Institute Comments on SEC Concept Release on Credit Rating Agencies, July 2003

Washington, DC, July 30, 2003 -The Institute has filed a comment letter with the U.S. Securities and Exchange Commission regarding its concept release examining rating agencies and the use of credit ratings under the federal securities laws.

Background
The SEC, as part of a review of the role of credit rating agencies in the operation of the securities markets, issued a June 4 concept release seeking comment on various issues, including whether credit ratings should continue to be used for regulatory purposes under the federal securities laws, and, if so, the process of determining whose credit ratings should be used, and the level of oversight to apply to such credit rating agencies.

ICI Position
Information from credit rating agencies and the credit ratings published by rating agencies play a key role in the investment decisions of investment companies, and it is therefore essential that the quality and integrity of these ratings are maintained.

The Institute filed a comment letter commending the SEC for reevaluating the current regulatory structure for ratings agencies, and for its discussion of a number of significant regulatory issues in the concept release.

The fund industry took particular interest in the discussion of the continuing role of credit ratings in certain Commission rules, in particular, Rule 2a-7 under the Investment Company Act of 1940. The Institute believes that it is vital to continue to require that credit ratings issued by nationally recognized statistical rating organization (NRSROs) be used as a basis for minimum quality standards under Rule 2a-7. However, if credit ratings are to continue to be relied upon in Commission rules, the current regulatory structure governing NRSROs should be improved. In particular, ICI believes that there are several means by which the Commission can improve the current regulatory structure for credit rating agencies, including:

strengthening the system of oversight of credit rating agencies;
requiring public disclosure of the resources, standards, procedures and policies employed by the agencies in their rating process;
instituting a new public comment and review process regarding rating agencies' performance, standards, and methodologies; and
holding rating agencies legally accountable for their ratings.

The comment letter states that, in light of increased investor and Commission reliance upon NRSROs, the Commission should strengthen the process by which rating agencies are recognized as NRSROs, and supports improving the transparency of this process. Toward this end, the letter recommends that the Commission require NRSROs to disclose various types of information including increased disclosure of the methodologies used to evaluate the material risks involved with types of financial instruments and their policies and procedures addressing conflicts of interest. In order to facilitate increased disclosure, the letter recommends that the Commission should consider adopting for NRSROs a specialized form, which would require the periodic disclosure of the information discussed above.

The Institute devotes a section of this website to the issues that face fund investment advisers as they work on their shareholders' behalf in the U.S. equity and fixed-income markets.