National Association of Insurance Commissioners
July 28, 2003
U.S. Securities and Exchange Commission
Thank you for the opportunity to comment on the U.S. Securities and Exchange Commission Concept Release: Rating Agencies and the Use of Credit Ratings under the Federal Securities Laws. On behalf of the Rating Agency Working Group (RTAWG), of the National Association of Insurance Commissioners (NAIC), I am pleased to provide you with comments in response to your Invitation to Comment.
(The RTAWG is comprised of state insurance commissioners and regulators. It is the views of these individuals that are represented in this comment letter. Although liaison relationships have been formed with several rating agencies, this comment letter does not necessarily represent the opinions of the rating agencies on the SEC Concept Release. It is our understanding that the rating agencies will submit individual comment letters.)
Formed in 1871, the NAIC is a voluntary organization of the chief insurance regulatory officials of the 50 states of the United States of America, the District of Columbia, American Samoa, Guam, Puerto Rico and the Virgin Islands. The mission of the NAIC is to assist state insurance regulators, individually and collectively, in serving the public interest and achieving the following fundamental insurance regulatory goals in a responsive, efficient and cost-effective manner, consistent with the wishes of its members:
In fulfilling this mission, the NAIC developed the `Securities Valuation Office' (SVO), which is responsible for the day-to-day credit quality assessment and valuation of securities owned by state regulated insurance companies. Unlike, ratings of nationally recognized statistical rating organizations (NRSROs), the NAIC designations are not suitable for use by anyone other than the NAIC.
Ratings issues by the NAIC SVO have historically been administered on a credit quality-risk gradation range from highest quality (least risk) to lowest quality (greatest risk) The NAIC has six NAIC Designation Categories to denote a category of credit quality:
NAIC `1' - Assigned to obligations exhibiting the highest quality. Credit risk is at its lowest and the issuer's credit profile is stable.
NAIC `2' - Assigned to obligations of high quality. Credit risk is low but may increase in the intermediate future and the issuer's credit profile is reasonably stable.
NAIC `3' - Assigned to obligations of medium quality. Credit risk is intermediate and the issuer's credit profile has elements of instability.
NAIC `4' - Assigned to obligations of low quality. Credit risk is high and the issuer's credit profile is volatile.
NAIC `5' - Assigned to obligations of the lowest credit quality, which are not in or near default. Credit risk is at its highest and credit profile is highly volatile, but currently the issuer has the capacity to meet its obligations.
NAIC `6' - Assigned to obligations that are in or near default. Payments of interest, or principal, or both are not being made, or will not be made, in accordance with the contractual agreement.
The NAIC's interest in the SEC's Concept Release: Rating Agencies and the Use of Credit Ratings under the Federal Securities Laws, primarily pertains to the possible elimination and/or increased regulation of the credit rating agencies (NRSROs). The SVO currently has filing exceptions for securities that are rated by an NRSRO in the equivalent of the NAIC `1' and `2' designation categories. As the NAIC SVO currently relies on the ratings issued by Commission-appointed NRSROs, the elimination of this designation would cause significant turmoil to the NAIC as well as to other federal and state legislators.
Specific comments have been prepared by the RTAWG of the NAIC and are organized in a manner consistent with the questions outlined in the SEC's Concept Release. As part of the NAIC's due process procedures, these comments have also been shared with interested parties to the RTAWG, all of whom were given an opportunity to contribute to these comments.
A. Alternatives to the NRSRO Designation
Question 1 - Should the Commission eliminate the NRSRO designation from commission rules?
Although the Commission is primarily concerned with the inclusion of the NRSRO designation in the Commission rules, and expects other regulatory and legislative bodies to determine appropriate substitutes for the NRSRO designation in any non-commission rules or legislation, on behalf of the NAIC SVO and the current reliance on the findings of SEC designated `NRSROs', we would encourage the Commission to continue with the NRSRO designation. A significant amount of investment-grade bonds that insurance companies hold are exempted from filing with the NAIC SVO as they received high ratings from designated NRSROs. Without the outside, objective NRSRO designation, it is not clear what the NAIC would have to do to gain the same level of comfort about these security ratings.
