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THE RATINGS GAME: IMPROVING
TRANSPARENCY AND COMPETITION
AMONG THE CREDIT RATING AGENCIES

Tuesday, September 14, 2004
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance,
and Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
    The subcommittee met, pursuant to call, at 10:04 a.m., in Room 2128, Rayburn House Office Building, Hon. Richard H. Baker [chairman of the subcommittee] presiding.
    Present: Representatives Baker, Gillmor, Biggert, Capito, Brown-Waite, Kanjorski, Moore, Ford, Lucas of Kentucky, McCarthy, and Scott.
    Chairman BAKER. [Presiding.] I would like to call this meeting of the Capital Markets Subcommittee to order.
    The purpose of this morning's hearing is to again review the performance and regulatory authority for the conduct of what are commonly known as the credit rating agencies. On April 2, 2003, this committee convened a hearing in the course of its normal review of market sector performance to hear from a representative of the SEC and others concerning the status of and performance of the rating agency community.
    To date, there is not clearly established a methodology by which a corporate entity may become recognized as a rating agency. There is no ongoing supervision as to the methodologies utilized in performing their duty, and there is not a method to formally decommission an agency once having been designated.
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    The purpose of today's hearing is to receive additional comment as to the advisability of either SEC rule or legislative action to provide additional transparency, to provide sufficient disclosure as to methodologies, and to evaluate the very manner by which these agencies engage in their rating practices.
    The Investment Company Act requires the maintenance of at least two rating agency analyses before issuance of public debt, and therefore there is a statutory requirement that public corporations utilize the services of these rating agencies. That makes it all the more important for us to make sure that market participants fully understand their function and the methodologies by which these ratings are issued. It is clear, at least to me, that we are a long way from that type of functioning system.
    Secondarily, it is extraordinarily important that the agencies engage in and conduct arms-length evaluations to ensure the ratings which are used by many in the market for various purposes are reliable and professional. It is troubling to realize the superficial nature by which many of the ratings have been issued and the reliance that many have placed upon that data. We only have to return to the bursting bubble a few months back and painfully look at the ratings issue just prior to many prominent corporations' announced bankruptcies.
    How is it that these events came to pass? What is it that needs to be changed to ensure that it does not occur again in the future? And are there other options available to us to obtain the necessary financial data without perhaps mandatory reliance on the rating agency system as it is structured today?
    For all these reasons, the committee meets. We will be pleased to hear the comments of those who have agreed to testify, and would point out that Standard & Poor's, which was invited to participate, notified the committee as of yesterday they would be unable to attend here today. We look forward to hearing from them on another occasion.
    With that, I yield to the gentleman from Pennsylvania.
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    Mr. KANJORSKI. Mr. Chairman, we meet for the second time in the 108th Congress to examine the issue of credit rating agencies.
    Entities like Moody's, Standard & Poor's and Fitch have long published their views on the creditworthiness of the issuers of debt securities. The importance of these opinions has grown significantly in recent years as a result of the increases in the number of issues and issuers, the globalization of our financial markets and the introduction of complex financial products like asset-backed securities and credit derivatives.
    As you know, Mr. Chairman, I have made investor protection one of my top priorities. I believe that strong regulation helps to protect the interests of America's investors.
    Accordingly, I am pleased that we have worked diligently during the last several years to augment the resources available to the Securities and Exchange Commission, enacted sweeping reforms of auditing and accounting practices, restored accountability to investment banking and analyst research, and improved the conduct of business executives and corporate boards. Although credit rating agencies received some scrutiny after the recent tidal wave of corporate scandals, we have not yet mandated any substantive changes in their practices.
    Nevertheless, this issue is ripe for examination and action. At hearings before our committee last year, the commission's Director of Market Regulation noted that while credit rating agencies have generally performed their work well for nearly a century, they have also missed some colossal failures in recent years. A Senate investigative report also found that the monitoring and review of Enron's finances ''fell far below the careful efforts one would have expected from organizations whose ratings hold so much importance.''
    After last year's hearing, I was hopeful that the commission would take swift action regarding these matters. It did belatedly issue a concept release to examine the issues surrounding rating organizations in June of 2003. Since that time, the commission has continued to study these matters without reaching any conclusion. The commission, I should note, has been examining these matters for more than a decade.
