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July 28, 2003

Jonathan G. Katz, Secretary
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Dear Mr. Katz:

Re.: NRSRO Concept Release regarding NRSRO Rating Firms (File No. S7-12-03)

Egan-Jones Ratings Co. is a ratings firm which, unlike most other rating firms, is not compensated by issuers for its ratings and is focused on protecting investors. The current SEC-recognized rating firms (i.e., NRSRO's) have failed to warn investors about failures such as Enron, WorldCom, Genuity, the California utilities, and AT&T Canada. The fundamental reasons for such failures have been conflicts of interest and the lack of competition. Wall Street analysts were found to have favored issuers over investors because of the large issuer-paid investment banking fees. Likewise, the major rating firms receive approximately 90% of their revenues from issues and have been reluctant to take negative actions on large important issuers. Although the argument can be made that any one issuer represents a small share of the major rating firm's revenue base, the reality is that investors have not been protected. Revenues produced by security analysts Jack Grubman and Henry Blodget were likewise only a small portion of CitiGroup's and Merrill's revenues. Regarding the lack of competition, Dept. of Justice personnel have aptly described the industry as a "partner monopoly" since two ratings are normally needed to issue rated debt, and the two major firms do not compete with each other. Even if an emerging rating firm is able to prove that it produces more credible ratings, it is unlikely to gain much market acceptance because of the lock the two major rating firms have on the market. The investment banks, which do not pay for the ratings, are unlikely to recommend an emerging rating firm since it might jeopardize the investment bank's relationship with the dominant rating firms. Furthermore, the penalty for the major rating firms' delaying taking negative actions on large important issuers is almost non-existent, particularly if the other partner monopoly firm still maintains an unrealistically high rating. Hence, we are left with the current dysfunctional system whereby investors, pensioners, and workers continue to be harmed.

The main thrust of the Concept Release is the establishment of some controls such as the separation of research from marketing, the limitation of revenues from any one issuer, and additional training for analysts. Unless the two major problems are addressed (i.e., the conflict of interest and the lack of competition) the controls will fail. The SEC is perceived as protecting investors, and therefore the rating firms sanctioned by the SEC should support that mission. If the SEC cannot clean up the industry, the SEC is better off stepping away from recognizing rating firms since investors are given a false sense of security by the current arrangement. Below are a few minimal steps that should be taken to reform the industry:

  1. Prohibit issuer compensation - just as equity research practices were not corrupted until the emergence of large issuer-based compensation, in the form of investment banking fees, existing NRSRO's prior to 1970 obtained most of their compensation from investors. NRSRO's argue that the copy machine made the old business model less attractive because of the ease of distributing ratings. Our response is that there are a number of firms that have thrived without issuer compensation; Sanford Bernstein and Prudential are prime examples on the equity research side, and Egan-Jones and Mikuni are examples on the credit rating side.

  2. Prohibit involvement with rated firms and dealers - Moody's Chairman, Clifford Alexander, served as a director of MCI from 1982 until 1998 and of WorldCom from 1998 until June 2001; the Company filed for bankruptcy in July 2002 making it the largest bankruptcy in US history. Moody's President Clifford Alexander should be prohibited from serving on the board of the National Association of Security Dealers, which represents security dealers. Dealers' interests are not parallel to investors' interests.

  3. Remove the exclusion from Regulation FD - rating firms are essentially private research firms and therefore should not be provided with any special treatment. Information gathered by the monopolistic rating firms regarding rating triggers was subsequently distributed only to clients paying for the research portion of the NRSRO's service. Firms other than the major NRSRO's would have considerable difficulty obtaining similar information from issuers.

  4. Separate ratings from consulting - just as accountants were compromised by their consulting assignments, rating firms have similar issues. A number of independent, non-conflicted firms offer this service.

  5. Prohibit the use of rating triggers - affording another example of putting issuers' interests ahead of investors', the current NRSRO's were reluctant to downgrade firms because of the fear of setting off rating triggers.

  6. Prohibit the usage of "independent" description - all the current NRSRO's obtain the majority of their compensation from issuers and therefore should not mislead investors by describing themselves as independent.

