California Public Employees' Retirement System
Lincoln Plaza - 400 P Street - Sacramento, CA 95814

Investment Office
P.O. Box 2749
Sacramento, CA 95812-2749
Telecommunications Device for the Deaf - (916) 326-3240
TEL: (916) 326-3400
FAX: (916) 326-3330

September 15, 2003

Jonathan G. Katz
Secretary
The Securities and Exchange Commission
450 Fifth Avenue, NM
Washington, D.C. 20549

Re: File S7-12-03

Dear Mr. Katz:

We write to comment on your current deliberations relating to the nationally recognized statistical rating organizations (NRSRO), including whether credit ratings should continue to be used for regulatory purposes under Federal securities laws. As background information, the California Public Employees Retirement System (CalPERS), with $145 billion in assets, is the largest pension fund in North America and provides retirement and health benefit services to more than 1.3 million members and nearly 2,500 employers. Our membership consists of active, inactive and retired members from the State, school districts and local public agencies.

We have followed with interest the SEC's published materials on the review of NRSRO's and believe that we have a fiduciary responsibility to comment on potential changes that may affect the framework for the credit rating review process. We would like to state emphatically that the nature of and form of regulation of the NRSRO's, who are valuable players in securities markets, is important to us. The use of credit ratings as a whole is a critical component for making informed investment decisions within the fixed income asset class.

Our first comment relates to the conflicts of interests faced by NRSRO's all of whom receive substantial fees from the firms they are supposed to be rating "objectively" and "independently." According to Moody's 10-K, it obtains more than 85% of its compensation from issuers. No single NRSRO discloses the amount of the fees derived from engaging in rating activities. We believe these conflicts and perhaps pressure on the NRSRO's from the issuers themselves (who devote a lot of time and resources to the relationship with rating agencies) and in some cases investment banks may have contributed in part to the failure of the rating agencies to provide adequate timely and quick assessment of the deteriorating credit qualities of some issuers over the past few years.

Given these issues, it would seem that requiring credit agencies to disclose the amount of fee revenue generated from their rating services will go a long way to mitigating the heightened concerns regarding their independence.

Another potential solution would require all potential issuers to be rated by all designated NRSROs based on pre-determined "uniform" or appropriate "sliding scale" rating fees paid directly by such issuers to the SEC who in turn will pay the NRSROs directly. A sliding scale fee will, in our example, correct for the disproportionate experience of the NRSROs and take into account the track record of the agencies individual company ratings history.

Our second comment relates to the issue of competition. While four NRSRO's (Moody's, S&P, Fitch and DBRS) currently provide credit ratings to the marketplace, there is clearly a dominant duopoly structure within the market that now exists - Moody's and S&P wield considerable market power and dominate the other two NRSROs. The market and most institutional investors through their respective investment policies demand ratings from two recognized agencies. There have been instances where issuers have refused to retain or dropped retainers of NRSRO's who lowered the ratings of such issuers. This practice is clearly anti-competitive. As a result, we believe the SEC should explore ways to promote competition and reduce regulatory barriers to entry and increase opportunities to succeed. Besides raising the level of competition, these prospective new agencies and strengthened third and fourth players within the market may serve to keep rating agency fees low and keep needed pressure on dominant NRSROs to be more independent and objective.

We thank you for the opportunity to express our views.

Sincerely,

Kevin Winter
Senior Principal Investment Officer

cc: Mark Anson, Chief Investment Officer
Christianna Wood, Senior Investment Officer
Curtis Ishii, Senior Investment Officer
Ted White, Director, Corporate Governance