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    Although a formal proposal for improved oversight of credit rating agencies has yet to emerge, a top official at the commission did suggest in a recent speech that additional legislative authority may be needed I this area.
    I have previously urged the commission to act promptly and prudently in these matters. It is therefore my expectation that it will move expeditiously in the coming months to finalize its opinions on credit rating agencies and advise us about the most appropriate steps to take in these matters during the 109th Congress.
    When we revisit these matters next year, it is also my hope that we will be able to put together a more inclusive and comprehensive hearing. We are fortunate today to have with us two rating professionals. We will also hear from the Association for Financial Professionals, which has taken a leading role in examining the need and identifying ways to improve the oversight of credit rating agencies.
    Rather than rushing to hold a hearing, our proceedings would have greatly benefited if we had waited and been able to receive the testimony of the commission, major credit rating agencies, and other interested parties.
    In closing, Mr. Chairman, we are at a crucial moment in the evolution of our capital markets. We must act to ensure the continued integrity of the rating agencies and the credit rating process. I also look forward to continuing to work with you as we move forward deliberately on these important matters.
    [The prepared statement of Hon. Paul E. Kanjorski can be found on page 27 in the appendix.]
    Chairman BAKER. I thank the gentleman.
    Mr. Scott?
    Mr. SCOTT. Thank you, Mr. Chairman.
    Due to the development of complex financial products and the globalization of the financial markets, credit ratings have been given increased importance. The credit ratings affect the securities markets in many ways, but the Securities and Exchange Commission has not performed any significant oversight over rating agencies. Several of the large corporate scandals at Enron, WorldCom and other companies were not brought to the attention of regulators by the rating agencies.
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    Since 1994, the SEC has developed proposed rulemaking to provide better oversight of rating agencies. I believe that it is time for the SEC to try to provide a better standard for oversight of rating agencies. In that regard, Mr. Chairman, I look forward to hearing from our distinguished panel about recommendations for the SEC review of the credit agencies.
    Chairman BAKER. Thank you, Mr. Scott.
    Ms. McCarthy, did you have a statement?
    Mrs. MCCARTHY. Thank you, Mr. Chairman. I will hand in my opening statement. I would rather hear the testimony.
    Chairman BAKER. Thank you, Ms. McCarthy.
    If we could please have our witnesses come forward, we would like to recognize you at this time. This morning, we are pleased to have Mr. Sean Egan, managing director of Egan-Jones Rating Company; Mr. James A. Kaitz, President and CEO, Association for Financial Professionals; Dr. Barron H. Putnam, President and chief economist, LACE Financial Corporation; and Mr. Alex J. Pollock, resident fellow, American Enterprise Institute.
    Since Mr. Egan is a little behind this morning, we are going to start first with Mr. Kaitz.
    Welcome, sir.
STATEMENT OF JAMES A. KAITZ, PRESIDENT AND CEO, ASSOCIATION FOR FINANCIAL PROFESSIONALS
    Mr. KAITZ. Thank you, Congressman.
    Good morning, Chairman Baker, Ranking Member Kanjorski, and members of the committee. I am Jim Kaitz, President and CEO of the Association for Financial Professionals.
    AFP welcomes the opportunity to participate in today's hearing on improving competition and transparency among the credit rating agencies. As we have continually noted, AFP believes that the credit rating agencies and investor confidence in the ratings they issue are vital to the efficient operation of global capital markets.
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    AFP represents more than 14,000 finance and treasury professionals representing more than 5,000 organizations. Organizations represented by our members are drawn generally from the Fortune 1000 and the largest of the middle-market companies from a very wide variety of industries. Many of our members are responsible for issuing short-and long-term debt and managing corporate cash and pension assets for their organizations.
    In these capacities, our members are significant users of the information provided by credit rating agencies. Acting as both issuers of debt and investors, our members have a balanced view of the credit rating process and a significant stake in the outcome of the examination of rating agency practices and their regulation.
    When I appeared before this committee more than 17 months ago, I shared the results of a survey conducted by AFP in September 2002. In summary, that survey found that many of our members believe that the information provided by credit rating agencies is neither timely nor accurate and that the Securities and Exchange Commission should take steps to foster greater competition in the market for credit ratings and improve its oversight of rating agencies.
