1 See Memorandum 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, dated November 22, 1994.
December 9, 1994
TO: CLOSED-END FUND COMMITTEE No. 33-94
SEC RULES COMMITTEE No. 130-94
SUBCOMMITTEE ON ADVERTISING No. 22-94
UNIT INVESTMENT TRUST COMMITTEE No. 81-94
RISK MEASUREMENT TASK FORCE
RE: INSTITUTE COMMENT LETTER TO SEC CONCERNING RATINGS AND
RATING AGENCIES
_____________________________________________________________________________
As we previously informed you, 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") and proposed rule amendments to require mandatory disclosure of
certain ratings.1 Attached is a copy of the Institute's comment letter on the releases.
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 quality ratings in certain circumstances. On the other hand,
the Commission should not rely on NRSROs to conduct regulatory oversight on matters such as
potential self-dealing and overreaching by insiders. Thus, 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 regulatory responsibilities. In addition, the Commission should
recognize the important distinctions between credit ratings of debt securities and preferred stock and
other types of ratings, such as ratings of mutual fund shares, as to which the NRSROs' expertise is
questionable. The letter thus strongly opposes relaxing liability standards under the Securities Act of
1933 for mutual fund ratings, including "volatility ratings."
In response to a specific request for comment, the Institute's letter also opposes application of
the Commission's proposed mandatory disclosure requirement to closed-end funds and other
investment companies. Finally, in response to a specific request for comment, the Institute's letter states
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