American Securitization Forum Recommendations Regarding

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					                           American Securitization Forum
     Recommendations Regarding Potential Reforms to Credit Rating Agency Oversight


Credit rating agencies (“CRAs”) occupy a centrally important role in the securitization and
structured credit markets. These markets are large, growing rapidly and confer substantial
benefits to consumers and businesses, by increasing access to credit at more affordable cost.

Securitization offerings have been extended to embrace a wide range of asset classes and
transaction structures that are both innovative and complex. Investors and other market
participants rely on CRAs for expert, independent and reliable views on the credit performance
and risks associated with securitization transactions and instruments. Threshold requirements for
ratings issued by certain CRAs are widely used in current securities, banking and other
regulations, as well as in privately established investment guidelines and contracts. Accordingly,
a well-functioning CRA oversight framework is essential to the efficient assessment of risk and
allocation of capital throughout the financial markets generally, and within the securitization and
structured credit markets in particular.

Significant attention is now being devoted by policymakers and market participants alike to the
role, function and oversight of CRAs. Among other things, Congress is considering legislation
that would reform the current framework for CRA regulatory oversight. The Securities and
Exchange Commission has proposed rules to formalize the process by which it designates
“Nationally Recognized Statistical Rating Organizations,” or “NRSROs.” The SEC and
international regulatory bodies have worked with CRAs and other market participants to
promulgate codes of business conduct, which some CRAs have adopted on a voluntary basis. 1

In light of the importance of CRAs to the securitization market and the pendency of the above-
mentioned legislative, regulatory and market-driven reform initiatives, the American
Securitization Forum (“ASF”) 2 has developed the policy views and recommendations set forth in
this document. 3 ASF believes the goals and principles outlined below should be pursued in any

1 In 2004, the International Organization of Securities Commissions, of which the SEC is a member, issued a recommended
  code of conduct for CRAs, entitled the IOSCO Code Fundamentals. This code has been voluntarily adopted by a number of
  CRAs operating throughout the world.

2 The American Securitization Forum is a broadly-based professional forum of participants in the U.S. securitization market that
  seeks to build consensus on issues of broad importance to the industry. Among other roles, ASF members act as issuers,
  investors, financial intermediaries, legal and accounting firms, trustees, financial guarantors, rating agencies, and data vendors
  and suppliers in connection with securitization transactions. ASF advocates its members’ interests on significant legal,
  regulatory and market practice issues, and sponsors informational and educational events and conferences for its members and
  other constituencies. Additional information about ASF, its members and activities is available at

3 The recommendations set forth in this document were developed principally by the ASF’s Credit Rating Agency Task Force
  (the “Task Force”). The Task Force was composed of representatives drawn from a wide range of ASF member firms,
  including securitization issuers, investors, financial intermediaries, legal and accounting firms and other professional

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reform initiative (whether legislative, regulatory or market-driven) that would affect the role,
function and oversight of CRAs.


ASF believes that the following policy goals and principles should be pursued in connection with
any legislative, regulatory or market-based reforms to the current framework of credit rating
agency oversight:

      1. Independence: Promote the independence of CRAs (e.g., to eliminate or minimize
         actual or potential conflicts of interest between CRAs and other parties, including issuers,
         investors and governmental entities, and to avoid external influences that may undermine
         methodological independence or interfere with the content of credit opinions).

      2. Competition: Promote enhanced competition among CRAs (e.g., to promote new
         entrants into the CRA business, and to increase the quality and efficiency of the credit
         ratings business).

      3. Transparency and Disclosure: Promote greater transparency and better disclosure of
         CRA methodologies, processes, ratings outputs and fees.

      4. CRA Designation: Improve and refine the process and substantive criteria for
         determining which CRAs should enjoy governmental designation/recognition, such that
         the ratings they issue satisfy various legal and regulatory standards tied to ratings (e.g.,
         legal investment laws, securities registration standards, regulatory capital requirements,

ASF believes that many of the above policy goals and principles are interconnected. For
example, promoting enhanced competition among CRAs depends in part on refinements to the
process by which CRAs are designated for regulatory purposes. Similarly, improvements in
transparency and disclosure can help CRAs maintain their actual and perceived independence
from external influences. In recognition of the interplay among the ASF’s recommended policy
goals and principles, we offer the following more specific suggestions.