    AFP is currently conducting an update to the 2002 survey and preliminary results indicate that confidence in the credit rating agencies has not improved. We will be releasing the results of the updated survey later in the fall.
    In June of 2003, the SEC issued a concept release on rating agencies and the use of credit ratings under the federal securities laws. That concept release asked 56 questions about the nationally recognized statistical rating organization, designation, recognition criteria, the examination and oversight of NRSROs, conflicts of interest, and anticompetitive, unfair and abusive practices.
    The concept release asked market participants to provide answers in less than 60 days. Yet more than 15 months after this concept release and more than a decade after a similar concept release in 1994, the SEC has yet to provide a single answer of its own.
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    To address many of the questions raised by the SEC and market participants, the Association for Financial Professionals in April of this year, along with treasury associations from the United Kingdom and France, took the initiative and developed an exposure draft of a Code of Standard Practices for Participants in the Credit Rating Process.
    We are currently reviewing comments we received on the exposure draft and intend to release our final recommendations later this year. We developed the draft code in an effort to improve investor and issuer confidence in the credit rating agencies and the ratings they promulgate. This is particularly important in light of the SEC's continued inaction.
    I have submitted a copy of the code, along with my testimony. However, I would like to take a minute to summarize the key themes. The code contains recommendations for regulators, as well as rating agencies and issuers. To be clear, the code is a private-sector response intended to complement rather than replace regulation.
    Regulatory recommendations in the code of standard practices focus on establishing transparent recognition criteria based on whether a credit rating agency can consistently produce credible and reliable ratings over the long term. Establishing clearly defined recognition criteria is a crucial step to removing barriers to entry and enhancing competition in the credit ratings market.
    The regulatory recommendations also include improving ongoing oversight of approved rating agencies to ensure that NRSROs continue to meet the recognition criteria. The code also urges regulators to require that rating agencies document internal controls that protect against conflicts of interest and anticompetitive and abusive practices that may arise from ancillary services such as corporate governance reviews and ratings advisory services.
    For rating agencies, the code includes suggestions to improve the transparency of the rating process, protect non-public information provided by issuers, protect against conflicts of interest, address the issue of unsolicited ratings, and improve communication with issuers and other market participants.
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    Finally, recognizing that the credibility and reliability of credit ratings is heavily dependent on issuers' providing accurate and adequate information to the rating agencies, the code of standard practice outlines issuer obligations in the credit rating process. These obligations are intended to improve the quality of the information available to the rating agencies during the initial rating process and on an ongoing basis, and to ensure that issuers respond appropriately to communications received from rating agencies.
    Other organizations have also taken steps to address this critical issue. The International Organization of Securities Commissions, IOSCO, in September 2003 issued a statement of principles regarding the manner in which rating agency activities are conducted. In February of this year, IOSCO also announced the formation of a special task force chaired by SEC Commissioner Campos to develop a code of conduct for credit rating agencies. We expect IOSCO to issue that code shortly.
    In July, the Committee of European Securities Regulators, at the request of the European Commission, issued a call for evidence on possible measures concerning credit rating agencies. The committee intends to review comments, develop a consultation paper, hold an open hearing, and approve and publish its final advice to the European Commission in March 2005, I would note, less than 8 months after the commencement of its activities.
    Despite all this activity, the SEC remains silent on the appropriate regulation of credit rating agencies. At hearings before the Bond Market Association in January, a senior SEC official admitted that the commission needs to come up with an approach or ''cede the area'' to other rulemakers. By its continuing inaction on this issue, the SEC is abdicating its responsibility to capital market participants and potentially subjecting issuers, investors and rating agencies to a fragmented, duplicative and overly prescriptive regulatory regime.
    A reasonable regulatory framework that minimizes barriers to entry and is flexible enough to allow innovation and creativity will foster competition among existing NRSROs and those that may later be recognized and restore investor confidence in the rating agencies and global capital markets. Rather than excessively prescriptive regulatory regimes, innovation and private-sector solutions, such as AFP's Code of Standard Practices, are the appropriate responses to many of the questions that have been raised about credit ratings.
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    Restoring issuer and investor confidence in the credit ratings process is critical to global capital markets. We commend you, Mr. Chairman and the committee, for recognizing the importance of this issue and its impact on all institutional and individual participants in global capital markets. We hope this hearing will motivate the SEC to action.
