Review Of Implementation Of The IOSCO Fundamentals Of A Code Of Conduct For Credit Rating Agencies

REVIEW OF IMPLEMENTATION OF THE IOSCO FUNDAMENTALS OF A CODE OF CONDUCT FOR CREDIT RATING AGENCIES CONSULTATION REPORT TECHNICAL COMMITTEE OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS FEBRUARY 2007 THIS PAPER IS FOR PUBLIC CONSULTATION PURPOSES ONLY. IT HAS NOT BEEN APPROVED FOR ANY OTHER PURPOSE BY THE IOSCO TECHNICAL COMMITTEE OR ANY OF ITS MEMBERS. 2 PREAMBLE The Chairmen’s Task Force of the Technical Committee of the International Organization of Securities Commissions is seeking comment on this Consultation Report on a Review of Implementation of the IOSCO Fundamentals of a Code of Conduct for Credit Rating Agencies. The public is invited to submit comments on this Consultation Report by 11 May 2007. Instructions regarding the submission of comments are set out below. In December 2004, after extensive discussions with investor groups, credit rating agencies (CRAs), issuers, and other interested organizations such as the Basel Committee of Banking Supervisors and the International Association of Insurance Supervisors, the IOSCO Technical Committee released its Code of Conduct Fundamentals for Credit Rating Agencies (IOSCO CRA Code). This IOSCO CRA Code includes a set of provisions designed to protect investors and enhance market efficiency by improving the transparency by which CRAs decide on ratings and 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. The IOSCO CRA Code is designed to be useful for all CRAs using all business models, and not just the largest and most widely recognized CRAs using an ―issuer-pays‖ model. To date, the IOSCO CRA Code has received praise from investor groups, regulators and governments, as well as issuers and the CRAs themselves. The IOSCO CRA Code is now two years old. Accordingly, IOSCO’s Technical Committee agreed that it may be valuable to reconstitute the Chairmen’s Task Force on Credit Rating Agencies to assess (1) the degree to which CRAs have adopted codes of conduct that reflect the provisions of the IOSCO CRA Code, and (2) whether any trends exist with regard whether CRAs consistently choose to ―explain‖ (rather than comply with) specific provisions of the IOSCO CRA Code. If such trends exist, the Technical Committee believes such information may prove valuable in determining whether any aspects of the IOSCO CRA Code should be modified to better reflect market realities, or better explained to help ensure more consistent implementation After the consultation process, the Chairmen’s Task Force will submit a final version of the Implementation Report to the IOSCO Technical Committee for approval. How to submit comments Comments may be submitted by one of the following three methods, at the latest on 11 May 2007. To help us process and review your comments more efficiently, please use only one method.1 1 Important: All comments will be made publicly available, unless anonymity is specifically requested. Comments sent via e-mail, fax or post will be converted to PDF format and then posted on the IOSCO website. Personal information (such as e-mail addresses) will not be deleted from submissions. 3 1. E-mail  Send your comments to Ms. Tillie Rijk: t.rijk@iosco.org  The subject line of your message should indicate ―Comment on Consultation Report on Board Independence‖  Please, do not submit attachments as HTML, GIF, TIFF, PIF, ZIP or EXE files. Or 2. Fax Send your comments by fax to the attention of Ms. Tillie Rijk at the following fax number: +34 91 555 93 68. Or 3. Post Send your comment letter to: Ms. Tillie Rijk IOSCO General Secretariat C/ Oquendo 12 28006 Madrid Spain Your comment letter should indicate prominently that it is a ―Comment on the Consultation Report on Implementation of the IOSCO CRA Code‖. 4 BACKGROUND In December 2004, after extensive discussions with investor groups, credit rating agencies (CRAs), issuers, and other interested organizations such as the Basel Committee of Banking Supervisors and the International Association of Insurance Supervisors, the IOSCO Technical Committee released its Code of Conduct Fundamentals for Credit Rating Agencies (IOSCO CRA Code). This IOSCO CRA Code includes a set of provisions designed to protect investors and enhance market efficiency by improving the transparency by which CRAs decide on ratings and 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. The IOSCO CRA Code is designed to be useful for all CRAs using all business models, and not just the largest and most widely recognized CRAs using an ―issuer-pays‖ model. To date, the IOSCO CRA Code has received praise from investor groups, regulators and governments, as well as issuers and the CRAs themselves.2 One crucial component of the IOSC