings.6
4.

Duplication

No duplication is apparent.
5.

Effect on Small Entities

Small entities that choose to register as NRSROs may be affected by Rule 17g-2
because all credit rating agencies, regardless of size, that are registered as NRSROs will
be required to make and retain records in accordance with Rule 17g-2.
6.

Consequences of Not Conducting Collection

Up to date records are essential for the Commission to monitor whether an
NRSRO continues to meet the requirements for registration as an NRSRO. If an NRSRO
did not make these records, or if it made these records less frequently, the goals of the
Rating Agency Act--including enhancing the information used by investors to make
investment decisions--will be diminished.
7.

Inconsistencies With Guidelines In 5 CFR 1320.5(d)(2)

There are no special circumstances. This collection is consistent with 5 CFR
1320.5(d)(2).

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6

15 U.S.C. 78o-7.
Rule 17g-2(d).

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8.

Consultations Outside the Agency

The required Federal Register notice with a 60-day comment period soliciting
comments on this collection of information was published. No public comments were
received.
9.

Payment or Gift

There was no payment or gift to respondents.
10.

Confidentiality

Rule 17g-2(d) will require certain information required to be made and retained
by an NRSRO to be made publicly available. The rest of the information required to be
made and maintained under the amendments will be available only to the examination
staff of the Commission. Subject to the provisions of the Freedom of Information Act, 5
U.S.C. 552 (“FOIA”) and the Commission’s rules under FOIA (17 CFR
200.80(b)(4)(iii)), the Commission generally does not publish or make available
information contained in reports, summaries, analyses, letters, or memoranda arising out
of, in anticipation of, or in connection with an examination or inspection of the books and
records of any person or any other investigation.
11.

Sensitive Questions

Questions of a sensitive nature are not asked.
12.

Burden of Information Collection

The number of respondents that will be subject to Rule 17g-2 will depend, in part,
on the number of entities that will meet the statutory requirements for eligibility for
registration. Further, registration is voluntary, and, consequently, the number of
respondents will also depend on the number of entities that will choose to register with
the Commission. The Commission estimates that approximately one credit rating agency
will register with the Commission as an NRSRO under section 15E of the Exchange Act
during the collection period (approximately 0.33 applicants per year) based upon its
discussions with potential NRSRO applicants. There are currently nine NRSROs
registered with the Commission. Based on staff experience, the Commission believes
that there will likely be at least one additional credit rating agency that successfully
registers as an NRSRO during the collection period. Therefore, the Commission
estimates that there are ten NRSROs that will be impacted by this information collection.
The Commission estimates that the average one-time burden of implementing a
recordkeeping system to comply with Rule 17g-2 each year is approximately 300 hours.
Additionally, the Commission estimates that an NRSRO will spend an average of 279

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hours per year to make and retain records under Rule 17g-2, for a total annual hour
burden under Rule 17g-2 of 2,790 hours.7
In addition, Rule 17g-2 requires an NRSRO to make publicly available, on its
website in XBRL format, ratings action histories for a random sample of 10% of its
outstanding issuer-paid credit ratings in each class of credit rating for which it is
registered and has determined 500 or more issuer-paid credit ratings.8 Based on
information furnished on Form NRSRO, seven of the ten currently registered NRSROs
issue 500 or more issuer-paid credit ratings in at least one of the classes of credit ratings
for which they are registered. The Commission believes that even as the number of
registered NRSROs expands, this number will remain relatively constant, as new entrants
are likely to predominantly determine subscriber-paid credit ratings, at least in the near
future. In addition, the Commission believes that each of the NRSROs affected by this
new requirement already has, or will have, an Internet website. The amendment, as
adopted, specifies that in making the required information available on its website, an
NRSRO will use the List of XBRL Tags for NRSROs as specified on the Commission’s
website, thus eliminating the need for an NRSRO to develop its own taxonomy and tags
and significantly reducing the amount of time required to comply with the amendment.
Therefore, based on staff experience, the Commission estimates that, on average,
an NRSRO subject to the requirement will spend approximately 30 hours to publicly
disclose the required information in an XBRL format and, thereafter, 10 hours per year to
update this information.9 Accordingly, the total aggregate one-time burden to the
industry to make the history of rating actions publicly available in an XBRL format will
be 30 hours, and the total aggregate annual burden hours will be 70 hours.10
Rule 17g-2 also requires that an NRSRO that uses a third-party record custodian
furnish the Commission with an undertaking from the custodian. Based on staff
experience, the Commission estimates that approximately five NRSROs will file this
undertaking on a one-time basis. The Commission estimates, based on staff experience,
that it will take an NRSRO approximately 10 hours to complete an undertaking prior to
furnishing it to the Commission.11 Therefore, the Commission estimates that the total
one-time hour burden for this undertaking will be 50 hours.12

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279 hours x 10 respondents = 2,790 hours.
See amendment to Rule 17g-2(d).
The Commission also bases this estimate on the current one-time and annual burden
hours for an NRSRO to publicly disclose its Form NRSRO. No alternatives to these
estimates as proposed were suggested by commenters. See June 5, 2007 Adopting
Release, 72 FR at 33609.
10 hours x 7 NRSROs = 70 hours.
The estimated 10 hours includes drafting, legal review, and receiving corporate
authorization to file the undertaking with the Commission.
10 hours x 5 NRSROs = 50 hours. This estimate is the same as the previous hours
estimate to use a third-party record custodian.

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The Commission therefore estimates that the burden associated with Rule 17g-2 is
380 hours (300 + 30 + 50 = 380) on a one-time basis and 2,860 hours (2,790 + 70 =
2,860) on an annual basis.
13.

Costs to Respondents

The Commission estimates that an NRSRO may need to purchase recordkeeping
system software to establish a recordkeeping system in conformance with Rule 17g-2.
The Commission estimates that the cost of the software would vary based on the size and
complexity of the NRSRO. Also, the Commission estimates that some NRSROs would
not need such software because they already have adequate recordkeeping systems or,
given their small size, such software would not be necessary. Based on these estimates,
the Commission estimated that the average on-time cost for recordkeeping software
across all NRSROs would be approximately $1,000 per firm. The Commission believes
that the requirement to publicly disclose certain ratings action histories in an XBRL
format will result in a cost of $800 per firm per year. Therefore, the Commission
believes that the cost to the industry discussed above will increase by $5,600,13 for a total
one-time cost to the industry for Rule 17g-2 of $1000 and an annual cost of $5,600.
14.

Costs to Federal Government

There would be no additional costs to the Federal Government.
15.

Changes in Burden

The reduction in the annual time burden of 9,013 hours is due to the number of
respondents decreasing from 30 to 10 NRSROs and the expectation of significantly fewer
new NRSRO applicants during this collection period. The Commission had assumed
there would be 30 NRSROs when the rule was adopted. This number was based on the
belief that 30 companies would register as NRSROs with the Commission. We have
revised the estimate to reflect the current number of 10 NRSROs.
16.

Information Collection Planned for Statistical Purposes

Not applicable. The information collection is not used for statistical purposes.
17.

Display of OMB Approval Date

The Commission is not seeking approval to not display the expiration date for
OMB approval.
18.

Exceptions to Certification for Paperwork Reduction Act Submissions

This collection complies with the requirements in 5 CFR 1320.9.
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$800 x 7 = $5,600.

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B.

Collection of Information Employing Statistical Methods
This collection does not involve statistical methods.

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