Nationally recognized statistical rating organization
| Company type | Designation |
|---|---|
| Industry | Financial services |
| Founded | 1975 |
| Founder | U.S. Securities and Exchange Commission |
| Headquarters | United States |
Area served | United States |
| Website | www |
A nationally recognized statistical rating organization (NRSRO) refers to a credit rating agency (CRA) officially authorized by the U.S. Securities and Exchange Commission (SEC) to issue credit ratings that financial institutions must utilize for specific regulatory requirements.
History
The designation NRSRO was first introduced in 1975 when the SEC implemented regulations concerning net capital requirements for banks and broker-dealers ().
Prior to 1975, the SEC lacked formal criteria for recognizing credit rating agencies as "nationally recognized," instead handling recognition on an individual basis. This acknowledgment was conveyed through a "No Action Letter" issued by SEC personnel, which indicated that if regulated entities relied on the ratings from a particular CRA, the SEC would not pursue enforcement actions. These letters were publicly accessible and could be referenced by other regulated organizations. In March 2005, the SEC proposed regulatory measures to define clearer standards for NRSRO status. Important considerations included an agency’s nationwide recognition among primary users, operational competence, corporate structure, financial strength ensuring independence, staff expertise, rating methodologies, and protections against misuse of confidential information. Additionally, the SEC suggested that agencies register as investment advisers.
Due to criticism surrounding the ambiguous "No Action Letter" process and limited regulatory oversight, Congress enacted the Credit Rating Agency Reform Act of 2006, . This legislation required the SEC to establish explicit criteria for granting NRSRO status, authorized oversight of internal practices such as record maintenance and conflict-of-interest policies, and mandated SEC approval for all NRSRO designations. However, it barred the SEC from regulating the actual rating methodologies used by agencies. In June 2007, the SEC adopted these rules through formal regulations. Subsequent amendments in February 2009 addressed concerns regarding the reliability of ratings on structured finance instruments, particularly mortgage-backed securities.
Regulatory reforms following 2010 under the Dodd–Frank Wall Street Reform and Consumer Protection Act have further shaped NRSRO supervision. Notably, in January 2011, a Final Rule was issued requiring disclosures related to asset-backed securities in accordance with Section 943 of Dodd-Frank.
Controversies
The requirement by many private sector users—such as pension funds and banking institutions—to rely on ratings from an NRSRO has sparked debate over whether SEC recognition confers an unfair competitive edge. This dynamic is reflected in persistent efforts by non-NRSRO CRAs to obtain official NRSRO designation. Despite this, many market participants continue to favor well-established firms like Standard & Poor's and Moody's, regarded as industry leaders. The NRSRO label has also arguably increased competition by granting smaller agencies—such as DBRS, Kroll Bond Rating Agency, HR Ratings de México, and Egan-Jones—a government-endorsed status. This situation raises critical questions about whether the NRSRO recognition process is suitable and effective.
Leading NRSROs have been criticized for their "issuer-pays" business model, where bond issuers finance their own credit ratings. Regulators acknowledge this arrangement creates conflicts of interest since issuers may pressure agencies for more favorable evaluations, potentially resulting in a downward spiral of rating quality. The dominant CRAs defend this model by arguing that their ratings’ broad public availability makes subscription-based revenue models unfeasible. Nonetheless, concerns remain that issuer-funded ratings incentivize inflated assessments aimed at client retention. U.S. regulatory bodies have responded by revising rules to separate payment negotiations from credit rating determinations within these firms.
Major CRAs frequently receive nonpublic information from issuers but under SEC Regulation FD are permitted to use such data only if their ratings are made freely accessible to the public.
Some smaller CRAs—most notably Egan-Jones, which is unique among NRSROs in employing a subscription-only model—limit access to their ratings exclusively to paying subscribers rather than releasing them publicly. This strategy reduces dependence on issuer cooperation and helps alleviate conflicts inherent in issuer-paid frameworks.
Subprime mortgages, collateralized debt obligations, and the financial crisis
Credit rating agencies were instrumental in shaping the markets that drove the subprime lending surge from 2000 to 2008 and contributed to the subsequent financial crisis. The 1984 Secondary Mortgage Market Enhancement Act (SMMEA) facilitated the tradability of private-label (non-agency) mortgage-backed securities by recognizing NRSRO AA-rated securities as legally equivalent to Treasury securities for federally-chartered banks, state-chartered financial institutions, and Department of Labor-regulated pension funds, except where state legislation (adopted by 21 states by 1991) provided otherwise.
By the year 2000, NRSROs were generating substantial revenue through rating collateralized debt obligations (CDOs), residential mortgage-backed securities, and other complex financial instruments linked to subprime loans. These ratings were essential for banks to sell these products to institutional investors including pension funds, university endowments, and municipal governments—some of which suffered significant financial setbacks (for instance, Narvik Municipality in Norway lost approximately US$18 million). The behavior of credit rating agencies during this era has been thoroughly examined in publications such as Michael Lewis’s The Big Short and Christine S. Richard’s Confidence Game. Industry authorities like Janet Tavakoli have advocated for rescinding NRSRO status from certain categories of financial products. Additionally, the 2011 US Senate Levin-Coburn report delivered a detailed investigation into the involvement of credit rating agencies in the crisis.
List of NRSROs
Currently, ten entities hold designation as NRSROs, including the prominent Big Three:
- AM Best
- DBRS (a subsidiary of Morningstar, Inc.)
- Demotech
- Egan-Jones Ratings Company
- Fitch Ratings
- HR Ratings de México, S.A. de C.V.
- Japan Credit Rating Agency
- Kroll Bond Rating Agency
- Moody's Investors Service
- S&P Global Ratings
Bibliography
- Report on the Role and Function of Credit Rating Agencies in the Operation of the Securities Markets
- Rating Agencies and the Use of Credit Ratings under the Federal Securities Laws