January 31, 2007
1. Expansion of Interactive Data Voluntary Program to Include Mutual Fund Information
The Commission will consider whether to propose rule amendments to enable mutual funds to submit risk/return summary information from their prospectuses using interactive data under the Commission’s voluntary program. The risk/return summary at the front of every mutual fund prospectus includes information about a fund’s investment objectives and strategies, risks, costs, and historical performance.
The submission of tagged risk/return summary information would be supplemental and would not replace the required official versions of the information. Any mutual fund submitting tagged risk/return summary information would be required to include this information as an amendment to a filing on Form N-1A, the registration form for mutual funds.
The proposed rule amendments would permit mutual funds to submit tagged risk/return summary information using a taxonomy being developed by the Investment Company Institute (ICI). This month, the ICI released its draft risk/return summary taxonomy and announced that it would provide a 45-day period for public review and comment. The taxonomy, as well as instructions for commenting on the taxonomy, are available at the ICI’s Web site at http://members.ici.org/xbrl.
Data tagging uses standard definitions (or data tags) to translate text-based information into data that is interactive, that is, data that can be retrieved, searched, and analyzed through automated means. Tags are standardized through the development of taxonomies, which are essentially data dictionaries that describe individual items of information and mathematical and definitional relationships among the items. Tagged information can help investors, analysts, and other users to mine the wealth of information contained in detailed paper disclosure documents, providing users with the ability to access precisely the information in which they are interested and to analyze that data.
2. Proposed Rules to Implement the Credit Rating Agency Reform Act of 2006
The Securities and Exchange Commission will today consider whether to propose rules to implement provisions of the Credit Rating Agency Reform Act of 2006 (Public Law No. 109-291), which was enacted on Sept. 29, 2006. The Credit Rating Agency Reform Act defines the term “nationally recognized statistical rating organization” (NRSRO), provides authority for the Commission to implement registration, recordkeeping, financial reporting, and oversight rules designed to ensure that NRSROs conduct their activities with integrity and impartiality, and directs the Commission to issue final rules no later than 270 days after its enactment (or by June 26, 2007).
Proposed Rule 17g-1 would require a credit rating agency to apply to the Commission for registration as an NRSRO and, if approved, to provide updated information (when certain information provided becomes materially inaccurate) and an annual certification on proposed Form NRSRO. The credit rating agency would be required to provide information such as the classes of credit ratings for which it is applying to be registered; credit ratings performance statistics; methods for determining credit ratings; organizational structure; procedures to prevent the misuse of material non-public information; conflicts of interest; procedures to address and manage conflicts of interest; and the qualifications of its credit analysts and compliance personnel. The credit rating agency would be required to provide on a confidential basis certifications from qualified institutional buyers; a list of its largest customers; audited financial statements; and certain summary financial information. The proposed rule would also require an NRSRO to make the non-confidential information and documents submitted to the Commission in its application or amendments to the application publicly available and readily accessible; for example, by posting them on its Web site.
Proposed Rule 17g-2 would require an NRSRO to make and retain certain records relating to the business of issuing and maintaining credit ratings. The proposed rule would also prescribe the time periods and manner in which the records must be maintained.
Proposed Rule 17g-3 would require NRSROs to furnish the Commission, on a confidential basis, financial statements audited by an independent public accountant annually. In addition to statements of financial condition, results of operations, and cash flows, the audited statements would include summary financial information that would assist the Commission in carrying out its statutory responsibilities under the Credit Rating Agency Reform Act.
Proposed Rule 17g-4 would require an NRSRO to have procedures designed to prevent three specific potential misuses of material nonpublic information. NRSROs would be required to have procedures designed to prevent the dissemination of confidential information, procedures designed to prevent employees of the NRSRO from trading on material nonpublic information, and procedures designed to prevent the misuse of information relating to a pending credit rating action.
Proposed Rule 17g-5 would require an NRSRO to disclose and manage those conflicts of interest that arise in the normal course of engaging in the business of issuing credit ratings. These include receiving compensation from persons being rated or from subscribers that use the credit ratings for regulatory purposes. The proposed rule would prohibit other conflicts of interest. For example, an NRSRO could not rate an affiliate.
Proposed Rule 17g-6 would prohibit the NRSRO from engaging in certain acts or practices relating to the issuance of credit ratings that the Commission has determined to be unfair, coercive, or abusive. For example, an NRSRO could not pressure a customer to buy other services or products sold by the NRSRO by threatening to lower a credit rating if the purchase were not made.