    In addition, regulators should require rating agencies to develop policies to insure against the inappropriate use of nonpublic information to which the rating industries are privy because of their exemption from regulation FD. Recently, the SEC took action against a former credit rating agency employee who used nonpublic information regarding pending mergers for personal enrichment. While we cannot comment on the specifics of this case, this again highlights the need for the SEC to take an active role in the oversight of credit rating agencies.
    Thank you.
    [The prepared statement of James A. Kaitz can be found on page 31 in the appendix.]
    Chairman BAKER. Thank you very much, sir. We appreciate your comments.
    Dr. Putnam, please proceed.
STATEMENT OF BARRON H. PUTNAM, PRESIDENT AND CHIEF ECONOMIST, LACE FINANCIAL CORPORATION
    Mr. PUTNAM. Thank you, Mr. Chairman and other distinguished members of the committee. My name is Barron Putnam and I am President of LACE Financial Corporation. I am a former staff member of the Federal Reserve Board here in Washington. While I was at the Fed, I chaired the committees that put together—this is a three-interagency bank committee that put together the off-site rating system for the Fed. I also set up the Bank Holding Company Analysis Program for the Fed and I directed for the Fed the surveillance of all banks and bank holding companies for a period of 10 years.
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    I left the Fed in 1984 and established LACE Financial Corporation. LACE Financial rates approximately 20,000 institutions. We have issued over a period of 20 years about 1.2 million credit ratings. We have never received a complaint from a regulator, be it state or federal or any regulator, nor have we ever had a serious threat of a lawsuit. We have actually rated banks and other financial institutions prior to Moody's and Standard & Poor's entering the market.
    I have been in the banking business for more than 25 years. I would like to say that it is an honor for me to sit here today before your committee.
    I would like to address two areas of concern to your committee, the NRSRO designation process and the anticompetitive effects that the SEC net capital rules and the NRSRO designation have on a rating company like ours.
    First, we submitted our application for NRSRO status back in 1992. Eight years later, we received a phone call from a lawyer at the SEC stating that our application was denied. I asked him what the reason was, and he could not give that to me over the phone. So I said, well, would you put it in writing. He was a little surprised that I asked for that, but they sent it to me and the denial was based on the fact that we only had three financial analysts. I wrote back to them saying this was an error; that in fact we had 10 financial analysts and that eight were involved in the ratings process.
    We received another letter, which stated the NRSRO criteria, which I am sure most of you are familiar with. It is very detailed and lengthy. And then they stated at the bottom of the letter that our application had been denied because you did not meet the criteria above. They did not say what part of the criteria. When we saw that Congress was interested in this issue as well as the press we appealed our application. We sent our appeal in and it has been now 2 years and 3 months and we have not heard anything from the SEC.
    To me, this is deja vu. I think that given what we have gone through, I do not feel that any person or corporation should go through something in this manner. It is just that an agency of the government should not act in this way. Obviously, there needs to be transparency in this process and the application process needs to be expedited.
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    I also would like to say that I feel that the SEC staff, and I think it is the policies, not necessarily the staff members, have more of an adversary view towards companies like ours. It should be the other way around. They should be proactive. If a company does not meet the criteria, they should state why and let the company come back and show that in fact what it is that they need so that they can go on and eventually become an NRSRO company.
    Now, the other point I would like to speak to the committee on is the effects of both the net capital rules and the NRSRO designation on the ability of a company like ours, a small company, to effectively compete with other NRSRO companies. First, Moody's, Standard & Poor's and Fitch have tremendous name recognition and market share. That is a tough act to compete against. However, from the very beginning, all we wanted was to be on a level playing field with these companies. The problem is, and people at this table know this well, that we are prohibited by law, federal law, the SEC regulations, to compete with these existing NRSRO companies.
    The designation and the use in the bylaws of large corporations prohibit companies like ourselves from being able to use these companies as clients. To put it in other words, if the company does not have an investment-grade rating from an NRSRO company, those are the only ratings they can use, either credit ratings or buy securities of those companies. That keeps us, we cannot compete with a very large portion of the AFP members. Although we do have several clients in that organization, many of them are prohibited from using us. I used to get, and finally the gentleman gave up, from GE Capital, an e-mail asking me when we were going to get that status because they want to use us. Finally, he just gave up because I sent him back I was not sure.
