Thought Leadership  •  March 06, 2023

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What is SEC Rule 17g-5?

A Brief Explanation of SEC Rule 17g-5

In December 2009, the SEC made changes to Rule 17g-5 under the Securities Exchange Act of 1934 to increase transparency and address conflicts of interest in ratings by nationally recognized statistical rating organizations (NRSROs), more commonly known as ratings agencies.

This amendment was part of broader regulatory changes following the 2008 financial crisis. The new rule requires NRSROs and the issuers, sponsors, and underwriters of structured finance products to disclose potential conflicts of interest and provide more information about the rating process.

Which securities are subject to SEC Rule 17g-5?

The rule applies to a range of structured finance products, including asset-backed commercial paper (ABCP), asset-backed securities (ABS), collateralized debt obligations (CDOs), commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS), and other similar financial products. It also covers securities and money market instruments issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction. The rule applies to not only public offerings but also private offerings, including those made under Rule 144a, and exempt offerings, including municipal student loan transactions.

In general, if a transaction were to involve a U.S. originator or were to be offered to U.S. investors, it must comply with Rule 17g-5.

What are the key requirements of SEC Rule 17g-5?

SEC Rule 17g-5 has several provisions. Two key requirements for Rule 17g-5 compliance are:

  1. A hired NRSRO must establish a password-protected "Ratings in Process" website that provides free and unlimited access to other non-hired NRSROs. This website must include a list of all transactions for which the hired NRSRO is determining an initial rating and the web address to access the Issuer Information (described below).
  2. A hired NRSRO must receive a commitment from the Issuer to maintain a password-protected website where the Issuer must post all information provided to the hired NRSRO to determine the initial rating and undertaking rating surveillance. This information must be posted at the same time it is provided to the hired NRSRO and the Issuer must provide eligible NRSROs access to the website.

In terms of Rule 17g-5 exemptions, a 2019 amendment codified new rules to make them consistent with Exchange Act Rules 17g-7(a) and 15Ga-2.

What is information required under SEC Rule 17g-5?

Arrangers, including issuers, sponsors, and underwriters, must post all information, such as documents, files, and email communication, provided to the hired to determine an initial rating and undertaking rating surveillance.

Please note:

  1. The rule does not specify "all material information" to be posted.
  2. Different NRSROs have different policies on audio communication, such as recorded conference calls.

What are the conditions for non-hired NRSROs to access the issuer's website?

Non-hired NRSROs must be given unrestricted and unlimited access to the issuer's 17g-5 data room upon request.

When accessing this information, non-hired NRSROs must adhere to the "10 times/10% test", which means that they:

  1. will not access information on any Issuer website more than 10 times in a calendar year without providing a credit rating
  2. will determine and maintain credit ratings for at least 10% of the issued securities for which they access information
  3. must provide annual certification to the SEC attesting:
    • access to the issuer's website is to determine and monitoring credit ratings
    • they will keep confidential all information and the 10 times / 10% test was met last year and will be met this year