The Ontario Securities Commission reports that International Organization of Securities Commissions is seeking public comment on a code of conduct for credit rating agencies.

The proposed code of conduct builds on IOSCO’s statement of principles regarding credit rating agencies, which has been under development since 2003. In February 2003, the technical committee of IOSCO established a special chairmen’s committee to oversee the development of a statement of principles regarding CRAs.

The chairmen’s committee was composed of many IOSCO technical committee members, including OSC chairman David Brown. The committee in turn created an IOSCO Project Team to develop the statement of principles, which included OSC vice-chairwoman Susan Wolburgh Jenah, supported by OSC staff.

During the spring of 2003, the project team completed a study regarding:

  • CRA functions and operations;
  • the ways in which financial market participants use credit ratings;
  • the extent to which credit ratings are used in financial regulation in various jurisdictions; and
  • the nature of any regulatory oversight of CRAs.

The results of this study led to the development of the statement of principles, which were published in September 2003.

The statement of principles lays out high-level objectives that CRAs should strive toward in order to protect the integrity and analytical independence of the credit rating process. The proposed CRA Code of Conduct Fundamentals build on the statement of principles by offering more specific and detailed guidance to CRAs on how the objectives of the statement of principles can be achieved in practice.

The CRA Code of Conduct Fundamentals are designed to be a set of measures that should be included in some form or fashion in the codes of conduct of individual CRAs. As currently drafted, these measures are not intended to be rigid: when incorporating these measures into their own codes of conduct, CRAs will be able to maintain a degree of flexibility to deal with different legal and market circumstances.

It is envisioned that securities regulators may decide to:

  • incorporate the CRA Code of Conduct Fundamentals into their own regulatory oversight of CRAs;
  • oversee compliance of the CRA Code of Conduct Fundamentals directly;
  • provide for an outside arbitration body to enforce the CRA Code of Conduct Fundamentals, or
  • rely on market mechanisms to enforce compliance if an individual CRA’s own code of conduct fails to adequately address the provisions outlined by the CRA Code of Conduct Fundamentals.

Comments are due by November 8.