Nationally Recognized Statistical Rating Organization

A nationally recognized statistical rating organization (NRSRO) is a credit rating agency (CRA) that issues credit ratings that the U.S. Securities and Exchange Commission (SEC) permits other financial firms to use for certain regulatory purposes. Originally, seven rating agencies were recognized as NRSROs, a number that dwindled as a result of mergers to six by the mid-1990s and then to three by 2003. As of March 2015, ten organizations were designated as NRSROs. Ratings by NRSROs are used for a variety of regulatory purposes in the United States. In addition to net capital requirements (described in more detail below), the SEC permits certain bond issuers to use a shorter prospectus form when issuing bonds if the issuer is older, has issued bonds before, and has a credit rating above a certain level. SEC regulations also require that money market funds (mutual funds that mimic the safety and liquidity of a bank savings deposit, but without U.S. Federal Deposit Insurance Corporation insurance) comprise only securities with a very high rating from an NRSRO. Likewise, insurance regulators use credit ratings from NRSROs to ascertain the strength of the reserves held by insurance companies.

The use of the term NRSRO began in 1975 when the SEC promulgated rules regarding bank and broker-dealer net capital requirements (17 C.F.R. 240.15c3-1). The idea is that banks and other financial institutions should not need to keep in reserve the same amount of capital to protect the institution (against, for example, a run on the bank) if the financial institution is heavily invested in highly liquid and very "safe" securities, such as U.S. government bonds or commercial paper from very stable companies. The safety of these securities, under this approach, is reflected in their credit ratings, as determined by certain highly respected CRAs. In the early 1980s, there were seven NRSROs, but, due to mergers, this number dropped to three during the 1990s. Recently, the SEC, arguably as a result of political pressure and/or concern about concentration in the industry, added to this number, first with DBRS (a Canadian CRA formerly known as Dominion Bond Rating Service) in 2003, and A.M. Best (highly regarded in particular for its ratings of insurance firms) in 2005. In 2007, the SEC added two Japanese rating agencies, Japan Credit Rating Agency and Ratings and Investment Information and a Philadelphia area based firm Egan-Jones Rating Company (EJR).

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