ICI Recommends Enhancements to Current System for Recognizing Credit Rating Agencies, June 2005

Washington, DC, June 13, 2005 - The Institute has urged the SEC to improve its current process for granting NRSRO status to statistical rating organizations, while also supporting an SEC proposal to define "nationally recognized statistical rating organizations" (NRSROs).

Background
In June 2003, the SEC issued a concept release soliciting public comment on various issues regarding credit rating agencies, 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. To address certain issues raised in response to the concept release, particularly with regard to the clarity of whether a credit rating agency is an NRSRO, the Commission is proposing to define the term "NRSRO" and to provide interpretations of that definition.

The proposed definition of NRSRO contains three components that must each be met in order for a credit rating agency to be an NRSRO. Specifically, the Commission is proposing to define the term NRSRO as an entity that:

issues publicly available credit ratings that are current assessments of the creditworthiness of obligors with respect to specific securities or money market instruments;
is generally accepted in the financial markets as an issuer of credible and reliable ratings, including ratings for a particular industry or geographic segment, by the predominant users of securities ratings; and
uses systematic procedures designed to ensure credible and reliable ratings, manage potential conflicts of interest, and prevent the misuse of nonpublic information, and has sufficient financial resources to ensure compliance with those procedures.

ICI Position
In a recent comment letter, the Institute notes that the SEC's proposal does not enhance the current regulatory structure and oversight of NRSROs and, in fact, may diminish the Commission's oversight by eliminating the need for credit rating agencies to seek no-action letters in order to be designated as NRSROs.

Absent SEC authority to impose a more stringent regulatory structure over NRSROs, ICI recommends that the Commission continue to require that credit rating agencies obtain NRSRO designation through the no-action process. In order to facilitate competition among credit rating agencies, the Institute recommends that the Commission institute several changes to the current no-action process, such as establishing a time period within which SEC staff would act on credit rating agency no-action requests for NRSRO status, and allowing credit rating agencies that confine their activities to limited sectors of the debt market or to limited geographic areas to be deemed an NRSRO.

ICI also notes that the transparency of the ratings process, and of the procedures in place to ensure that this process operates smoothly, is very important to investors. Therefore, the Institute recommends that the SEC consider, as an additional factor for assessing whether a credit rating agency meets the proposed NRSRO definition, the level of disclosure of these procedures to investors. Public disclosure of this information would allow investors a continuous opportunity to appraise the NRSROs' independence, their capabilities as NRSROs, and their unique operations.