From: Dave Colling [Dave.Colling@mourant.com] Sent: Thursday, July 31, 2003 12:26 PM To: rule-comments@sec.gov Subject: S7-12-03 : Concept Release: Rating Agencies and the Use of Credit Ratings under the Federal Securities Laws Dear Sir, We have been following the SEC review of the role of credit rating agencies with interest, unfortunately we failed to find the concept release document until yesterday and as a result are only able to respond today to the questions you have raised and provide additional input on rating agency practice in non US jurisdictions. We particularly would like to provide information in regard to Section E of the Concept Release and Question 53. BACKGROUND ABS Reports (UK) Limited (trading as absreports.com) is a company which has been in existence for less than three years and was established to provide a comprehensive centralised source of information relating to European Asset Backed Securities (ABS). This service is provided through a website, www.absreports.com, from which subscribers can obtain a wide range of information relating to over 700 different European asset backed securities, including copies of the original offering documents, details of the issue size, ISIN numbers, interest rates payable, amortisation and detailed post-issuance collateral pool performance. Also included with the information provided are the current and original ratings of each tranche of securities. We do not provide any commentary or analysis on deals reported on the website as this is something we see clearly as being within the domain of the rating agencies to which we provide weblinks from each transaction. In many cases, the information appearing on the absreports.com website is provided to us directly by the issuers or originators of the transactions. These institutions choose to report through the medium of absreports.com because it provides them with an efficient way of complying with the European Securitisation Forum's Code of Conduct on post issuance transaction reporting, and because there is significant demand from investors for this type of information to be disseminated as widely and as efficiently as possible. Excerpt from: The European Securitisation Forum "A FRAMEWORK FOR EUROPEAN SECURITISATION" May 2002 "Investors and potential investors should be entitled to continue to receive or obtain relevant information following their investment on a regular basis without legal or regulatory impediment in a form which enables comparisons to be made with other securitisation transactions of a similar type." The rating information for securities is available from very many sources, including the rating agencies' own websites, the value of having it on the absreports.com site is simply one of centralising all information relating to the particular securities in one place, so that investors do not need to go to different sources to obtain a complete picture of information regarding one security. The free availability of the ratings is a pre-requisite of market liquidity and is one of the main determining factors of the price at which ABS are traded. In evidence submitted to the SEC by S&P at a public hearing on 15th November 2002, S&P stated:- "Standard & Poor's long-standing policy has been to make its public credit ratings and the basis for such ratings generally available to the investing public without cost. Public credit ratings (which constitute 99% of Standard & Poor's credit ratings in the United States) are disseminated via real-time posts on Standard & Poor's website and through a wire-feed to the news media as well as via subscription services... " The above passage clearly demonstrates that S&P appreciate the vital importance to the markets of the free availability of ratings information. Furthermore, it makes it clear that they do disseminate this information through the media. The ratings agencies are in a hugely powerful position. Issuers are effectively obliged by market demand to obtain a rating from one or more of the rating agencies each time they issue securities, and the ability of investors to trade those securities (and the price at which that will happen) is in practice most significantly influenced by the ratings ascribed to the securities throughout their life. If the rating agencies prevent or actively seek to limit the public dissemination of that information, then they could severely disrupt the working of the capital markets. In addition the sensitivity of the relationship between rating agencies and issuers may not encourage issuers to raise concerns over existing practices. Rating Agency Practice in Europe. Some nine months ago, S&P contacted absreports.com to request a meeting. During the course of that meeting they advised that in their view S&P had copyright in the ratings assigned to securities, and that we were not entitled to publish them on the absreports.com website without first signing a Licence Agreement and paying a licence fee plus royalties. We were advised that if absreports.com did not agree to paying the fees and signing the Licence Agreement, S&P would take legal action. The fee requested was a formula based on a fixed annual fee, plus an additional royalty for each subscriber to the absreports.com service. At the same meeting S&P advised us they, acting for the CUSIP Service Bureau (CSB) (operated by Standard & Poor's, under contract to the American Bankers Association) also required a licence payment for the use and storage of CUSIP numbers which had been previously available free of charge. There is a marked difference between International and US Domestic requirements for CUSIP data as, Internationally, the number is the only element directly attributable to CSB which is stored and its use is limited to cross-referencing with other numbering systems and with data supplied by third parties. In seeking to limit choice in the dissemination of ratings information, S&P are acting against the interests of the investing community, reducing transparency and acting contrary to their own statements to the SEC on November 15th 2002. We also believe they apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage. We are aware that they have requested some other third parties to sign a Licence Agreement, we believe that there are many others who have not been targeted in this way, there is strong anecdotal evidence that S&P make no licence demands on the print media, concentrating their efforts on web based services. This may well be related to the fact that S&P themselves offer a service, called Ratings Direct, which to some extent is a competitor of absreports.com. Ratings Direct is a service for which a very significant fee (far in excess of that charged by absreports.com) is levied and this provides S&P with a financial incentive to ensure that there are effective bars to new entrants in this market. Prior to the contact by S&P we were approached by Moody's who similarly demanded that we sign a licence agreement in order to display their ratings. Although again we objected in principle and disputed their copyright claims in a series of letters and conversations, they eventually agreed to accept a nominal licence fee in lieu of their usual charging structure, and on that basis we took a commercial decision that it was best to sign the agreement, whilst expressly reserving our rights to raise this issue again in the future. The paperwork with Moody's was eventually finalised at 9.45 one morning. At 2.00pm on the same day, we had a call from S&P to raise the licensing issue for the first time. absreports.com had by this point been trading for nearly two years. We are therefore concerned that there may be a link between the organisations that may not wholly be in keeping with the spirit of transparency which is so fundamental to the maintenance of an efficient market. Many organisations who are rated have privately supported for the position we have adopted and have expressed a fear that as a consequence of the increasing importance of ratings in BASEL II they can foresee a position whereby the rating agencies through use of licensing become, over time, the monopolistic source of ratings information by effectively "squeezing out" other electronic media sources. In response to Question 53, we firmly believe that ratings information (original and any subsequent changes) should be available from as wide a variety of sources as possible , in both print and electronic media and action which encourages the rating agencies to permit and not actively seek to limit such widespread publication by imposition of fees or licenses, is to be applauded. Any action the SEC takes should include a statement requiring the rating agencies to permit other sources to freely distribute ratings without hindrance and further undertake to allow rated entities choice (without limitation), where they distribute their ratings information. Thank you for the opportunity to submit our views. David Colling Product Director. www.absreports.com Website: http://www.mourant.com The information in this email is confidential. The contents may not be disclosed or used by anyone other than the addressee. If you are not the intended recipient, please notify us immediately at the above e-mail address or telephone +44 (0)1534 609 000 We cannot accept any responsibility for the accuracy or completeness of this message as it has been transmitted over a public network. If you suspect that the message may have been intercepted or amended, please call the sender.