©2005 Investment Company Institute. All rights reserved. Information may be abridged and therefore incomplete.
Communications from the Institute do not constitute, and should not be considered a substitute for, legal advice.
[18911]
June 2, 2005
TO: SEC RULES COMMITTEE No. 38-05
CLOSED-END INVESTMENT COMPANY COMMITTEE No. 21-05
MONEY MARKET FUNDS ADVISORY COMMITTEE No. 9-05
FIXED-INCOME ADVISORY COMMITTEE No. 11-05
UNIT INVESTMENT TRUST COMMITTEE No. 8-05
RE: DRAFT INSTITUTE LETTER ON SEC PROPOSED RULE DEFINING THE TERM
“NRSRO”
As we previously informed you,1 the Securities and Exchange Commission has
published for comment a proposed new rule under the Securities Exchange Act of 1934 which
would define the term “nationally recognized statistical rating organization” (“NRSRO”).2 The
Institute has prepared a draft comment letter on the proposal. The most significant aspects of
the draft letter are summarized below and a copy of the draft letter is attached.
Comments on the proposal are due to the SEC no later than June 9, 2005. If you have
any comments on the draft letter, please contact the undersigned by phone at 202-371-5408 or
by e-mail at aburstein@ici.org no later than June 7.
The draft letter supports the proposal, as it would facilitate much needed competition
among credit rating agencies and would codify substantive standards for being an NRSRO. The
draft letter notes, however, that the proposal does not enhance the Commission’s current
regulatory structure and oversight of NRSROs and, in fact, may diminish the Commission’s
oversight by eliminating the need for credit rating agencies to seek no-action letters in order to
be designated as an NRSRO. Given the reliance of many provisions of the securities laws on
NRSRO ratings and the utilization of these ratings by investors in their investment decisions,
the draft letter therefore recommends that, in addition to adopting a formal definition of
“NRSRO,” the Commission continue to require that credit rating agencies obtain NRSRO
designation through the no-action process. At the same time, in order to facilitate competition
1 Memorandum to SEC Rules Members No. 52-05, Closed-End Investment Company Members No. 22-05, Money
Market Funds Advisory Committee No. 7-05, Fixed-Income Advisory Committee No. 9-05 and Unit Investment Trust
Members No. 6-05, dated April 22, 2005 [18798].
2 SEC Release Nos. 33-8570; 34-51572; and IC-26834 (April 19, 2005) (“Release”). The Release can be found on the
SEC’s website at http://www.sec.gov/rules/proposed/33-8570.pdf.
2
among credit rating agencies, the draft letter recommends that the Commission institute several
changes to the current no-action process.
Specifically, the draft letter supports the establishment of a time period under which
Commission staff would act on credit rating agency no-action requests for NRSRO status.
Establishing a time period to serve as a goal for Commission staff action would address
concerns regarding the current length of time necessary to obtain a no-action letter and would
facilitate the designation of credit rating agencies as NRSROs. In addition, the draft letter
supports allowing credit rating agencies that confine their activities to limited sectors of the
debt market or to limited geographic areas to be deemed an NRSRO. The draft letter states that
these changes would significantly improve the current no-action process and facilitate
competition for credit rating agencies, while at the same time ensure that there is the minimum
amount of NRSRO oversight necessary to ensure adequate investor protections and an efficient
NRSRO process.
The draft letter notes that the transparency of the ratings process, and of the procedures
in place to ensure that this process operates smoothly, is very important to investors. The draft
letter therefore recommends that the Commission consider, as an additional factor for assessing
whether a credit rating agency meets the third component of the proposed NRSRO definition,
the level of disclosure of these factors to users of their ratings. The draft letter states that the
public disclosure of these factors would allow investors a continuous opportunity to appraise
the NRSROs’ independence, their capabilities as NRSROs and their unique operations.
Ari Burstein
Associate Counsel
Attachment (in .pdf format)