FR05/2015 Code of Conduct Fundamentals for Credit Rating Agencies

CODE OF CONDUCT FUNDAMENTALS FOR CREDIT RATING AGENCIES Final Report THE BOARD OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS FR05/2015 MARCH 2015 Copies of publications are available from: The International Organization of Securities Commissions website www.iosco.org © International Organization of Securities Commissions 2015. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. Certain authorities may consider rule proposals or standards that relate to the substance of this report. These authorities provided information to IOSCO or otherwise participated in the preparation of this report, but their participation should not be viewed as an expression of a judgment by these authorities regarding their current or future regulatory proposals or of their rulemaking or standards implementation work. This report thus does not reflect a judgment by, or limit the choices of, these authorities with regard to their proposed or final versions of their rules or standards. Code of Conduct Fundamentals for Credit Rating Agencies – Final Report Table of Contents I. Introduction ............................................................................................................................ 1 II. Historical Background ........................................................................................................... 1 III. Revisions to the IOSCO CRA Code ...................................................................................... 5 Appendix A: New IOSCO CRA Code.......................................................................................... 39 1 I. Introduction The IOSCO Code of Conduct Fundamentals for Credit Rating Agencies (the “IOSCO CRA Code”) is intended to offer a set of robust, practical measures as a guide to and a framework for CRAs with respect to protecting the integrity of the rating process, ensuring that investors and issuers are treated fairly, and safeguarding confidential material information provided them by issuers. The IOSCO CRA Code was first published in 2004 when few jurisdictions had laws governing activities of CRAs. In recent years, many IOSCO members have implemented registration and oversight programs for CRAs and have exercised supervisory authority over CRAs. In light of these developments, IOSCO is adopting significant revisions and updates to the IOSCO CRA Code.1 II. Historical Background In 2003, IOSCO published a set of principles with respect to CRAs (the “IOSCO CRA Principles”).2 At the same time, IOSCO also published a report outlining the activities of CRAs, the types of regulatory issues that arise relating to these activities, and how the IOSCO CRA Principles address the issues.3 The report highlighted the growing and sometimes controversial importance placed on credit ratings, and found that, in some cases, CRAs’ activities are not always well understood by investors and issuers alike. Given this lack of understanding, and because CRAs typically were subject to little formal regulation or oversight in most jurisdictions, concerns had been raised regarding the manner in which CRAs protect the integrity of the rating process, ensure that investors and issuers are treated fairly, and safeguard confidential material information provided to them by issuers. Consequently, the IOSCO CRA Principles were intended to be a useful tool for CRAs, regulators, and others seeking to improve how CRAs operate and how credit ratings are used by market participants. The IOSCO CRA Principles address four key objectives to promote informed, independent analyses and opinions by CRAs:  Quality and integrity of the rating process: CRAs should endeavor to issue opinions that help reduce the asymmetry of information among borrowers, lenders and other market participants.  Independence and conflicts of interest: CRA ratings decisions should be independent and free from political or economic pressures and from conflicts of interest arising due to the CRA’s ownership structure, business or financial activities, or the financial interests of the CRA’s employees. CRAs should, as far as possible, avoid activities, procedures or relationships that may compromise or appear to compromise the independence and objectivity of the credit rating operations. 1 The new IOSCO CRA Code is attached to this report at Appendix A. 2 See IOSCO Technical Committee, Statement of Principles Regarding the Activities of Credit Rating Agencies (Sept. 2003), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD151.pdf. 3 See IOSCO Technical Committee, Report on the Activities of Credit Rating Agenci