ASF believes it would be desirable to establish a general framework that relies on disclosure of
actual ratings performance over time as the principal means to promote greater CRA competition
and transparency, and that would serve as an objective basis for CRA designation and
accountability. Specifically, under this framework, any CRA seeking governmental designation

  securitization market participants. By design, the Task Force did not include any CRA representatives; however, as part of its
  deliberations the Task Force solicited and obtained the views of CRAs that are ASF member firms. The Task Force met on
  seven occasions in 2005 and 2006 to discuss and develop these recommendations. In mid-2006 the Task Force submitted its
  final policy recommendations to ASF Board of Directors. These recommendations were approved by the ASF Board in
  August 2006, and accordingly constitute ASF’s official policy views. The views expressed herein do not necessarily represent
  the views of individual ASF member firms.

would be obligated to disclose data on the actual performance of their ratings over time. Insofar
as possible, these data should set forth common performance metrics and should be presented in
a standardized format among CRAs seeking such designation, to permit meaningful evaluation
and comparison of ratings accuracy and quality by parties who use those ratings (e.g.,
investors). 4

 Ratings performance data (e.g., data regarding defaults of rated securities, ratings
 migration/transition, ratings volatility and other performance indicators) would be subjected to
 appropriate external review and verification procedures to ensure reliability. 5 The SEC should
 be called upon to establish standards for ratings performance disclosures and to enforce ongoing
 compliance with those disclosure requirements by CRAs seeking to obtain and maintain their
 regulatory designation.


 In addition to mandated public disclosure of ratings performance data, ASF believes that the
 SEC should have defined authority and responsibility to establish and review other objective
 and subjective criteria to determine which CRAs should receive and maintain a regulatory
 designation. In general, these review criteria should be designed to ensure that any CRAs
 seeking governmental designation possess sound organizational, operational and financial
 infrastructures, and observe policies and procedures that are reasonably designed to promote the
 independence and transparency of their ratings methodologies, processes and criteria. Such
 review criteria should not, however, in any way seek to influence or regulate substantive ratings
 criteria or opinions, as this would undermine the independent role of CRAs and inhibit
 competition and diversity among them.


ASF acknowledges that the general framework outlined above calls upon the SEC directly to
establish and enforce CRA designation and ratings performance disclosure criteria. Some CRAs
and others parties have suggested that, rather than direct SEC (or other governmental) regulation
of CRA functions, a purely voluntary regime would be preferable, pursuant to which CRAs
undertake to implement and observe common business practice frameworks (including those
established with governmental involvement and input), and to have their compliance with those
frameworks subject to periodic governmental review and oversight.

4 ASF acknowledges that ratings issued by different CRAs do not necessarily measure identical credit performance
  characteristics, and that therefore there are likely to be inherent difficulties in establishing completely “standardized” ratings
  performance metrics and presentation formats. Nevertheless, ASF believes that facilitating meaningful comparison between
  and among performance data of different CRAs is an important goal that should be pursued in establishing and enforcing
  relevant disclosure standards. For example, some CRAs may base their ratings solely on the probability of default, while
  others may base their ratings on expected losses in the event a default occurs (i.e., taking any expected recovery value into
  account). However, the incidence of default of rated securities is relevant to an analysis of ratings performance under these
  different methodologies, and can be presented in a standardized format by all CRAs.

5 The precise content and scope of these review procedures would need to be established, and should reasonably balance costs
  and benefits.

ASF recognizes the significant and beneficial contribution that voluntary adherence to CRA
codes of conduct can have in promoting the fundamental goals and principles outlined in this
document, particularly in maintaining the independence of ratings functions and promoting
greater transparency and disclosure of ratings methodologies and criteria. Especially with
respect to the IOSCO Code Fundamentals, common adherence also promotes international
consistency in norms and expectations for CRA business practices. This is an increasingly
important consideration as the securitization and broader debt capital markets become more
global in scope. Accordingly, ASF supports and encourages the continued development,
application and refinement of these voluntary initiatives, to the extent they serve to promote
achievement of the policy goals and principles set forth in this document.

However, ASF does not believe that adherence to voluntary frameworks alone—even with
periodic review and oversight by regulatory bodies—is sufficient to achieve the broader policy
goals outlined herein. As noted above, standards tied to ratings from governmentally-designated
CRAs are used extensively throughout current securities and banking regulations. These
standards are used and are relied upon by many constituencies—including but not limited to
investors—that those regulations are designed to serve and protect. ASF believes therefore that
it is appropriate for regulatory bodies to develop, implement and enforce compliance with basic
oversight measures of the type set forth in Sections A and B above. These measures should be
designed to ensure that governmentally-designated CRAs operate with integrity, independence
and transparency, and that CRAs supply information and disclosures necessary to enable users of
those ratings to make informed judgments about their quality, accuracy and reliability. ASF
further believes that, given the SEC’s central role in regulating the securities markets and current
and historical involvement in designating CRAs, it is appropriate for the SEC to serve this
important regulatory oversight role.