    But it is a very tough problem. In 1992, about the time we submitted our application, Thompson Bank Watch received NRSRO status. Our revenues prior to that time were growing about 25 or 30 percent a year. For 10 years, they just stopped growing. They stagnated. Only until recently have our revenues starting picking up and growing about 20 percent because we have entered into new security issues. We have kind of broken into that market, but it has taken us 20 years to do so. It is a very tough game for a non-NRSRO company to basically stay in this business.
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    If you want to bring competition into this industry, you not only have to recognize companies like ours, Sean's company, also there are several others out there that are very credible companies, but they have to aid these companies in becoming larger and better competitors. The NRSRO status is a double-edged sword. It keeps you from competing, but if you receive the designation it will help you a great deal in growing because clients will come your way if you are good and credible. Companies like ourselves have to grow about 40 percent a year to become effective competitors to the NRSRO companies.
    Moody's and Standard & Poor's, I do not know exactly, but they are growing about 20 percent a year, about what we are, but our size is so small relative to theirs that we will not become effective competitors unless we grow faster. We cannot do it unless we have the NRSRO status.
    Thank you, sir.
    [The prepared statement of Barron H. Putnam can be found on page 55 in the appendix.]
    Chairman BAKER. Thank you very much.
    Welcome back, Mr. Pollock. I think this is your first appearance in your new capacity.
STATEMENT OF ALEX J. POLLOCK, RESIDENT FELLOW, AMERICAN ENTERPRISE INSTITUTE
    Mr. POLLOCK. It is, Mr. Chairman, and thank you very much. Mr. Chairman, Ranking Member Kanjorski, and members of the committee. It is a pleasure to be here to present my views, which focus on the unintended cartel-like effects of the SEC's regulation of rating agencies through its NRSRO designation.
    I must say I find Dr. Putnam's comments very convincing. He expresses in a specific case many of the same things I am going to say in a somewhat more abstract way. I then want to talk about what steps might be taken to reduce these barriers to competition.
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    The theme of my work at the American Enterprise Institute is to examine ways to inject greater economic efficiency and market choice into situations in which the government in one way or another has created noncompetitive structures.
    What do we find in the rating agency sector? As Professor Larry White of New York University has written, ''The problem concerns the SEC's regulation of the bond rating industry. Incumbent bond rating firms are protected; potential entrants are excluded, and new ideas and technologies for assessing the riskiness of debt, and therefore the allocation of capital, may well be stifled. This entry regulation is a perfect example of good intentions gone awry.''
    The fundamental source of the problem is that the designation ''nationally recognized statistical rating organization'' or NRSRO has become embedded in numerous rules of numerous regulators. The only way to get to be an NRSRO is to be designated as one by the SEC, and this involves, as many commentators have pointed out, a practically insuperable Catch-22.
    The SEC's own concept release, which was referred to earlier by the ranking member, on the subject states that in order to become a recognized NRSRO, ''The single most important criterion is that the rating agency is widely accepted in the U.S. as an issuer of credible and reliable ratings by the predominant users of securities ratings.''
    To summarize their position, you cannot be widely accepted by the predominant users unless you are an NRSRO, but you cannot become an NRSRO unless you are already widely accepted. That is the Catch-22. The same SEC release says, ''Some commenters believe that the NRSRO designation acts as a barrier to entry into the credit rating business.'' There seems to be no doubt that these commenters, which include the Department to Justice, are correct.
    It seems to me that we should simply consider that when John Moody published his first ratings in 1909, or when Poor's Publishing Company published its first ratings in 1916, or the Fitch Publishing Company published its first ratings in 1924, they were not yet ''widely accepted by the predominant users.'' They all had to discover a market need, and compete their way into becoming nationally recognized in time.
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    Dr. Putnam also touched on the natural barriers to entry in the credit rating business, which seem to be pretty substantial, including the need to establish reputation, reliability and integrity; a definite prestige factor involved in the purchase of opinions and judgments; and natural conservatism of the users of ratings. To add to this a ''distortionary entry restriction regime,'' to use Professor White's phrase, ensures a noncompetitive outcome.