The four NRSROs have a good deal of influence in the market. For insurance regulators, NRSRO ratings have become part of the financial surveillance framework in place for insurers, specifically the Securities Valuation Office of the NAIC takes into account the rating decisions of the NRSROs in its securities valuation process. Considering alternatives to the current system that has worked well for state insurance regulators could be costly and complicated.
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)?
The NAIC Custodial Assets Working Group is currently considering authorizing broker-dealers as custodians. If this proposal is adopted, the RTAWG would have substantial concerns with the suggested alternative to permit broker-dealers to determine capital charges under the Net Capital Rule.
Question 8 - Are there alternatives other than those discussed above that might be better substitutes for the NRSRO designation in particular Commission rules?
As stated previously, the RTAWG supports the retention of the Commission-endorsed NRSRO designation. The RTAWG does not support the elimination of this designation, or the suggested alternatives provided in the Concept Release. The NAIC SVO currently relies on the NRSRO designation for securities classified in a manner equivalent to the NAIC `1' and `2' designation categories.
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?
Although the RTAWG would prefer for the Commission to continue with the NRSRO designation, if the Commission decides to discontinue this designation for the Commission rules, we would encourage the appointment of another entity to recognize NRSROs for uses other than Commission rules. At this time, the RTAWG does not recommend a specific entity to oversee this responsibility. However, the elected entity would need to illustrate independence and objectivity when assigning or monitoring the NRSRO designation.
B. Recognition Criteria
Question 11 - Are the criteria currently used by a 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?
In the RTAWG opinion, the most important determining factor regarding the appointment of an NRSRO is acceptance in the US as an issuer of credible and reliable ratings. The RTAWG also endorses the current process the Commission uses to review rating agencies for NRSRO status. As the RTAWG is familiar with the recent criticisms regarding possible barriers to entry and insufficient transparency from the NRSRO designation process, the RTAWG supports the proposals included in the Concept Release to openly communicate and improve the transparency of the NRSRO designation process.
Question 12 - Is it appropriate to condition NRSRO recognition on a rating agency being widely accepted as an issuer of credit and reliable ratings by the predominant users of securities ratings in the United States (e.g., underwriters, dealers, banks, insurance companies, mutual funds and other investment managers, 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 RTAWG supports the proposal to administer NRSRO designations by considering the acceptance by the predominant users (underwriters, dealers, banks, insurance companies, mutual funds, issuers) of the security ratings. As the insurance industry is a key user of credit ratings, both as investors and issuers, we feel that it would be essential for the opinion of insurers to be considered when issuing an NRSRO designation for a credit rating agency that predominantly rates securities of insurance companies. We would believe that the examples provided in the Concept Release, including the use of statistical data, and comment letters from users, would provide the acceptance the Commission would require. (Although perhaps beyond the commission's "securities" mandate, insurance and especially reinsurance buyers sometimes use the NRSRO ratings in their insurance purchase decisions.)
The RTAWG disagrees, however, with the proposal that acceptance be determined by a credit rating agency documenting that it has been retained to rate securities issued by a broad group of well-capitalized firms. With the use of the other `acceptance verifiers' stated in the Concept Release, the RTAWG does not feel that this method will be necessary. Furthermore, we foresee possible inappropriate activity (conflicts of interest, and the issuance of `rating guarantees') as well as the possible reduction of competition by eliminating opportunities for smaller firms as rating agencies attempt to acquire these retainers for documentation to the SEC.
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 RTAWG agrees that the use of uniform rating symbols should be required by designated NRSROs to reduce marketplace confusion. Under the existing practice, NRSROs are able to utilize different symbols as well as different criteria in assessing ratings. This activity produces a strain on the marketplace as attempts are made to compare ratings issued by various NRSROs.
The RTAWG further agrees that the Commission should require procedures to ensure credible, reliable, current and consistent ratings. However, except as mentioned, the RTAWG does not have specific comments regarding the minimum standards the Commission should use when overseeing the NRSRO processes or determining when/if a credit rating agency's NRSRO designation should be removed. As previously stated, the RTAWG supports the proposal that public acceptance should be the ultimate determination of issuing (and retaining) an NRSRO rating.
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?
Access to senior management of an issuer should be a factor, but not solely, in NRSRO status. Senior managements would likely have superior information on a specific issue. The RTAWG does suggest required disclosures for ratings that are developed without the involvement of senior management.
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?
A more comprehensive picture can be obtained if more than just a computerized statistical model is used in arriving at a specific rating. Otherwise, qualitative elements are missed from the overall analysis (e.g, market sentiment, political climate, and the role of contagion). The RTAWG has noticed that purely quantitative credit models have gained acceptance by credit risk managers in recent years. These models should be further considered before restricting NRSRO status to companies who do not solely rely on statistical models. If such models are recognized, they should be designated as `quantitative' (e.g., NRSRO: Quantitative)
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 quality of a credit rating is definitely related to knowledge of the response under Question 15 above. In other words, there should be minimum standards for training and qualification of a rating agency's analysts.
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 quality of ratings would ultimately be determined by the market, and the rating agency would likely respond accordingly by adjusting the number of issues covered per analyst, etc.
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?
A credit-rating agency's organization structure would impact the credibility of its ratings. (This has been clearly demonstrated by some of the auditing firms that have attempted to provide both research/analysis and auditing services.)
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?
The RTAWG believes that the Commission should consider a rating agency's financial resources as a factor in determining NRSRO status. The Commission should ensure that NRSROs are able to maintain an independent status, although fees are collected when providing ratings, by verifying that one particular contract or issuer does not provide a significant portion of the financial revenue or stability of the NRSRO.
A rating agency's financial resources may involve a conflict of interest, if the issuer being rated is also one that significantly supports the agency. The fee structure of the rating agencies needs to be examined, so that all issuers, small and large, are on equal footing.
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 RTAWG does believe that rating agencies with specific expertise within a limited section of the debt market should be considered for NRSRO recognition. Additionally, rating agencies that confine activity to a specific geographic area should not be precluded from the NRSRO designation. However, the designations these entities receive should clearly indicate that they specialize in a particular industry or geographical location. (e.g., A.M Best - NRSRO: Insurance or ABC Ratings - NRSRO: Japan).
Question 21 - Should the Commission consider a provisional NRSRO status for rating agencies that comply with NRSRO recognition criteria but lack national recognition?
The RTAWG would encourage the Commission to further explore this possibility. Rating agencies that are not national in nature, but provide quality ratings should not be precluded from receiving recognition of an NRSRO. This is particularly true when other federal and state bodies utilize the NRSRO designation. The RTAWG would suggest perhaps providing separate distinctions for rating agencies that operate on a national level and those which operate within a specific region (e.g., NRSRO - Nationally Recognized Statistical Rating Organization and RRSRO - Regionally Recognized Statistical Rating Organization.) (See related comments in response to Questions 15 & 20.)
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?
The RTAWG would support the consideration of procedures to improve information flow surrounding the ratings process when awarding an NRSRO designation. Although the RTAWG has recently began procedures to improve relations with several credit rating agencies, the RTAWG is still working to improve communication with the rating agencies to enhance the regulatory aspects of the NAIC as well as the information the rating agencies receive to determine ratings. The RTAWG feels that if the state insurance regulatory departments and the rating agencies assist each other in providing information then the state financial condition reports and the issued ratings will both adequately represent the company's condition. The RTAWG would encourage the Commission to assist in the improvement of information flow for these regulatory purposes.
Question 26 - Should the Commission publicize applications for NRSRO recognition, and seek public comment on the credibility and reliability of the applicant's ratings?
In order to improve the transparency of the NRSRO designation process, the RTAWG would support the public announcement of NRSRO applications as well as the public request for comments on the credibility and reliability of the applicant's ratings.
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 RTAWG believes that it is important to reconsider the NRSRO designations periodically. Rating agencies that have not continued to meet the standards necessary to receive an NRSRO designation should have their designation revoked.