  7. Police monopolistic practices - a fair amount of controversy has been generated by Moody's notching (adjusting downward) Fitch's ratings by up to five or six notches in the structured finance area in an attempt to extend its reach. Similarly, it appears as though the large NRSRO's have discouraged major news organizations from carrying ratings or news generated from competing rating firms.

  8. Prohibit providing "color" to investors - some investors, particularly large investors are given information on analysts' opinions in advance of others. Why was Citigroup given advance warning on Moody's pending downgrade of Enron? Did Citigroup trade on that information? Who else was among the privileged few? Why weren't Moody's Emails and phone logs reviewed?

  9. Recognize non-conflicted firms which have warned investors - The best way to prevent future Enron's and WorldCom's is to recognize as NRSRO's rating firms that do not have a conflict of interest with investors and which have succeeded in providing warnings to investors.

We have an application pending for NRSRO designation and succeeded in providing warning to investors about failures such as Enron, WorldCom, Genuity, the California utilities, AT&T Canada, Global Crossing and other major failures. Our success has been recognized by the Federal Reserve Bank of Kansas City which compared all our ratings since inception in December 1995 to those of S&P and concluded:

"Overall, it is robustly the case that S&P regrades from BBB- moved in the direction of EJR's earlier ratings. It appears more likely that this result reflects systematic differences between the two firms' rating policies than a small number of lucky guesses by EJR."

Source: Research Division, Federal Reserve Bank of Kansas City, Feb. 2003

Link: http://www.kc.frb.org/publicat/reswkpap/RWP03-01.htm

Below are our responses to the specific questions of the Concept Release.

Sincerely yours,

Sean J. Egan
Managing Director


A. Alternatives to the NRSRO Designation

Question 1: Should the Commission eliminate the NRSRO designation from Commission rules?

The notion of eliminating the NRSRO designation is intriguing, but it is unclear how it might be implemented.  Would an investor be able to trust a broker/dealer's word that a CDO traunch is truly "AAA" quality, or are we to rely on a government official to tell us when Enron is troubled?  Ultimately the best approach is to reform the industry (see above comments) and recognize some firms that have succeeded in warning investors and have no conflict of interest.

Question 2: If so, what alternatives could be adopted to meet the regulatory objectives of the Commission rules that currently incorporate the NRSRO designation? What are their respective strengths and weaknesses?

The main weakness of the rules has been the inability to recognize firms that i) have protected investors and ii) do not receive a majority of their compensation from issuers.

Question 3: Specifically, what are the advantages and disadvantages of allowing broker-dealers to use internally developed credit ratings to determine capital charges under the Net Capital Rule? Is it appropriate to require strict firewalls between the broker-dealer employees who develop internal credit ratings and those responsible for revenue production? Should a broker-dealer be required to obtain regulatory approval of its credit rating procedures and rating categories before it could use internal credit ratings for calculating capital charges? If so, what factors should the Commission review in determining whether to grant such approval? If the Commission substitutes internal credit ratings for the NRSRO designation in the Net Capital Rule, what would be the impact on broker-dealers, including small broker-dealers, and what costs would be associated with this change? If there would be an inordinate financial impact on small broker-dealers, are there market-based solutions that could reduce the compliance costs for them? For example, should the Commission permit large broker-dealers to sell their internal credit ratings to small broker-dealers for these purposes? If so, would this help to provide a more competitive marketplace for credit ratings? To what extent should the Commission exercise additional regulatory oversight of this activity (e.g., to control potential conflicts of interest)?

Experience has taught us that broker-dealers will be hard pressed to maintain the independence of the internal credit ratings. A lower rating translates into a higher capital allocation, which reduces overall business activity. The net result of allowing only the brokers to determine the ratings would be chaos.

Question 4: What are the advantages and disadvantages of allowing broker-dealers to use credit spreads to determine capital charges under the Net Capital Rule and/or other Commission rules? How could capital charges be determined using credit spreads? For example, could the Commission base capital charges on the yield differential between particular debt securities and U.S. Treasury securities of comparable maturity, such that a larger differential results in a larger haircut? How could credit spreads be determined for newly issued, thinly traded, or privately issued securities? Or for variable rate and other short-term synthetic securities held by money market funds? Are there readily available public sources of information sufficient to calculate credit spreads on domestic and foreign debt securities? Are there other model-based statistical scoring systems and/or market-based alternatives that would be viable alternatives to NRSRO ratings?