    What could be done to make this business more competitive? I suggest four possible actions. First, it is clear that what NSRSO really means is ''SEC approved rating agency.'' The term ''NRSRO'' with its implication that is represents some sort of a market test, which 30 or 40 years ago it did, but it no longer does, should be dropped altogether. If the SEC continues to require its own approval of raging agencies for regulatory purposes, at least we could get the designation accurate and just make it ''SEC approved.''
    Second, if the SEC continues to require its approval of rating agencies, the Catch-22 criterion of having to be ''nationally recognized'' in advance should be simply eliminated.
    Third, the approval of rating agencies for specialized purposes, as the SEC has sometimes done in the past, should be encouraged. Such specialization might be an industry, for example, financial institutions; a country, for example, Japan; or any other logical domain defined by competence and knowledge. This would allow new entrants to create competition based on their skills and where they are best able to compete, to demonstrate in those specialized domains their value, and if they succeed, then to grow organically.
    Fourth, in my opinion, in the best case, not only the term ''NRSRO'' but also the requirement of designation by the SEC would be dropped. Instead, the responsibility to choose among rating agency alternatives should belong to investors, financial firms, securities issuers and other users, in short, the market. Every firm should have among its financial and risk management policies its approved policies for how it uses credit ratings and whose ratings can be used for what.
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    These policies should be appropriately disclosed, and could be examined by any relevant regulators. Under these circumstances, which rating agencies turn out to be nationally recognized would reflect a true competitive market test, and that competition would provide its normal benefits of innovation, improved services, lower cost, choice and efficiency.
    Thank you very much for the opportunity to testify, Mr. Chairman.
    [The prepared statement of Alex J. Pollock can be found on page 52 in the appendix.]
    Chairman BAKER. Thank you, Mr. Pollock.
    I wish to welcome Mr. Sean Egan, managing director, Egan-Jones Rating Company.
    Welcome.
STATEMENT OF SEAN EGAN, MANAGING DIRECTOR, EGAN-JONES RATINGS CO.
    Mr. EGAN. Thank you. I apologize for being late.
    Chairman Baker, members of the subcommittee, good morning. I am Sean Egan, managing director of Egan-Jones Ratings Company, a credit ratings firm. By way of background, I am a co-founder of Egan-Jones Ratings, which was established to provide timely, accurate credit ratings to institutional investors.
    Our firm differs significantly from other rating agencies in that we have distinguished ourselves by providing timely, accurate ratings and we are not paid by issuers of debt, which we view as a fundamental conflict of interest. Instead, we are paid by approximately 400 firms consisting mainly of institutional investors and broker-dealers. We are based in a suburb of Philadelphia, although we do have employees that operate from other offices.
    The rating industry currently is suffering from a severe lack of competition. S&P and Moody's dominate the industry, which has caused the following problems. One, issuers pay too much for capital because they are underrated; and two, investors are not provided with sufficient warning about failing firms such as Enron, WorldCom, and Parmalat.
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    By way of interest, we receive a lot of publicity for our identifying problem companies. That is because reporters like to report on that. But in reality, we have pointed out many more cases where companies are underrated, that is they are paying too much for capital.
    There are few industries where the two major firms do not directly compete, and yet control over 90 percent of the revenues. Since two ratings are needed to issue debt, the two major firms do not compete and therefore are not subjected to the normal checks and balances. Even after the recent credit rating debacles, S&P and Moody's revenues have continued to grow because of their lock on the market.
    To put the industry structure in perspective, it is as though there are only two major broker-dealers for corporate securities and the approval of both were required before any transactions could be completed. Some other manifestations of the limited competition include abuses in the use of unsolicited ratings and heavy-handed marketing of related corporate services such as issuer governance ratings.
    Regarding Egan-Jones, we have provided warning for the Enron, Genuity, Global Crossing and WorldCom failures. We did not rate Parmalat. Furthermore, we regularly identify improving credits. Most of our ratings have been above S&P's and Moody's over the past 2 years, thereby providing issuers with more competitive capital. Our success has been recognized by the Federal Reserve Bank of Kansas City, which compared all our ratings since inception in December 1995 to those of S&P and Moody's. You can read the quote from that study. It is available online.
    Stanford University and the University of Michigan drew similar conclusions. That also is available online. In August 1998, we applied for recognition by the SEC as a ratings firm, i.e. NRSRO status. We continue to provide information to the SEC and hope to eventually be recognized.
