Egan-Jones Ratings Company

Providing ratings and research

Sean J. Egan, Managing Director

Providing credit ratings and research

for enhanced investment results.

Tel. 610-642-2411 Fax 610-642-9185

for Institutional Investors.

March 30, 1998

Mr. Jonathan G. Katz, Secretary

Securities and Exchange Commission

450 Fifth Street, NW – Stop 6-9

Washington, D.C. 20549

Re. File Number S7-33-97 Proposed NRSRO Amendments

Dear Mr. Katz:

The purpose of a ratings firm is to provide timely, accurate, credit quality assessments of various issuers. Unfortunately, the current industry participants do not always succeed at this task; the latest failing being the difficulty in identifying the problems in Asia. We believe there are two problems with the current situation: (i) lack of competition and (ii) conflicts of interest. Regarding the lack of competition, in the U.S. corporate market, S&P and Moody's have over 90% of the market. The current industry conditions tend to perpetuate themselves as in many cases, investment bankers are reluctant to recommend alternatives to issuers because of fear that future dealings with the two main ratings firms would become more difficult. Regarding the conflict of interest, we believe being compensated for ratings by issuers makes it difficult to point out that the "emperor has no clothes". With regards to the proposal, we are concerned that the currently proposed requirements create insurmountable barriers to new competitors, especially those relating to size. A number of years ago AT&T could have argued that they were the only firm qualified to carry on the critical task of long distance service - only they had the size, staffing, experience and financial resources for this vital function. Had the FCC agreed with AT&T, the American people would not be enjoying the substantial drop in rates and improved service. Furthermore, as a result of the domestic competition, the U.S. firms are able to compete more effectively in the international markets, unlike many "protected" European and Asian competitors. Sadly, it is situations like Asia whereby the current rating agencies are least able to respond (for the previously-mentioned reasons) that cause the most disruption to the capital markets and ultimately cost a significant amount of money to investors and possibly taxpayers because of the delay in recognizing the problems.

Regarding whether an NRSRO should be required to make public its ratings, it is unlikely that a firm could make much headway against S&P and Moody’s in well-established securities markets such as the US debt market (Fitch and Duff & Phelps have 5 to 7% of the market and they have been recognized for a number of years). Therefore, requiring that a firm make its ratings available at no charge to be recognized as an NRSRO creates an insurmountable barrier. Furthermore the actions taken by currently-recognized NRSRO’s, including the ratings in the case of one NRSRO, are not readily available to the public. Regarding using quantitative measures or models listed on page 8 of the rules proposal, we have found such measures do not have sufficient reliability. Regarding the use of objective standards, we believe the main criteria should be national recognition. The market is the best judge of whether a firm’s ratings are timely and credible rather than some criteria that will become inappropriate and burdensome. There should be recognition for timeliness; it does the market little good if a ratings firm issues a rating that is thorough but arrives after the damage is done. In the case of ratings for the previously mentioned Asia

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example, downgrading when most investors are attempting to unwind their positions is akin to shouting fire in a movie theater.

Regarding allowing only issuer-approved ratings, we believe it is a terrible mistake and particularly unfair to firms that do not receive compensation from issuers for their ratings (in the case of firms that are compensated by issuers, issuing unsolicited ratings might be used to intimidate issuers into hiring them.) With the broad public disclosure of relevant investment information, it is possible to form timely accurate ratings. Furthermore, CFO’s and investor relation departments are normally readily available to answer questions. A foundation of the U.S. securities market is timely, public disclosure of relevant investment information. Requiring that a firm have access to supposedly confidential information to be recognized as an NRSRO smacks of hypocrisy. We believe that ratings issued by firms without a conflict of interest are superior.

Your suggestion that all NRSRO’s register as Investment Advisors is burdensome to the smaller firms that are already faced with significant barriers to entry. We believe an Initial Regulatory Flexibility Analysis ("IRFA") exclusion is appropriate for small firms that otherwise qualify for NRSRO. The principal criterion for recognizing a firm as an NRSRO should be national recognition.

Lastly, the review period, we hope that a period of 180 days or less is sufficient for the review of new NRSRO’s.

Egan-Jones is an internationally recognized rating firm for US corporate debt that is compensated by investors, not issuers, for its ratings.


Sean J. Egan