TAILIEUCHUNG - As Required by Section 702(b) of the Sarbanes-Oxley Act of 2002

The term “NRSRO” was originally adopted by the Commission in 1975 solely for determining capital charges on different grades of debt securities under the Net Capital Rule. 9 The Net Capital Rule requires broker-dealers, when computing net capital, to deduct from their net worth certain percentages of the market value of their proprietary securities positions. A primary purpose of these “haircuts” is to provide a margin of safety against losses that might be incurred by broker-dealers as a result of market fluctuations in the prices of, or lack of liquidity in, their proprietary positions. The Commission determined that. | Report on the Role and Function of Credit Rating Agencies in the Operation of the Securities Markets As Required by Section 702 b of the Sarbanes-Oxley Act of 2002 . Securities and Exchange Commission January 2003 TABLE OF CONTENTS EXECUTIVE SUMMARY. 1 I. INTRODUCTION. 3 II. BACKGROUND A. General. 5 B. Regulatory Use of Credit Ratings . 6 C. Recognition of NRSROs . 8 1. NRSRO Recognition Criteria . 9 2. Recent Initiatives .10 a. 1994 Co ncept Release .10 b. 1997 Rule Proposal .12 III. RECENT INQUIRIES INTO THE ROLE OF CREDIT RATING AGENCIES A. Senate Initiatives . 16 1. Enron-Related Credit Rating Agency Hearing . 16 2. Governmental Affairs Committee Staff Report . 17 B. Commission In itiatives . 18 1. Broad-Based Commission Review . 18 2. Commission Examinations of NRSROs . 19 3. Credit Rating Agency Hearings . 20 a. Current Role and Functioning of Credit Rating Agencies . 21 b. Information Flow in the Credit Rating Process . 21 c. Concerns Regarding Credit Rating Agencies . Potential Conflicts-of-Interest or Abusive Practices . 23 i. Issuer Influence . 23 ii. Subscriber Influence . 23 iii. Advisory Services . 23 iv. Abusive Practices . 24 d. Regulatory Treatment of Credit Rating Agencies including Concerns regarding Potential Barriers to Entry . 24 IV. DISCUSSION A. Role of Credit Rating Agencies in the Evaluation of Issuers of Securities . 25 1. General Procedures for Evaluating Issuers . 25 2. Rating Committee Process . 26 3. Rating Decisions and Publication . 26 B. Importance of the Role of Credit Rating Agencies to Investors and the Functioning of the Securities Markets . 27 1. Issuers . 27 2. Buy-Side Fir ms . 28 i 3. Sell-Side Firms .28 4. Regulatory Use of Ratings .28 5. Use of Ratings in Private C. Impediments to the Accurate Appraisal of Issuers by Credit Rating Agencies 30 1. Level of Public Disclosure by 2. Diligence and Qualifications of Credit Rating Agency D. Measures to Improve the Dissemination of .

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