From: Lawrence White [lwhite@stern.nyu.edu]
Sent: Friday, July 25, 2003 10:39 AM
To: rule-comments@sec.gov
Subject: File No. S7-12-03
To the U.S. Securities and Exchange Commission:

        In response to the SEC's request for comments on its Concept Release 
"Rating Agencies and the Use of Credit Ratings under the Federal Securities Laws", 
I respectfully offer the following comments:

        I strongly urge the SEC to abolish the regulatory category of "nationally 
recognized statistical rating organization" (NRSRO) and to cease its use of the 
NRSRO criterion for deciding which rating company's ratings can be used for the 
SEC's regulatory purposes (such as its net capital rule for broker-dealers, 
17 CFR 240.15c3-1).  The SEC should then make the compensating adjustments in 
its other regulations, as is suggested in the Concept Release, so as to achieve 
the SEC's regulatory purposes in those other regulations.

        In so doing, the SEC would allow securities markets participants to make 
their own judgments as to which rating company's ratings (if any) ought to be 
heeded, rather than having the SEC force that choice, as it has since it created 
the NRSRO category in 1975.  In so doing, the SEC would be encouraging the freer 
development of new ideas and new ways of doing things in the assessments of 
companies' solvency prospects, as well as new business models among rating companies 
as to how they distribute their ratings and how and who they charge for the 
information that they develop in the course of developing their ratings.  
These are matters that should be the results of judgments of the securities 
markets participants themselves -- what works, what is effective -- rather than 
of the SEC.  The efficiency of the securities markets would surely be enhanced 
by such a freeing-up of the ratings process.

        If the SEC does not choose to abandon the NRSRO category, then I urge 
the SEC to cease being an artificial barrier to entry.  It should actively consider 
and approve qualified applicants for NRSRO status through an open and transparent 
process, so as to encourage more competition among NRSROs.  In so doing, the SEC 
should focus on criteria that consider "outputs" -- the performance record of an 
applicant in predicting bond defaults -- rather than the "inputs" (the internal 
organization and procedures of the applicant) that the SEC has considered as possible 
criteria in the past (e.g., in its 1997 proposed regulations concerning NRSROs).  
Any criteria that the SEC applies to applicants should also be applied periodically 
to incumbents.

        Expansions of the reasoning underlying these comments can be found in my 
writings on the subject:

 "The SEC's Other Problem,"Regulation, Winter 2002-2003 
(http://www.cato.org/pubs/regulation/regv25n4/v25n4-10.pdf).

"The Credit Rating Industry: An Industrial Organization Analysis," in R.M. Levich, 
C. Reinhart, and G. Majnoni, eds. Ratings, Rating Agencies and the Global Financial System, 
Kluwer, 2002 (http://www.wkap.nl/prod/b/1-4020-7016-0).

"Don't Like the 'Power' of the Bond Rating Firms? Basel 2 Will Only Make It Worse," 
in Bumps on the Road to Basel: An Anthology of Views on Basel 2, Centre for the 
Study of Financial Innovation, 2002 (http://www.csfi.fsnet.co.uk/).
 
"An Industrial Organization Analysis of the Credit Rating Industry," in M. Ong, ed., 
Credit Ratings: Methodologies, Rationale and Default Risk, Risk Books, 2002 
(http://www.riskbooks.com/ix_crmradr.html).

        Thank you for your consideration of my comments.

Lawrence J. White

****************
Lawrence J. White
Professor of Economics
Stern School of Business
New York University
44 West 4th Street
New York, NY 10012-1126
Tel.: 212-998-0880
Fax: 212-995-4218
http://www.stern.nyu.edu/~lwhite