(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

SEC Proposes Fund Data Tagging, Rating Agency Rules

The SEC voted unanimously to propose for comment rule amendments to permit mutual funds to voluntarily submit risk-return summary information using interactive data tags and rules to implement the Credit Rating Agency Reform Act of 2006. The tagged risk-return summary information would be supplemental and would not replace the official version of the information. The comment period on both proposals is open for 30 days. The Credit Rating Agency Reform Act requires the SEC to adopt final rules for registered credit rating agencies by June 26, 2007.

The risk-return summary appears at the front of every mutual fund prospectus and contains, among other things, information about the fund's investment objectives, risks, costs and historical information. The proposed supplemental information would be submitted as an amendment to a filing on Form N-1A. Voluntary filers would use the taxonomy developed by the Investment Company Institute. ICI is seeking public comments on its draft taxonomy for 45 days. Once approved, ICI's taxonomy software will be open source.

SEC Chairman Christopher Cox noted that one of the challenges of using data tagging for the risk-return summary information is that the information is largely narrative. Once properly tagged, an investor could sort for the type of fund in which they wish to invest.

Voluntary filers may start and stop their filings at any time they choose. There is no need to withdraw from the program. The rule proposal includes additional protection from liability for volunteers in the program. Commissioner Paul Atkins said he hopes the program will lead to a short-form mutual fund prospectus with liability protections. He said the previously adopted "profile prospectus" is seldom used due to concerns about liability.

Credit Rating Agency Rule Proposal

The Credit Rating Agency Reform Act was signed into law on September 29, 2006. The Act defined the term "nationally recognized statistical rating organization" and gave the SEC the authority to require registration, recordkeeping, financial reporting and oversight rules for the industry. Chairman Cox noted that the rule proposal addresses two criticisms by Congress, the length of time applicants had to wait for a response to their applications for NRSRO status and the lack of involvement by commissioners. Currently, NRSROs are recognized by the Division of Market Regulation under the no-action letter process. The rules will require the approval or disapproval of an application within 90 days. The staff hopes to analyze each application and submit its recommendation to the commissioners within 60 days.

Proposed Rule 17g-1 would require the submission of an application for registration as an NRSRO with the Commission. If the application is approved, the agency must provide certain updated information such as performance statistics and an annual certification from qualified institutional buyers. Proposed Rule 17g-2 would subject registered credit rating agencies to certain recordkeeping rules.

Proposed Rule 17g-3 would require the annual submission of confidential financial statements that were audited by an independent public accountant. Proposed Rule 17g-4 would require that NRSROs have in place procedures to prevent the misuse of material non-public information. Proposed Rule 17g-5 would require the disclosure of conflicts of interest and how the agency manages the conflicts. The rule would also prohibit certain conflicts of interest such as the rating of an affiliate. Proposed Rule 17g-6 would prohibit certain acts and practices that are deemed unfair, coercive or abusive.

Commissioner Atkins observed that the rulemaking initiative is one of three undertaken recently in which Congress has intervened because of the SEC's failure to act. He noted that one applicant for NRSRO status has been waiting since 1990. Commissioner Annette Nazareth, formerly the director of the Division of Market Regulation, later clarified that, to the extent that entities did not receive a no-action letter, it was not due to inactivity. It was because the staff determined they did not qualify for NRSRO status, she said, but the lack of transparency in the process did not make that known to the public.

The staff has estimated that as many as 30 agencies may apply to be NRSROs.

The proposing releases will be published in a forthcoming Report.