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    To reform the ratings industry, we recommend the following changes. One, recognize some rating firms which have succeeded in providing timely, accurate ratings. Two, wean rating firms from issuer compensation. We think that is a fundamental conflict, just like the equity analyst problem. Three, adopt a code of standard practices for participants in the credit rating process issued by the ACT, AFP, and AFTE. And four, encourage SEC action. This area has been under review since the early 1990s and is in dire need of reform. The costs of delaying the recognition of additional rating firms is far greater than the benefit of additional study.
    There are two additional points that I would like to make. That is, one of my colleagues brought up the issue of national recognition criteria being dropped. We disagree with that. We believe that the successful firms can achieve national recognition. We have national recognition. A recent firm that was admitted by the SEC, DBRS, according to outside studies did not have that recognition in the United States. We take issue with the application of those criteria.
    The second problem is that it may be worth finding out why it is that there has been such a delay in taking action. We tend to believe that it is because the SEC has bought into the notion offered by S&P and Moody's that more competition in this area would lead to problems. That is, there would be rate shopping. We think in those cases where the rating firm is not paid by the issuers, that is not a problem. But there has to be some fundamental cause for the huge delay in action in this area, and this may be one of them.
    Thank you very much.
    [The prepared statement of Sean Egan can be found on page 29 in the appendix.]
    Chairman BAKER. Thank you very much, Mr. Egan.
    I appreciate each of your perspectives on this important issue. It is clear to me there is not an objective standard by which a corporation may comply and be assured it will achieve a NRSRO status. There really is no oversight of an entity once it has received a designation, and there is not an official decommissioning process by which such an award may be removed.
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    Secondly, it is not very clear as to what standards of review the rating agencies utilize in determining a public corporation's rating; that prior to the rating being made public, the agency can meet with a subscriber and go over the information or release it previously prior to public disclosure; that an agency can send a bill to a public company without having solicited the rating, which creates an interesting problem for the company, I am sure; and that at the end of the day the rating agency performance in the midst of the corporate crisis we faced was frankly marginally, if better at all, than the broader market controls that seem to have failed us generally.
    It leads me to the question or the observation, this may be one area where the Congress can actually act and not make matters worse. There is no room for us to go downhill from here. In light of that, we have had a concept release as early as 1994 by the SEC, subsequent concept release, and to date still no recommendation for action either for the SEC or for the Congress.
    I am very troubled by this because of the Public Company Investment Act requires the maintenance of at least two ratings prior to issuance of public debt, and there appears to be great reliance on these ratings by many stakeholders without understanding fully the mechanisms by which these ratings are issued.
    I even have read of late where Basel is considering utilizing the rating agency determinations for determination of capital adequacy for financial institutions, which is a shocking turn of events given what I think I know about the agency's performance to date.
    I know that each of you has suggested that enhanced competition may be the ultimate reform that is most beneficial. But I am very concerned that that potential could have been exercised over the last decade, where resources could have been brought to bear, and as Dr. Putnam's case indicates, the languishing in response from the SEC to be told no for 2 years is not the most professional standard of conduct.
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    Is there anything short of incentivizing additional competitors? For example, some have suggested that utilization of credit spreads might be more beneficial in getting real critical examination of financials than looking with a retrospective view that apparently the rating agencies use.
    What other rating alternatives might there be available to us? Are there any? And is the only hope SEC action and competition? I just make that observation and question to the panel.
    Mr. EGAN. Regarding credit spreads, we have a variety of clients including a number of hedge funds. I think if there is a turning to credit spreads as being the rating proxy, it would be fairly easy for sophisticated traders to manipulate it.
    Basically what they would do is buy up the company's securities and sometimes the float is not that great so it does not take much time to control the float; move down the spread, which would imply a higher rating; let other institutions get into that security and then move out. You can do that multiple times. It is very, very easy to manipulate a system like that.
    Also, there is some suggestion for pure quantitative systems. We started out, probably about 12 or 13 years ago when the firm was founded, as purely a quantitative shop. We found that it did not get us where our clients wanted to go. That is, we were maintaining 95 percent-plus accuracy. With a pure quantitative system, it would be between 85 and 90 percent. Typically, these quantitative systems rely on equity prices, and again you have mixed signals. For example, if a company announces a share buy-back, its share price will go up, but that would be a negative for credit quality.
