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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Remarks at the SEC Open Meeting: Final Rules regarding Oversight of Credit Rating Agencies Registered as Nationally Recognized Statistical Rating Organizations


Commissioner Kathleen L. Casey

U.S. Securities and Exchange Commission

Washington, D.C.
May 23, 2007

As I stated when we voted to propose the rules that are in final form before us today, the passage of the Credit Rating Agency Reform Act of 2006 sent a clear and unmistakable message from Congress that it was dissatisfied with the status quo and expected the Commission to use its new authority under the Act to promote accountability, transparency and competition in the credit rating industry.

Keeping this message clearly in mind, it is incumbent on the Commission to adopt rules for NRSROs that mirror the intent of Congress as closely as possible. Congress wished the registration process for NRSROs to become more transparent, and I believe the process under the new rules does more clearly identify the criteria to become an NRSRO and narrow the timeframes for the processing of applications. I am pleased that the staff has eliminated or at least reduced some of the more burdensome information requests from Form NRSRO as well as the ongoing books and records requirements.

Congress also made it clear that the new process should be designed to reduce barriers to competition among NRSROs. At the proposing stage, I noted my particular interest in commenters' views on whether the proposed rules retained any vestiges of the anti—competitive effects of the prior regulatory approach to NRSROs. My remaining concern in this area, as reflected in some of the comments, centers on the Commission's potential involvement in determining the reasonableness of the fees of certain applicants for NRSRO status. The statute's definition of credit rating agency speaks in terms of agencies that make their credit ratings accessible via the Internet or other readily accessible means, for free or for a reasonable fee. The adopting release does not define the term "reasonable fee." Instead, citing the need for additional experience to assess the bounds of what is "reasonable," the Commission will require the disclosure of fees by credit rating agencies that do not make their ratings available for free.

I question the wisdom of this approach. In addition to the obvious disadvantages of having the Commission involved in deciding the appropriate level of fees, the Commission's scrutiny of fees would affect only one business model — the subscription model. Agencies that charge issuers for ratings and, subsidized by the issuers, make their ratings available for free will not get caught up in the reasonable fee determination. But credit rating agencies that operate on a subscription basis, bundling their ratings and their analysis and charging one fee for both, will run into a roadblock. Can a rule that treats business models differently truly level the playing field?

Going forward under our new process, I hope that the Commission will interpret the statute's "reasonable fee" language broadly. I am certain that Congress did not contemplate that the reference to a "reasonable fee" would provide a basis for making it more difficult for subscription-model credit rating agencies to gain NRSRO status. If a consequence of our interpretation is to subvert the goal of increasing competition, I question whether we are achieving the spirit, if not the letter, of the law.

I found the comments we received on the proposed rules very helpful in providing an initial assessment of our success in achieving the goals Congress set. The area that drew the most comment was the notching issue. Notching is a difficult issue, and there is no easy answer. While we recognize the concerns expressed by the various NRSROs over the effects of this practice, we do not have sufficient capability or experience at this time to make the findings of unfair, abusive and coercive practices required by Congress as the prerequisite to rulemaking. Therefore, I believe that the modified approach we have taken is a sensible one. Additional recordkeeping by NRSROs and scrutiny by Commission examiners will provide a basis for further Commission action, if that is deemed necessary.

All in all, I believe that the rules we adopt today will go far towards improving our oversight of credit rating agencies to the extent provided under the Act. Credit rating agencies play an important role in our securities markets, and Congress has placed on us the responsibility to ensure that NRSROs meet certain minimum standards, that the disclosure of their policies and procedures, including policies for managing conflicts of interest and handling material nonpublic information, is accurate, and that certain unfair and coercive practices are prohibited. As we move forward, we must exercise our oversight authority cautiously and judiciously. Congress did not intend us to become a merit regulator.

Having said that, however, I very much look forward to implementing the new oversight system. The better our understanding of NRSRO practices, including notching practices, the more effective our oversight will be.


Modified: 06/15/2007