July 28, 2003

Re: Rating Agencies and the Use of Credit Ratings
under the Federal Securities Laws
File No. S7-12-03

Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609

Dear Mr. Katz:

In response to your release [Rating Agencies and the Use of Credit Ratings under the Federal Securities Laws; File No. S7-12-03], we are pleased to submit our comments as follows. Please note, however, that these comments are not exhaustive.

Comments upon II. Discussion

On B (Recognition Criteria), C (Examination and Oversight of NRSROs), and F (Information Flow)

It is essential that the recognition criteria be modified if the SEC is going to use the NRSRO recognition scheme. In the recognition, examination and oversight of NRSROs, sufficient emphasis should be placed on the rating companies' provision of concrete and quantitative information justifying specific rating decisions regarding issuers. The level of accountability to issuers required at the time of first acquisition of NRSRO status should be the minimum requirement for continued recognition as an NRSRO. In other words, the following information to be provided to issuers, both public and private, at the time of first acquisition of NRSRO status should be included for ongoing recognition as an NRSRO:

  1. Methodology used in the rating process.

  2. Assumptions underlying the rating.

  3. Definition of the default of the issuer being rated.

  4. Information and documents used to reach the rating decision.

  5. Concrete and quantitative evidence used to reach the rating decision.

  6. Responses to questions from the issuer.

  7. Quantitative evidence for downgrading an issuer based on their lack of commitment to debt repayment (even though the financial or economic conditions of an issuer had not declined).

  8. Quantitative comparison between an issuer being downgraded and other issuers with the same financial or economic status in the past and in the same rating category at that time.

  9. Rating companies are not opposed to public announcements about the explanations provided to issuers, if issuers agree with the public announcement.

  It is said that more Japanese private sector issuers are complaining that they are under heavy pressure from rating companies, which essentially have a monopoly on the credit rating business in the international market. In this context, the recognition criteria should be reexamined to promote new entry in the field by a wide variety of entities.

It is important that NRSROs disclose whether a rating is solicited or unsolicited. However, we are opposed to requiring NRSROs to disclose whether or not an issuer participated in the rating process because the notion of "participation" varies. It cannot be justified, for instance, for a mere protest by an issuer to be unilaterally considered by the rating company as participation in the rating process. Moreover, issuers should not be required to make such disclosures. NRSRO recognition should be conditioned on the rating firm's disclosure of whether a rating was solicited or unsolicited. Action should be taken to ensure this disclosure is required.

Last but not least, it is essential that the SEC again solicit public comments, if it modifies the NRSRO recognition criteria.

Comments upon III. Solicitation of Additional Comments

The SEC calls such firms in the credit rating business "rating agencies" or "rating organizations." Such names could be easily mistaken as government authorities, government departments, or public or nonprofit organizations.

Rating agencies are profit corporations. It would be preferable for the SEC to consider abandoning the terms "rating agencies" and "rating organizations" in favor of "rating companies" or "rating firms." Usage of these latter terms would clarify the profit-oriented nature of the companies.

Thank you for your kind consideration of this feedback.


Yours sincerely,

Daisuke Kotegawa
Deputy Director-General
Minister's Secretariat
Ministry of Finance, Japan