Credit spreads are a function of many factors besides credit quality such as current and prospective demand and supply, portfolio allocations, and new capital offerings. Furthermore, a seasoned trader could easily manipulate spreads to obtain a higher rating and exit the bonds after new money purchased the securities.

Question 5: What are the advantages and disadvantages of requiring the SROs to set appropriate standards for broker-dealers to use in determining rating categories for net capital purposes? What form might these standards take?

The SROs do not have the incentive or expertise to set the standards. Additionally, broker/dealers and issuers could easily manipulate the standards.

Question 6: What are the advantages and disadvantages of eliminating the "objective test" from Rule 2a-7, and relying solely on the "subjective test" - the credit analysis performed by the adviser to the money market fund - for the purposes of determining asset quality?

The advisor would have a strong incentive to inflate ratings and it would be difficult, time-consuming and costly for fund investors to assess the accuracy of the fund-assigned ratings.

Question 7: What are the advantages and disadvantages of relying upon specified investor sophistication, large size denomination, or asset and structure experience criteria for purposes of determining Form S-3 eligibility? Should the Commission explore these possibilities in more depth? If so, what specific criteria should be considered?

No comment.

Question 8: Are there alternatives other than those discussed above that might be better substitutes for the NRSRO designation in particular Commission rules?

There are no other apparent practical alternatives.

Question 9: If the Commission discontinued using the NRSRO designation, should an entity other than the Commission recognize NRSROs for uses other than Commission rules? If another entity, which entity? How would the transition from the Commission to that entity take place?

If the SEC continues to award the NRSRO designation only to those firms that i) have failed in warning investors and ii) obtain most of their compensation from issuers, then the SEC should discontinue over-seeing this area. An alternative might be an investor-based organization.

Question 10: If, on the other hand, the Commission should continue to use the NRSRO designation in some Commission rules, could that designation be eliminated from other rules? If so, which rules?

No comment.

B. Recognition Criteria

Question 11: Are the criteria currently used by Commission staff to determine whether a credit rating agency qualifies as an NRSRO appropriate? If not, what are the appropriate criteria? How should a determination be made as to whether a credit rating agency has met each criterion?

The criteria as described are reasonable. The difficulty has been in the application of the criteria whereby applicants are measured against similarity to the major firms rather than the applicant's market recognition and success in protecting investors.

Question 12: Is it appropriate to condition NRSRO recognition on a rating agency being widely accepted as an issuer of credible and reliable ratings by the predominant users of securities ratings in the United States (e.g., underwriters, dealers, banks, insurance companies, mutual funds, issuers)? Would this general acceptance be verifiable through the examples set forth above (e.g., requiring verification through attestations from, and interviews with, authorized officers of users of securities ratings, as well as using statistical data to demonstrate market reliance on an applicant's ratings)? As a more objective way of evidencing market reliance and credibility, should NRSRO recognition be conditioned on a credit rating agency documenting that it has been retained to rate securities issued by a broad group of well-capitalized firms?

The list of major users of ratings should include institutional investors; broker/dealer and issuer interests are often at odds with investors' interests. Issuer compensation has been and remains a cause for significant industry problems and therefore should not be a measure for an NRSRO.

Question 13: Should the Commission condition NRSRO recognition on a rating agency developing and implementing procedures reasonably designed to ensure credible, reliable, and current ratings? At a minimum, should each NRSRO have rating procedures designed to ensure that a similar analysis is conducted for similarly situated issuers and that current information is used in the rating agency's analysis? What minimum standards should the Commission use to determine whether the agency's ratings are current? Should each NRSRO use uniform rating symbols, as a means of reducing the risk of marketplace confusion? When reviewing a rating agency's procedures for obtaining information on which to base a rating action, should the Commission establish minimum due diligence requirements for rating agencies? How could these minimum requirements be developed? By the Commission? By the industry, with Commission oversight?

The procedures used by the major rating firms are in general thorough and adequate. The major ratings firms have failed because of issuer compensation, the lack of much real competition, and the lack of penalties for missed rating calls. The rating process is one of evaluation, not disclosure.

