SEC Rule 17g-5 and Why You Should Care

Rule 17g-5 of the Securities Exchange Act of 1934 mandates that NRSROs affects all structured financial products and, in turn, perhaps even your business.


11 March 2014

SEC Rule 17g-5 and Why You Should Care - www.dealcloserblog.com

By: Michelle Wu & Isabel Munson

Rule 17g-5 of the Securities Exchange Act of 1934 mandates that Nationally Recognized Statistical Ratings Organizations (NRSROs) manage (or refrain from altogether) conflicts of interest in a way that ensures the integrity of the credit rating system.  What you need to know is that this rule affects all structured financial products and, in turn, perhaps even your business.

NRSROs provide ratings for a wide range of financial products, most notably bonds, loans and other structured financial products. Currently, only ten ratings organizations are registered with the SEC and thereby eligible to rate financial products. Ratings furnished by NRSROs serve as a key component to investment decisions.

The introduction of Rule 17g-5 was part of the comprehensive NRSRO regulatory changes introduced after the financial crisis of 2008.  In defining the new rules of the game, the SEC intentionally uses the term “structured financial product” instead of asset-backed security (ABS) to encapsulate any “security or money market instrument issued by an asset pool or as part of any asset- backed or mortgage-backed securities transaction.” The more general language the SEC has chosen encompasses the “substantial increase in the number and in the complexity of RMBS and CDO deals since 2002” for which the ratings “policies and procedures…can be better documented.”

Complying with Rule 17g-5

  • Arrangers of structured financial products must maintain password-protected websites with information they furnish to NRSROs for ratings purposes .

  • NRSROs must also maintain separate sites detailing information about each rating that is subject to an “issuer-pay conflict.”

  • NRSROs must issue ratings for at least 10% of the securities whose sites they have accessed (granted they access 10 or more sites) in order to prevent misuse of material non-public information (MNPI).

  • Access to either of these websites must be granted to any NRSRO, even those that are not paid.

NRSRO Conflicts of Interest

As part of its governance of NRSRO conflicts of interest, the SEC defined an “issuer-pay conflict” as occurring when an NRSRO is hired to issue/maintain a rating on a product by the arranger of the deal.  There are prohibited conflicts of interest for NRSROs, such as issuing/maintaining credit ratings solicited by a person who provided the NRSRO with net revenue equal or greater than 10% of the NRSROs total net revenue for the most recently concluded fiscal year.  Implementation of these checks and balances should promote increased visibility and decrease the likelihood for any NRSRO bias.

17g-5 Compliant VDRs

The inclusion of technology in NRSRO ratings guidelines is another example of a SEC shift toward the use of electronically focused security and compliance tools.  For example, here at Intralinks, we offer Virtual Data Rooms (VDRs) that are 17g-5 compliant.  We can help streamline the ratings process for all structured finance products, including Commercial Mortgage-Backed Securities (CMBS) and Asset-Backed Securities (ABS) transactions.

Since Rule 17g-5 affects all structured financial products, it’s imperative that you understand its impact and ensure that your business is in compliance.



Michelle Wu

Michelle Wu

Michelle Wu is a Product Marketing Director for the Intralinks Banking and Securities vertical and is responsible for all aspects of the go-to-market strategy for the debt capital markets business. Prior to joining Intralinks in 2011, Michelle was an investment banker at HSBC focused on capital markets origination working across various product groups in New York, Hong Kong and Japan.