CR08/12 Credit Rating Agencies: Internal Controls Designed to Ensure the Integrity of the Credit Rating Process and Procedures to Manage Conflicts of Interest

i Credit Rating Agencies: Internal Controls Designed to Ensure the Integrity of the Credit Rating Process and Procedures to Manage Conflicts of Interest Consultation Report TECHNICAL COMMITTEE OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS CR380/2012 May 2012 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. ii Copies of publications are available from: The International Organization of Securities Commissions website www.iosco.org © International Organization of Securities Commissions 2012. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. iii Foreword The International Organization of Securities Commissions’ (IOSCO) Technical Committee (TC) has published this Consultation Report, Credit Rating Agencies: Internal Controls Designed to Ensure the Integrity of the Credit Rating Process and Procedures to Manage Conflicts of Interest, prepared by IOSCO Standing Committee 6 on Credit Rating Agencies (SC6). This Consultation Report describes certain internal controls and procedures that credit rating agencies (CRAs) use to promote the integrity of the credit rating process and address conflicts of interest, respectively, with the aim of promoting a better understanding of these practices. The TC seeks the views of stakeholders, and particularly CRAs, on the questions posed in this Consultation Report to refine and enhance the descriptions and assist in further analysis by SC6 of the internal controls and procedures used by CRAs. How to Submit Comments Comments may be submitted by one of the three following methods on or before 9 July 2012. To help us process and review your comments more efficiently, please use only one method. Important: All comments will be made available publicly, unless anonymity is specifically requested. Comments will be converted to PDF format and posted on the IOSCO website. Personal identifying information will not be edited from submissions. 1. Email  Send comments to CRA@iosco.org  The subject line of your message must indicate Credit Rating Agencies: Internal Controls Designed to Ensure the Integrity of the Credit Rating Process and Procedures to Manage Conflicts of Interest.  If you attach a document, indicate the software used (e.g., WordPerfect, Microsoft WORD, ASCII text, etc) to create the attachment.  Do not submit attachments as HTML, PDF, GIFG, TIFF, PIF, ZIP or EXE files. 2. Facsimile Transmission Send by facsimile transmission using the following fax number: + 34 (91) 555 93 68. 3. Paper Send 3 copies of your paper comment letter to: Mr. Tim Pinkowski General Secretariat International Organization of Securities Commissions (IOSCO) Calle Oquendo 12 28006 Madrid Spain iv Your comment letter should indicate prominently that it is a “Public Comment on Credit Rating Agencies: Internal Controls Designed to Ensure the Integrity of the Credit Rating Process and Procedures to Manage Conflicts of Interest.” v Contents Chapter 1 Executive Summary ........................................................................................................ 1 Chapter 2 Background ..................................................................................................................... 3 2.1 Previous work of IOSCO on CRAs ........................................................................................ 3 2.2 The current project on internal controls and conflict procedures............................................ 4 2.3 Scope and purpose of the Consultation Report ....................................................................... 5 Chapter 3 Quality and integrity of the rating process ...................................................................... 6 3.1 Quality of the rating process ................................................................................................... 6 3.1.1 Control functions within the CRA .................................................................................. 7 3.1.2 Preparatory phase – gathering and using information ..................................................... 8 3.1.3 Assessment phase – use and consistency of methodologies ......................................... 11 3.1.4 Decision phase – rating committee structure and voting process ................................. 13 3.1.5 Dissemination phase – release of rating actions ........................................................... 16 3.2 Structural support to ensure the quality of the rating process ............................................... 18 3.2.1 Resource