ENHANCED REGULATION, ACCOUNTABILITY, AND TRANSPARENCY OF NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATIONS.

SEC. 932. ENHANCED REGULATION, ACCOUNTABILITY, AND TRANSPARENCY OF NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATIONS.(a) In General.—Section 15E of the Securities Exchange Act of 1934 (15 U.S.C. 78o–7) is amended—(1) in subsection (b)—(A) in paragraph (1)(A), by striking “furnished” and inserting “filed” and by striking “furnishing” and inserting “filing”;(B) in paragraph (1)(B), by striking “furnishing” and inserting “filing”; and(C) in the first sentence of paragraph (2), by striking “furnish to” and inserting “file with”;(2) in subsection (c)—(A) in paragraph (2)—124 STAT. 1873(i) in the second sentence, by inserting “any other provision of this section, or” after “Notwithstanding”; and(ii) by inserting after the period at the end the following: “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.”; and(B) by adding at the end the following:“(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.”;(3) in subsection (d)—(A) by inserting after “or revoke the registration of any nationally recognized statistical rating organization” the following: “, 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,”;(B) by inserting “bar” after “placing of limitations, suspension,”;(C) in paragraph (2), by striking “furnished to” and inserting “filed with”;(D) in paragraph (2), by redesignating subparagraphs (A) and (B) as clauses (i) and (ii), respectively, and adjusting the clause margins accordingly;(E) by redesignating paragraphs (1) through (5) as subparagraphs (A) through (E), respectively, and adjusting the subparagraph margins accordingly;124 STAT. 1874(F) in the matter preceding subparagraph (A), as so redesignated, by striking “The Commission” and inserting the following:“(1) In general.—The Commission”;(G) in subparagraph (D), as so redesignated—(i) by striking “furnish” and inserting “file”; and(ii) by striking “or” at the end.(H) in subparagraph (E), as so redesignated, by striking the period at the end and inserting a semicolon; and(I) by adding at the end the following:“(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.”;(4) in subsection (h), by adding at the end the following:“(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.124 STAT. 1875“(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).124 STAT. 1876“(B) Public disclosure.—Upon receiving such a report, the Commission shall make such information publicly available.”;(5) in subsection (j)—(A) by striking “Each” and inserting the following:“(1) In general.—Each”; and(B) by adding at the end the following:“(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.”;124 STAT. 1877(6) in subsection (k), by striking “furnish to” and inserting “file with”;(7) in subsection (l)(2)(A)(i), by striking “furnished” and inserting “filed”; and(8) by striking subsection (p) and inserting the following:“(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 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.124 STAT. 1878“(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 124 STAT. 1879 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; and124 STAT. 1880“(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;124 STAT. 1881“(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 124 STAT. 1882 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 ½ 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—124 STAT. 1883“(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 ½ 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.”.(b) Conforming Amendment.—Section 3(a)(62) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(62)) is amended by striking subparagraph (A) and redesignating subparagraphs (B) and (C) as subparagraphs (A) and (B), respectively.