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SEC Concept Release: Revoking NRSRO Liability Protection

Earlier this week, the SEC issued a concept release seeking input from the industry on whether to rescind Rule 436(g) under the Securities Act of 1933, a rule providing significant protection from liability for Nationally Recognized Statistical Rating Organizations (NRSROs).  Currently, under the Securities Act of 1933, if an SEC registrant relies on a NRSRO in the preparation of their registration statement, the registrant is not required to file consent of the NRSRO with its registration statement, and the NRSRO is insulated from Section 11 liability for making false or misleading statements ultimately relied upon by investors.  Given the SEC's concurrent proposal to require certain registrants to disclose in their registration statements how they use or rely on NRSROs, the Commission is seeking comment how rescinding this exemption would affect registrants and the registration process.

The Commission iterated four reasons for considering revoking the Rule 436(g) exemption for NRSROs


    • First, we believe that the original reasons supporting adoption of Rule 436(g) may no longer provide a sufficient basis to continue to provide the exemption to NRSROs. If this is the case, then we believe it is appropriate to reconsider whether NRSROs should continue to be insulated from liability under Section 11.




    • Second, we believe that when credit ratings are used to sell securities, investors rely on NRSROs and other credit rating agencies as experts and that it may be appropriate for our liability scheme for experts to apply to them. In our view, NRSROs represent themselves to registrants and investors as experts at analyzing credit and risk.




    • Third, we believe that rescinding Rule 436(g), and therefore potentially increasing the risk of liability under the federal securities laws, could significantly improve investor protection. Enhancing the accountability of NRSROs may help to address concerns about the quality of credit ratings.




    • Finally, we believe that the distinction in Rule 436(g) between NRSROs and credit rating agencies that are not NRSROs may contribute to competitive disadvantages. We understand that investors rely on credit ratings issued by NRSROs as much as, if not more than, credit ratings issued by credit rating agencies that are not NRSROs, particularly because the NRSROs dominate the credit rating market.


The comment deadline for this concept release is December 14, 2009.

The full text of the Commission's concept release is available at: