SEC Proposal Maintains Status Quo in Credit Ratings, Does Not Allow Truly Competitive Market According to AFP

June 7, 2005 — BETHESDA, MD — The Association for Financial Professionals today outlined its concerns that the Securities and Exchange Commission proposal to define the recognition process for credit rating agencies would still not allow for a truly competitive market. In a comment letter submitted in response to the SEC's proposed Definition of National Recognized Statistical Rating Organization, the AFP renewed its call on the SEC to take steps to eliminate artificial barriers to entry into the credit rating market and provide prudent oversight that ensures investor confidence in the rating process.

"While we are pleased that the SEC has taken steps to define the recognition process by accepting many of our recommendations, we believe that the SEC's proposed definition largely maintains the status quo instead of truly opening up the credit rating process to innovation and competition," said Jim Kaitz, President and CEO of the Association for Financial Professionals.

In its comment letter to the SEC, the AFP addressed the following concerns over the proposed definition and the credit rating process:

• The SEC proposed definition will not allow market participants to fully recognize the benefits of a truly competitive market because it appears to limit competition only to firms that look substantially similar to the current dominant market players;

• The definition largely requires methodologies that closely resemble those used by the existing credit rating agencies and does not adequately accommodate new rating agencies that may employ innovative methodologies to produce credible and reliable ratings;

• The lack of any proposal to conduct ongoing oversight of the credit rating agencies means that there is no mechanism to verify that credit rating agencies continue to issue credible and reliable ratings or have and adhere to policies that protect non-public information, prevent conflicts of interest and unfair and abusive practices;

• AFP opposes the SEC requirement that credit rating agencies must disclose their ratings at no cost as an unnecessary intrusion into the business model of prospective rating agencies that restricts competition and further entrenches the market position of the current rating agencies;

• Continuous monitoring as proposed by the SEC is neither practical or necessary, but instead the SEC should require credit rating agencies to stipulate the frequency with which their ratings are reviewed and the credit rating agencies should be required to disclose the date of the last formal review and when they last updated each rating;

• Credit rating agencies should be required to establish distinct and absolute separations between rating analysts and credit rating agency staff responsible for generating revenue for credit ratings, rating assessment services, corporate governance reviews or other ancillary services offered by the credit rating agency;

• One type of potential conflict of interest should be addressed by requiring disclosure by the rating agency of any relationship with the rated company or its directors; and

• SEC should conduct periodic reviews of credit rating agencies no less than every five years.

"To reflect the active role we envision for the SEC, we are calling on them to abandon the 'national recognized' requirements and instead establish a more market-driven definition and process that would be best summed up in a new designation called 'Registered Credit Rating Agency'," concluded Kaitz. "This new designation would more accurately reflect the role we recommend for the SEC in recognizing and overseeing credit rating agencies and would increase investor confidence in credit ratings and improve the efficiency of capital markets."

Editor's Note: AFP's complete comment letter was filed today with the SEC and will also be available on the SEC Web site.