The Bond Market Association And The Securities Industry Association Suggest Changes To Proposed Definition Of NRSRO

In a recently filed comment letter, The Bond Market Association and the Securities Industry Association responded to the Securities and Exchange Commission's (SEC) proposed Rule 3b-10, which would for the first time define the term “nationally recognized statistical rating organization,” and also commented on certain of the SEC's proposed interpretations of the term NRSRO. The letter generally supports the proposal, and makes technical comments on such issues as public availability of ratings, the “nationally recognized” requirement, recognition limited to sectors or geographical areas, conflicts of interest, and ratings that rely primarily on quantitative models.

The letter states that rating agencies that use solely quantitative models should not be granted NRSRO status. “There is a substantial difference between ratings that rely primarily on quantitative models that those that include extensive contacts with the issuer’s management,” said Frank Fernandez, senior vice president and chief economist at the Securities Industry Association. “We don’t believe that ratings that rely solely on quantitative models should be relied upon for regulatory purposes.”

The letter also notes that, while potential conflicts of interest arise - for example, when issuers pay for their ratings – these conflicts are manageable.

“We believe rating agencies can and should address concerns over conflicts of interest by instituting policies and procedures that ensure their credit ratings are not unduly influenced by a person with a vested interest in the level of the rating,” said Marjorie Gross, senior vice president and regulatory counsel at The Bond Market Association. “But many services that might be considered ‘ancillary’ to the ‘ratings’ business, such as ratings advisory services, issuance of company expected default frequency numbers, and issuance of insurance company claims payment ratings are often complementary and are not likely to affect the independent judgment of the ratings team, and thus should not be prohibited or required to be performed by a separate group of employees.”