A Review of Implementation of the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies

A REVIEW OF IMPLEMENTATION OF THE IOSCO CODE OF CONDUCT FUNDAMENTALS FOR CREDIT RATING AGENCIES TECHNICAL COMMITTEE OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS MARCH 2009 2 CONTENTS Page Report Overview – Scope and Purpose 3 Background on the IOSCO CRA Code and the Work of the CRA Task Force 4 2008 Revisions to the IOSCO CRA Code 5 Structure of the IOSCO CRA Code 6 Structure of the Review 6 Results 6  Level of Implementation of the 2008 Revisions to the IOSCO CRA Code 8  Non-Implementation of the 2008 IOSCO CRA Code 8  Partial or Substantial Implementation of the 2004 IOSCO CRA Code of Conduct 9  Minimal or No Implementation of the 2004 IOSCO CRA Code of Conduct 9 Results of the Review 10 Conclusion 15 3 IOSCO TECHNICAL COMMITTEE A REVIEW OF IMPLEMENTATION OF THE IOSCO CODE OF CONDUCT FUNDAMENTALS FOR CREDIT RATING AGENCIES REPORT OVERVIEW – SCOPE AND PURPOSE The purpose of this report is to determine the extent to which credit rating agencies have incorporated the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies (IOSCO CRA Code) into their own codes of conduct. The IOSCO CRA Code,1 first drafted in 2004, contains provisions that, if incorporated into a rating agency’s code of conduct, are designed to protect investors and enhance market efficiency by improving the transparency by which credit rating agencies (CRAs) decide on ratings. Its provisions also are intended to guard against conflicts of interest and other factors that may unduly influence a CRA’s analysis and ratings away from the actual merits of an issuance. Whether a CRA has adopted a code of conduct and the degree this code complies with the provisions of the IOSCO CRA Code constitute important information for investors, regulators, issuers and other market participants. This information is intended to help market participants determine how much credence they should lend to a CRA’s opinions, and can help assure regulators that potential conflicts of interest and other problematic issues are being addressed. For this reason, the IOSCO Technical Committee directed its Chairmen’s Task Force on Credit Rating Agencies (CRA Task Force) to review the codes of conduct of various CRAs around the world to determine whether the CRAs have incorporated the IOSCO CRA Code, resulting in this Report.2 The extent to which the IOSCO CRA Code is incorporated into a CRA’s code of conduct is particularly relevant to users of credit ratings now, in light of the ongoing financial crisis arising from concerns in the credit markets. The IOSCO CRA Code was updated in May 2008 to address problems that emerged in credit markets and the downgrades in credit ratings experienced by a number of issuances of securities, particularly structured finance products. The revised version of the IOSCO CRA Code contains new provisions intended to specifically address problems that arose with respect to structured finance products. Reviewing whether CRAs have issued codes of conduct along the lines of the IOSCO CRA Code can be viewed as the first of three levels of encouraging implementation of the IOSCO CRA Code. The second level regards whether variations from the IOSCO CRA Code matter to users of ratings. This second level of encouraging implementation is the remit of the market. The third level of encouraging implementation involves determining whether CRAs comply in fact with the statements made in their individual codes of conduct. This last level of encouraging implementation is the responsibility of individual regulators, as determined by their own laws and regulations. 1 The IOSCO CRA Code is a set of principles addressing issues that securities regulators agree should be addressed by CRAs, and, as such, represents a common point understanding across jurisdictions regarding CRA activities. 2 This report focuses on a CRA’s implementation of the IOSCO CRA Code and not on CRAs’ implementation or compliance with any particular jurisdiction’s regulation concerning CRAs. 4 Since IOSCO as an organization does not have the resources or legal authority to conduct a full assessment of whether CRAs have implemented the IOSCO CRA Code in ways that the CRAs have publicly stated, the Technical Committee instead is focusing on the first level of encouraging implementation. A key feature of the revised IOSCO CRA Code is that CRAs should publish a link to their codes of conduct on their home webpages in a prominent place. This approach is resource-efficient, since IOSCO (as well as any interested party) can easily confirm whether CRAs have published codes of co