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 RTAWG agrees that annual certifications with the Commission would be one appropriate way to oversee continued compliance of the NRSRO criteria.
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)?
The RTAWG agrees that public comments on the performance of each NRSRO would be considered a valuable resource in determining whether the public still considers the agency's issued ratings to be accepted in the marketplace. Although the RTAWG feels that an annual solicitation may be too frequent, we would recommend public solicitation of comments at least every three years. Furthermore, we would suggest the Commission to publicly announce that comments over rating agencies could be submitted without an official request to report concerns over recent activity of the NRSROs.
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?
Due to the amount of recognition and reliance the public places on an NRSRO designation, the RTAWG does agree that greater regulatory oversight may be warranted. However, the RTAWG does not have a specific recommendation for how this oversight should occur. The RTAWG would not object to the Commission obtaining additional judicial authority.
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?
The RTAWG would agree that conflicts of interest within rating agencies is a significant concern that should be addressed. The suggestion to require documentation of policies and procedures to address potential conflicts of interest within rating agencies would assist in alleviating this concern.
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 RTAWG would support a requirement for NRSROs to disclose possible conflicts of interest when ratings are published. It is perceived that most users of ratings would find information regarding potential conflicts of interests crucial in evaluating and relying on a particular rating. We are currently aware of practices in which ratings are provided for organizations with significant influence on or ownership in the rating agencies where no conflict of interest disclosures are currently provided.
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?
Although the RTAWG believes that potential conflicts of interest would be minimized by restricting the activities of certain employees within rating agencies, this procedure may require the rating agencies to restructure their current business practices. The RTAWG feels that this encroachment may exceed the responsibilities of the Commission in regulating the NRSRO designation. Other less invasive methods may be established that would prevent conflicts of interest within the NRSROs.
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 RTAWG believes that restricting the activities of NRSROs may reduce the conflict of interest concerns. The rating agencies conduct services that can be considered consistent or viewed comparable to services provided by public accounting firms, which have recently been restricted from performing both attestation and non-attestation services to clients.
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?
The RTAWG believes that the Commission should consider the financial resources of rating agencies when assigning/renewing an NRSRO designation. The RTAWG does not support a specific financial threshold, however, financial stability illustrating non-reliance on individual issuers or subscribers should be demonstrated.
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?
The RTAWG agrees that an NRSRO designation should only be administered to those rating agencies that function independently of their issuers or subscribers. As such, a rating agency that derives a significant source of financial resources from a single source should be evaluated to verify that they can continue to operate, with a strong sense of financial security, without the resources provided from the predominate single source. However, we advocate disclosure of revenues and not a prohibition or ceiling. An "excess" of revenue above 3% may be a function of the size of the issuer (e.g., a GSE) and or the complexity of its debt issues (MBS, CDO, etc.). The NRSRO has no control over those factors. Further, the larger or more complex the issuer/issue the more the market may be looking to an NRSRO for guidance. A source-based revenue ceiling might reduce transparency or uncertainty where and when it is most needed. Disclosure allows investors to make their own determination of influence without taking away the guidance. In addition, the RTAWG would encourage the Commission to evaluate whether other groups (i.e., investment bankers) can or do exert control or influence over a rating agency, and if particular procedures can be implemented to prevent these economic pressures. The RTAWG does not necessarily believe a set percentage should be established when evaluating revenue sources. A more objective test may more appropriately identify possible instances of economic pressures.
Question 44 - Are there other ways to address potential conflicts of interest in the credit rating business or to minimize their consequences?
The RTAWG would suggest the Commission to require additional disclosures and transparency in the ratings process as a means to address potential conflict of interest concerns.
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?
The RTAWG agrees that the Commission should identify specific anti-competitive practices to prohibit as a requirement for NRSRO recognition. The RTAWG does not object to the suggested practices included in the Concept Release.
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?
In reviewing a rating agency for NRSRO designation, the RTAWG feels that the Commission should determine whether formal procedures to prevent anticompetitive, abusive and unfair practices have been adopted by the entity.
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?
