November 22, 1994
TO: CLOSED-END FUND COMMITTEE No. 28-94
SEC RULES COMMITTEE No. 123-94
SUBCOMMITTEE ON ADVERTISING No. 19-94
UNIT INVESTMENT TRUST COMMITTEE No. 76-94
RISK MEASUREMENT TASK FORCE
RE: DRAFT INSTITUTE COMMENT LETTER TO SEC CONCERNING RATINGS
AND RATING AGENCIES
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The Securities and Exchange Commission recently issued a concept release soliciting comment
on the appropriate role of ratings and nationally recognized statistical rating organizations ("NRSROs").
Of particular interest to investment companies is the Commission's solicitation of comment on
prospectus use of mutual fund risk ratings and the adequacy of current disclosure concerning rated
portfolio securities. The Commission also proposed rule amendments to require mandatory disclosure
of certain ratings. The Commission requested comment on whether the mandatory disclosure
requirement should apply to closed-end funds and other investment companies. Comments on the
releases are due by December 6, 1994.
The Institute has drafted the attached comment letter on the releases. While our draft is
preliminary and may be subject to some revision, we would appreciate your input as soon as possible.
Please provide your comments on the Institute's draft letter no later than Thursday, December 1st.
You may submit your comments to the undersigned at 202/326-5819.
The Institute's letter states that the ratings by NRSROs of the credit quality of debt securities
and preferred stock serve an important function in the marketplace, and that it is proper for the
Commission to rely upon NRSRO credit ratings in certain circumstances. On the other hand, the
Commission should not transform the limited function of NRSROs into a more substantive regulatory
role, nor should the Commission rely on other types of ratings, such as ratings of mutual fund shares,
for which the NRSROs' expertise is questionable.
In particular, the Institute's letter states that we continue to believe that Rule 3a-7 under the
Investment Company Act of 1940 represents an improper delegation to the ratings industry of the
Commission's authority to exempt persons from the Act, and we would strongly oppose relaxing liability
standards under the Securities Act of 1933 for mutual fund ratings, particularly "volatility ratings." The
Institute's letter also states that we would oppose application of the Commission's proposed mandatory
disclosure requirement to closed-end funds and other investment companies. Finally, the letter states
that the Institute believes that current disclosure requirements with respect to rated portfolio securities
are sufficient to warn investors of the limitations and scope of credit ratings.
Thomas M. Selman
Associate Counsel
Attachment