Question 14: Should the extent of contacts with the management of issuers (including access to senior level management of issuers) be a criterion used to determine NRSRO status? Should the Commission limit the credit ratings that can be used for regulatory purposes to credit ratings that include access to senior management of an issuer? If so, why?

To require contact with senior management as a rating criteria would destroy the entire process. Corporate management would cease talking to those rating firms that issued lower ratings than the other rating firms and then claim the firm with the lower rating did not have all the appropriate facts. This problem also argues for an elimination of the Reg. D exclusion for rating firms; all rating firms and the public should be given access to the same information at the same time.

Question 15: To the extent a credit rating agency uses computerized statistical models, what factors should be used to review the models? Could a credit rating agency that solely uses a computerized statistical model and no other qualitative inputs qualify as an NRSRO?

The SEC does not have the expertise to evaluate computer models which most ratings firms use. A better approach is to rely on the "national recognition" requirement for the NRSRO designation. A rating firm that uses solely computer models would have difficulty adjusting for the many factors that comprise a rating such as share repurchases, a potential LBO, management changes, acquisition offers, etc.

Question 16: Should the size and quality of the credit rating agency's staff be considered when determining NRSRO status? Should the Commission condition NRSRO recognition on a rating agency adopting minimum standards for the training and qualifications of its credit analysts? If so, what entity should be responsible for oversight of qualifications and training? How could the Commission verify whether a member of a rating agency's staff is or was previously subject to disciplinary action by a financial (or other) regulatory authority?

The major rating firms have extensive, generally well-trained staffs and yet failed to issue timely, accurate ratings. Market acceptance is more important than staff size.

Question 17: Should the Commission condition NRSRO recognition on an entity's meeting standards for a minimum number of rating analysts or a maximum average number of issues covered per analyst? For example, should the Commission question whether a single analyst can credibly and reliably issue and keep current credit ratings on securities issued by hundreds of different issuers? Or would this level of scrutiny involve the Commission too deeply in the business practices of rating agencies?

The major rating firms have extensive, generally well-trained staffs and yet failed to issue timely, accurate ratings. Market acceptance is more important than staff size.

Question 18: Is a credit rating agency's organizational structure an appropriate factor to consider when evaluating a request for NRSRO status? Should the agency that seeks recognition consent to limiting its business to issuing credit ratings or could it conduct other activities, such as rating advisory services?

If the industry had some real competition, then extending business would not be a problem. Currently, there is little real competition and there is a problem similar to that of MicroSoft extending its monopoly of PC operating systems to other software areas. Because the current NRSRO's have been given the protection of the SEC, anti-trust suits are less likely.

Question 19: Should the Commission consider a credit rating agency's financial resources as a factor in determining NRSRO status? If so, how? Should NRSRO recognition be conditioned on a rating agency meeting minimum capital or revenue requirements?

This seems to be an unnecessary barrier to entry. There are no such criteria applied to issuers selling securities.

Question 20: Should a rating agency that confines its activity to a limited sector of the debt market be considered for NRSRO recognition? Should a rating agency that confines its activity to a limited (or largely non-U.S.) geographic area also be considered?

The criteria of national recognition in the US appears to be appropriate.

Question 21: Should the Commission consider a provisional NRSRO status for rating agencies that comply with NRSRO recognition criteria but lack national recognition?

No. If the rating firm has achieved national recognition, the firm should be given the NRSRO designation. A firm that issues timely, accurate ratings is likely to achieve national recognition over time.

Question 22: Should the Commission develop supplemental criteria to evaluate ratings quality that would be applicable to both rating agencies performing traditional fundamental credit analysis and those primarily reliant on statistical models?

The SEC does not have the staff or the time to make such evaluations; the national market recognition criterion is a better method for assessing the quality of a rating firm.

Question 23: Should the Commission consider other criteria in making the NRSRO determination, such as the existence of effective procedures reasonably designed to prevent conflicts of interest and alleged anticompetitive, abusive, and unfair practices, and improve information flow surrounding the ratings process?11

Some caution should be used in this area; small rating firms that might not have the resources to develop the systems used by the major rating firms are nevertheless able to generate timely, accurate ratings.