The RTAWG believes that the requirement to purchase ancillary services is an unfair practice within the industry. As such, rating agencies that receive an NRSRO designation should be prohibited from engaging in this activity.
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)?
The RTAWG believes that the practice of requesting payment for unsolicited ratings to be an unethical practice within the industry. As such, rating agencies that receive an NRSRO designation should be prohibited from engaging in this activity. The practice of "notching" or assigning lower ratings to unsolicited ratings should be discouraged. (In any one given case, such a lower rating may be an honest "difference of opinion.")
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?
Improving information flow from rating agencies is a key concern of the RTAWG with regards to coordination among state insurance regulators. The establishment of processes to improve upon this communication is greatly desired by the insurance industry. The NAIC formed the Rating Agency Working Group (RTAWG) in December 2002 with the primary focus of establishing relationships with the rating agencies. The ultimate goal of this working group is to enhance the confidential information flow between state insurance commissioners and the rating agencies as the RTAWG feels that this communication will improve the activities of both the rating agencies and the regulators to proactively monitor and assess insurance companies.
Although the RTAWG requests increased confidential information from NRSROs to assist with the regulation of the insurance industry, the RTAWG does not necessarily support a proposal to require the NRSROs to publicly disclose factors that specifically impact a calculated rating. The RTAWG recognizes that the public announcement of these disclosures may lead to companies operating in a specific manner to achieve/raise a particular rating. Although increased regulation is desired of the NRSROs, the RTAWG does not think the improved regulation should interfere or impact the current business practices taken by the rated entities.
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?
Although the RTAWG would welcome increased communication from the rating agencies, the RTAWG does not necessarily support the designation of specific standards that govern ratings. Although most rating fluctuations would be encompassed by a small range of performance indicators, the RTAWG recognizes that NRSROs need the freedom to implement a rating change for factors that may not be specifically identified as a industry standard.
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?
Although the RTAWG would welcome disclosure of the NRSRO's performance, the RTAWG does not believe the NRSRO should be required to publicly disclose the performance of the rated entities. Any such disclosure should follow uniform and comprehensive standards, similar to the Commission's rules for mutual fund performance.
Several rating agencies currently publish credit rating `migration' tables and statistics and historical default probabilities by rating category. These could be uniform. Other performance information might include comparisons among NRSRO of their ratings actions prior to that year's cohort of defaulting issuers, historical "average time between last two downgrades and default" or from "mean time from investment grade to default."
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?
The RTAWG does not endorse this requirement. The regulations of the rating agency should not impact the current business practices of the rated entities. Requiring this disclosure may entice more entities to actively participate in the rating process to avoid disclosures which may be perceived in a negative manner.
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?
The ratings, definitions thereof, and a description of rating methodology, should be in the public domain; but not necessarily the supporting analysis and research, which are rightly proprietary and therefore could be subject to subscription.
We offer the following reasoning: Conferring NRSRO status has substantial economic value to a rating agency whereas dissemination is not a significant economic burden, especially given Internet technology and the news media. It was the practice of current NRSROs even back in the days when they had to staff telephone banks to handle public inquiries. Public access to ratings improves the transparency of both financial markets and the quality of a NRSRO's ratings, both of which are valid and desirable public purposes.
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?
For ratings that are publicly available, the RTAWG does agree that public notification regarding the elimination of a rating should be required to achieve an NRSRO status. However, the RTAWG also notes that disclosure of why a rating has been eliminated may be necessary to adequately notify the public of possible concerns with the entity. (e.g., Has the rating been removed because the NRSRO has decided not to actively participate in a particular market, or because the NRSRO no longer has sufficient information to adequately rate the entity?)
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?
The RTAWG does not endorse this proposal. As previously mentioned, the RTAWG would caution the Commission in establishing requirements on NRSROs (or the industry) that would significantly change the fundamental business structure in which the rating agencies or issuers operate.
We appreciate the opportunity to comment on this SEC Concept Release. Should you have any questions, please contact me at 212-480-2287, or Julie Gann (NAIC Staff) at 816-783-8125, or David Vacca (NAIC Staff) at 816-783-8134.