The SEC oversight framework recommended by ASF is conceptually similar to the current
framework, pursuant to which the SEC designates NRSROs utilizing a “no action” letter
process. ASF believes however that the existing NRSRO designation process has not served to
promote or encourage growth in the number of ratings providers that is essential to fostering
increased competition, for the following reasons:

               The designation process is slow and cumbersome, which discourages new
               entrants and makes effective competition in the CRA space less likely.
               The process is opaque to the most important consumers of ratings information:
               investors and issuers. This inhibits the involvement of those consumers in the
               designation process, and eliminates the “feedback loop” from ratings customers
               that could stimulate improvements.
               The process serves to entrench existing NRSROs at the expense of potential new
               The process is somewhat paternalistic with respect to investors and other
               consumers of ratings information, because it is based on the assumption that such
               consumers (including sophisticated investors involved throughout the

                   securitization markets) are unable to differentiate between quality CRAs and
                   “ratings for hire” shops on the basis of their observable, objective performance.

ASF believes that many of these deficiencies could be overcome by formalizing and streamlining
the current NRSRO designation process, establishing prescribed timeframes for acting on
designation applications, and facilitating industry and public comment on pending applications.
ASF specifically recommends that the SEC be required to solicit and consider public and
industry comment on pending applications from CRAs for regulatory designation. 6 Industry
participants and users of ratings information are well-equipped to evaluate the merits of CRAs,
and the quality, accuracy and reliability of their ratings methodologies and opinions. ASF
believes that through the combination of a) comparable ratings performance data that is routinely
made available to the industry and to the general public; and b) direct input from the public and
from industry participants on pending applications, the SEC will be better equipped to make
informed judgments about which CRAs should be designated for regulatory purposes.

Together with more objective designation criteria and processes (including prescribed
timeframes within which the SEC should be obligated to make CRA designation decisions), ASF
believes that this framework should allow the SEC to act upon designation applications more
efficiently and rapidly than is presently the case under the current NRSRO designation process.
For example, sufficient flexibility should be provided to allow the SEC to confer regulatory
designation to a relatively new entrant to the CRA business—even one that has not established a
lengthy historical ratings track record—on the basis that the CRA in question meets requisite
organizational criteria, and employs ratings processes and makes ratings judgments that are
regarded as accurate and reliable by industry participants, including actual users and consumers
of those ratings. ASF believes that maintaining this flexibility is important to address the
“chicken and egg” problem that currently exists in the CRA business space: a CRA’s ratings
must be generally recognized within the industry to achieve regulatory designation, but such
recognition is dependent in part upon possessing that regulatory designation in the first place.7


Regulatory designation is obviously an important pronouncement to investors and other market
participants regarding the acceptance and credibility of ratings issued by that CRA, as well as the
soundness of policies and procedures pursuant to which that CRA conducts its business. In
general, ASF believes that securitization market participants regard SEC-designated CRAs
(current NRSROs, as well as any newly-designated CRAs pursuant to the framework set forth in
this document) as credible sources of ratings.

6 Public comment should be sought to solicit input on the fitness of individual applicants for governmental designation, based
  upon commentators’ assessments of the quality, accuracy and reliability of the applicants’ ratings. Appropriate safeguards
  should be enacted to avoid public disclosure of sensitive and/or confidential documents and other information (including
  sensitive and/or confidential issuer information) that may be part of a CRA’s application for designation.

7 The challenge facing new entrants in the CRA business is significant, and raises important policy issues in connection with the
  regulatory designation process. On one hand, designating new (and relatively unproven) CRAs arguably would enhance
  industry choice and competition. On the other hand, significant market dislocations could occur if CRA designations were
  granted prematurely or inappropriately, and later revoked. These issues should be carefully considered and balanced in
  crafting a revised CRA designation process, and in making individual designation decisions.

Achieving equality in regulatory designation status, however, is not tantamount to achieving
equality in competitiveness or business standing among CRAs in the marketplace. Business
competitiveness depends on many other factors—most importantly, the self-expressed
preferences of ratings users and customers.

Ultimately, ASF believes that most effective policy response to promote competition in the
issuance of independent credit opinions and analysis is to take steps that reduce or remove
artificial barriers to entry, promote new entrants into the business, and provide consumers with
better information and a greater range of choice among ratings providers. ASF believes that the
policy recommendations contained within this document serve those goals in connection with
CRAs who currently compete, or who wish to compete, in the securitization and structured credit
markets that ASF broadly represents.

The American Securitization Forum
August 2006


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