Question 24: Should the Commission expect NRSROs to follow generally accepted industry standards of diligence? If so, should the Commission encourage the establishment of a committee of market participants to develop those standards? Or should they be devised through other means?

Some caution should be used in this area; the large rating firms can afford to establish elaborate industry standards and practices and yet have failed to protect investors.

Question 25: Should recognition of NRSROs occur through Commission action (rather than through staff no-action letters)? Should the Commission establish an appeal process if the staff remains responsible for the recognition of NRSROs?

Staff action with an appeal process is probably the best approach.

Question 26: Should the Commission publicize applications for NRSRO recognition, and seek public comment on the credibility and reliability of the applicant's ratings?

Probably yes, and this should also be coupled with a review of the current NRSRO's.

Question 27: Should the Commission establish a time period to serve as a goal for action on applications for NRSRO recognition? If so, would an appropriate time period be 90 days after all required information has been received, or a shorter or longer period?

Ninety days is adequate.

C. Examination and Oversight of NRSROs

Question 28: Should NRSRO recognition be conditioned on an NRSRO's meeting the original qualification criteria on a continuing basis? If so, should a failure to meet the original qualification criteria lead to revocation of NRSRO recognition? Should some other standard of revocation apply?

The NRSRO should meet the criteria on a continuing basis with a reasonable timeframe to address and correct alleged failures.

Question 29: What would be the appropriate frequency and intensity of any ongoing Commission review of an NRSRO's continuing compliance with the original qualification criteria?

Every two years.

Question 30: Should NRSRO recognition be conditioned on a rating agency's filing annual certifications with the Commission that it continues to comply with all of the NRSRO criteria?

The way to correct the problems in the rating industry is not to increase the regulatory burden but rather to recognize some firms that have succeeded in protecting investors and by reducing or eliminating the conflict of interest.

Question 31: Should the Commission solicit public comment on the performance of each NRSRO, including whether the NRSRO's ratings continue to be viewed as credible and reliable? If so, how frequently should public comment be solicited (e.g., annually)?

If the SEC addresses the structural problems of the industry (i.e., lack of competition and conflicts of interest) it will be unnecessary to burden the market with something that will have little value.

Question 32: Should NRSROs be subject to greater regulatory oversight? If so, what form should this additional oversight take? If necessary, should the Commission seek additional jurisdictional authority from Congress?

If the SEC addresses the structural problems of the industry (i.e., lack of competition and conflicts of interest) it will be unnecessary to burden the market with something that will have little value.

Question 33: Should NRSRO recognition be conditioned on a rating agency's registering as an investment adviser under the Advisers Act? If so, how should the various sections of the Advisers Act apply to NRSROs? Could the Advisers Act rules be amended to make them more relevant to the businesses of NRSROs? Alternatively, would it be more appropriate for the Commission to adopt a separate registration and regulatory regime for NRSROs?

The NRSRO's are not advisors and therefore should not be treated as such. If the SEC addresses the structural problems of the industry (i.e., lack of competition and conflicts of interest) it will be unnecessary to burden the market with something that will have little value.

Question 34: Should NRSRO recognition be conditioned on recordkeeping requirements specifically tailored to the ratings business? Should NRSRO recognition be conditioned on a rating agency's maintaining records relating to the ratings business, including those relating to rating decisions?

If the SEC addresses the structural problems of the industry (i.e., lack of competition and conflicts of interest) it will be unnecessary to burden the market with something that will have little value.

Question 35: Are there minimum standards or best practices to which NRSROs should adhere? If so, how should these be established? By the Commission? By the industry, with Commission oversight? Should they be incorporated into the conditions for NRSRO recognition? Would it, or would it not, be a productive use of Commission resources to develop the expertise to review, e.g., issues related to the quality and diligence of the ratings analysis?

The establishment of fixed standards is an excellent way to further entrench the large rating firms since it will be the large rating firms defining the standards (the SEC is not qualified).

To serve investors' interests, let the market decide.

Question 36: If a currently recognized NRSRO gave up its NRSRO recognition because of concerns regarding the regulatory and liability environment, what effect, if any, would that action have on the market?

The market would adjust. Currently, there are numerous cases whereby the market disagrees with ratings assigned by NRSRO's.

