Thank you, Chairman Schapiro.
Today, the Commission is considering a number of steps aimed at improving the quality of credit ratings and ensuring that they are used responsibly. I support the various recommendations before us and look forward to the comments we will receive.
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Among the items before us are recommendations to eliminate references to credit ratings in certain rules under the Exchange Act and the Investment Company Act. The Commission is seeking additional comment on whether to remove various other references, including the net capital rule references in Exchange Act Rule 15c3-1. Earlier this year we sought additional comment on the role of references for money market funds under Investment Company Act Rule 2a-7.
References serve different purposes in different rules. While removing references in Commission rules may address concerns that the agency's rules have lent undue legitimacy to NRSRO ratings, this is not the only consideration in determining whether a reference should persist, although it is an important one. It also is important to consider what purpose a particular reference serves and its function on a rule-by-rule basis and to understand how behavior is likely to adapt — for better and for worse — if the reference is removed. Some references may still be useful.
I look forward to further comment on the references that have not been removed.
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We also are considering rules that are designed to spur competition and market-based accountability more directly. In effect, these rules leverage the power of disclosure as an alternative to imposing particular strictures on the conduct of NRSROs. Namely, rule amendments are before the Commission that would require NRSROs to disclose their ratings track records publicly and that would make information available so that NRSROs can rate structured products on an unsolicited basis.
Regarding track record disclosures, one concern has been the extent to which such disclosures could deprive NRSROs of revenues, in some instances challenging the commercial viability of certain NRSROs. This is a particular concern for the subscriber-pay model. To address this concern, the disclosures are to occur on a delayed basis.
In the future, it will be important for the Commission to monitor the overall impact of track record disclosures to ensure that competition is not inadvertently stiffled.
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The Commission is considering certain additional disclosure requirements. I support the proposals, but I have reservations about whether the disclosures ultimately will be useful to investors. I also have questions about whether certain of the proposed disclosures could undercut competition. I will focus my remarks on two disclosures.
One proposal would require an NRSRO to disclose the percentage of its net revenue attributable to the 20 largest users of the NRSRO's credit rating services. How useful is this information if, say, the percentage of an NRSRO's net revenue attributable to the largest user is considerably more than the percentage attributable to the twentieth largest user of the NRSRO's credit rating services? If the aggregate net revenue attributable to the 20 largest users is substantial, what should investors infer about the quality of particular ratings?
A second rule amendment would require NRSROs to disclose the relative standing of the person paying the NRSRO to issue a rating — namely, whether the person was in the top 10%, top 25%, top 50%, bottom 50%, or bottom 25% of contributors to the NRSRO's revenues. Again, to what use will investors put this information? Might the disclosure leave a misimpression that a conflict exists if the NRSRO's client is in a top tier, even if the client contributes a relatively small portion of the NRSRO's total revenue? To what extent might the disclosure negatively impact smaller NRSROs if clients prefer to receive ratings from larger NRSROs to avoid being in a top revenue tier?
Transparency is at the core of what the SEC does, but we must ensure that mandated disclosures are beneficial. I look forward to the comments we will receive.
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We also are considering a concept release that explores subjecting NRSROs to section 11 of the Securities Act. I look forward to the considerable comment I expect we will receive. For now, I will simply note that while subjecting NRSROs to section 11 may lead to more legal accountability, it may result in less competition if certain NRSROs are unable to bear the resulting risk of liability. Competition itself is a source of investor protection that may be lost if the risk of legal liability increases. We need to consider this and other tradeoffs in evaluating the proper liability regime for the credit rating industry.