D. Conflicts of Interest

Question 37: Should the Commission condition NRSRO recognition on an NRSRO's agreeing to document its procedures that address potential conflicts of interest in its business including, but not limited to, potential issuer and subscriber influence? If so, what other potential conflicts should these procedures address?

No, establishing and monitoring compliance with such procedures will do little to protect investors. The major rating firms had elaborate procedures and yet failed to warn investors. As equity analysts have shown, it is easy to breach so called Chinese Walls. A better approach is to eliminate conflicts, rather than trying to manage them.

Question 38: To what extent could concerns regarding potential conflicts of interest be addressed through the disclosure of existing and potential conflicts of interest when an NRSRO publishes ratings?

The issue is to eliminate conflicts, rather than simply disclose them. A boilerplate disclosure at the bottom of Jack Grubman's reports would have done little to protect investors. A mugger's explaining that he might have a conflict of interest with you before he takes your money does not offset his robbing you. The problem is particularly acute in the ratings field where there are two dominant firms, both of which have major conflicts of interest.

Question 39: Should NRSRO recognition be conditioned on an NRSRO prohibiting employees involved in the ratings process (e.g., rating analysts and rating committee members) from participating in the solicitation of new business and from fee negotiations? Would conditioning NRSRO recognition on a rating agency's establishing strict firewalls between employees in these areas and credit analysts address potential conflicts? Should the Commission also address the credit analyst compensation structure to minimize potential conflicts of interest?

Strict firewalls, Chinese Walls, and other barriers are nearly impossible to police and can be easily breached. If the SEC addresses the structural problems of the industry (i.e., lack of competition and conflicts of interest) it will be unnecessary to burden the market with something that will have little value. If the SEC cannot correct the structural problems, the SEC should stop giving investors a false sense of security via the firms it has designated and stop recognizing rating firms.

Question 40: Should NRSRO recognition be conditioned on an agreement by a rating agency not to offer consulting or other advisory services to entities it rates? Could concerns regarding conflicts of interest be addressed by limiting or restricting consulting or advisory services offered by rating agencies?

The major rating firms are extending one monopoly (i.e., credit ratings) into other monopolies. If the SEC addresses the structural problems of the industry (i.e., lack of competition and conflicts of interest), consulting services should be allowed. Until the conditions in the ratings field are corrected, no consulting or advisory services should be allowed.

Question 41: Should NRSRO recognition be conditioned on a prohibition on credit rating analysts employed by NRSROs from discussing rating actions with subscribers? If not prohibited, should the Commission adopt limits on contacts between analysts and subscribers? Or are existing remedies - antifraud, contractual, or otherwise - sufficient to deter inappropriate disclosures to subscribers?

Policing this is nearly impossible. Rating firms should not have access to insider information and should not provide preferential information if the rating firm is paid by issuers for its ratings.

Question 42: Should NRSRO recognition be conditioned on a rating agency having adequate financial resources (e.g., net assets of at least $100,000, or annual gross revenues of at least $1,000,000) to reduce dependence on individual issuers or subscribers?

If a market acceptance standard is employed, this should not be necessary.

Question 43: Should NRSRO recognition be conditioned on a rating agency not deriving more than a certain percentage of its revenues (e.g., 3%) from a single source to help assure that the NRSRO operates independently of economic pressures from individual customers?

If a market acceptance standard is employed, this should not be necessary. The 3% threshold is unlikely to provide much protection.

Question 44: Are there other ways to address potential conflicts of interest in the credit rating business or to minimize their consequences?

It is nearly impossible to identify all potential forms of abuse. If the SEC addresses the structural problems of the industry (i.e., lack of competition and conflicts of interest) it will be unnecessary to burden the market with something that will have little value.

E. Alleged Anticompetitive, Abusive, and Unfair Practices

Question 45: Should the Commission identify specific anti-competitive practices that NRSROs would agree to prohibit as a condition to NRSRO recognition? If so, what are those practices?

Yes. The Department of Justice should be enlisted to identify and counter the abuses of the major firms. The DOJ is more capable of policing this area which to date has received no attention by the SEC (see comments of Ms. Nazareth to the House Financial Services Subcommittee). The SEC should relinquish protection of the major rating firms afforded by its recognizing them as NRSRO's.

Question 46: Would it be sufficient to condition NRSRO recognition on the adoption of procedures intended to prevent anticompetitive, abusive, and unfair practices from occurring?

Yes, but the procedure would probably be easy to ignore or circumvent. The best approach is to address the industry conditions (i.e., lack of competition and conflicts of interest).

Question 47: Should NRSRO recognition specifically be conditioned on an NRSRO's agreeing to forbear from requiring issuers to purchase ancillary services as a precondition for performance of the ratings service?

Of course, but it is easy to circumvent this requirement by increasing the cost of the rating and providing the other service at little or no charge. The existence of these conditions underscore the unhealthy state of the industry. If the major rating firms did not have a lock on the industry, they would not be able to abuse their market position.

Question 48: Should NRSRO recognition specifically be conditioned on an NRSRO's not engaging in specified practices with respect to unsolicited ratings (e.g., sending a bill for an unsolicited rating, sending a fee schedule and "encouraging" payment, indicating a rating might be improved with the cooperation of the issuer)?

Of course, but it is difficult to police abuses. The existence of these conditions underscore the unhealthy state of the industry.

F. Information Flow

Question 49: Should the Commission address concerns about information flow from rating agencies? If so, should the Commission condition NRSRO recognition on a rating agency's agreeing to establish procedures to assure certain disclosures relating to its ratings business, such as those described above? Are there other disclosures that could be appropriate?

If the NRSRO standard is linked to market acceptance, the information flow should not be a problem.

Question 50: Specifically, should NRSRO recognition be conditioned on a rating agency disclosing the key bases of, and assumptions underlying its rating decisions? If so, should these disclosures be made pursuant to standards developed by the industry, or otherwise?

The market will make its own demands of the content of rating decisions. The SEC should not get involved in this area, and an industry group is likely to reflect mainly the interests of the major firms at the expense of the smaller firms.

Question 51: Would it be advisable for the Commission to condition NRSRO recognition on a rating agency's agreeing to disclose performance information periodically? If so, what type of performance information would be most useful? How often should it be disclosed?

If the SEC provides a level playing field, the market is best at sorting out this information.

Question 52: Should NRSRO recognition be conditioned on a rating agency's disclosing whether or not an issuer participated in the rating process? Or, could issuers be required to make such disclosures?

Providing such disclosure will do little to benefit investors. The major rating firms had extensive access to information on WorldCom (Moody's chairman sat on the board of WorldCom) and yet Moody's failed to provide timely warning. Furthermore, issuers should disclose all relevant information to all investors, rather than disclosing information to only a few preferred rating firms.

Question 53: Concerns have been raised that certain credit rating agencies make their credit ratings available only to paid subscribers, and that it would be inappropriate to require users of credit ratings to subscribe for a fee to an NRSRO's services to obtain credit ratings for regulatory purposes. What steps, if any, should the Commission take to address these concerns? For example, should NRSRO recognition be conditioned on a rating agency's agreeing to public dissemination of its ratings on a widespread basis at no cost, as is currently the case?

Egan-Jones discloses its ratings to callers. The major rating firms do not provide all their ratings and analyses free of charge on a timely basis. The cost of our service including electronic feeds is a fraction of the cost of the major rating firms' providing solely an electronic feeds. Furthermore, we do not charge issuers for our ratings.

Question 54: Should NRSRO recognition be conditioned on a rating agency's implementing procedures to assure public notification when it ceases rating/following an issuer. If so, what form of public notification would be appropriate?

Yes, using the same methodology used to announce the rating whenever practical.

Question 55: What steps, if any, can the Commission take to improve the extent and quality of disclosure by issuers to rating agencies or to the public generally, and in particular, regarding: (a) ratings triggers in financial covenants tied to downgrades; (b) conditional elements of material financial contracts; (c) short-term credit facilities; (d) special purpose entities; and (e) material future liabilities.

Rating triggers should be prohibited. The other items (b through e) should be disclosed if they are material.

Question 56: Is it appropriate for the Commission to take steps to minimize the ratings "cliff" that has been represented to be particularly pronounced in the commercial paper market? If so, what steps should the Commission take?

Correcting the industry conditions will address the problem.