    Chairman BAKER. But in the current circumstance, though, the rating agency to a great extent relies on representations made by management. They do not appear at least to rely on audit or underlying financial examination to a great degree. How assured can we be that the manipulative effects you are concerned about are not already in the market?
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    Mr. EGAN. Sometimes they are and sometimes they are not. I think that the best safeguard is to have a viable competitive market, which we do not have.
    Chairman BAKER. My time has just about expired, and I do have other members, but just one other question that concerns me about the way these markets function. Wouldn't it seem likely, given the way in which the review is now done, that the bigger the corporation the less scrutiny one might receive, and the further down the food chain you go the more likely the rating agency is to actually get involved into the real financials to make their determination?
    Mr. EGAN. Sometimes there is greater scrutiny of the larger companies, but they are given the benefit of the doubt.
    Chairman BAKER. Thank you.
    Mr. Kanjorski?
    Mr. KANJORSKI. Thank you, Mr. Chairman.
    Mr. Egan, you have been here so often you are starting to get the demeanor of a member of Congress.
    Mr. EGAN. My wife is wondering about my multiple trips to Washington.
    [Laughter.]
    Mr. KANJORSKI. Welcome.
    I do not know, if I were sitting at the table I sense a great deal of frustration. Am I correct?
    Mr. EGAN. Yes.
    Mr. KAITZ. Yes.
    Mr. PUTNAM. Yes.
    Mr. POLLOCK. Yes.
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    Mr. KANJORSKI. We obviously can give the authority for the SEC to regulate a particular industry or activity, but after that it is in their hands.
    Dr. Putnam, you indicated 8 years your application was pending?
    Mr. PUTNAM. Yes, sir.
    Mr. KANJORSKI. And, Mr. Egan, yours is 6 years?
    Mr. EGAN. Ours is since 1998, so yes.
    Mr. KANJORSKI. Six years.
    Do you think it is time that we throw up our hands and say that obviously the SEC does not want to be the regulatory body and we take the proposals of the professionals and craft authorization and assign it to the Federal Reserve and see if we have a better activity there and maybe you can create competition between the regulators.
    If a regulator does not seem to want to assert its authority in a field, let us find another regulator. What is your thought to that?
    Mr. PUTNAM. I am from the Fed, so I would look in that direction. But no, I think that the SEC should do it right.
    Mr. KANJORSKI. What if we cannot make them? Obviously, 10 years, Doctor.
    Mr. PUTNAM. Then it is time for change. There are obviously very serious problems, but it seems so simple, to be able to expedite an application and be more positive.
    Mr. KANJORSKI. What do you think the underlying proposition for the delay is?
    Mr. PUTNAM. I think it is to maintain the status quo.
    Mr. KANJORSKI. I mean, is there restriction of competition? Do they just want the majors in the field and nobody else?
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    Mr. EGAN. Our feeling is that if the area is not cleaned up; if the SEC cannot take action in the near future, that they should step away from regulating the area. Our relationship with the SEC has gone through different stages. At one point, they would not return our phone calls and simply ignored our requests. At this point, it appears as though we are making progress, but it is very easy to sidetrack that progress.
    It is very easy for them to compare us to S&P and Moody's and say you are significantly smaller, and therefore even though you have all these ratings correct, you warned investors about Enron, WorldCom and Global Crossing and Genuity, you still do not look big enough compared to them. At which point, we think that we would be fairly upset, because neither the investors nor the corporations are being served by the current arrangement.
    Mr. KANJORSKI. What do you want? To hang in for another 6 years?
    Mr. EGAN. No, I do not have that patience.
    Mr. KANJORSKI. What do you want us to do? Myself, I am convinced after the second year of hearings that we will be back next year in the 109th, and we will just have to have larger handkerchiefs.
    [Laughter.]
    Mr. EGAN. If there is not significant progress in the next 6 months, consider withdrawing their ability to regulate this area.
    Mr. KANJORSKI. As I say, why don't we prepare a model statute with the criteria set out of what the regulation should be and what the standards should be, and give them a year to promulgate rules and regulations and act to regulate, or automatic action that the authority transfers to the Federal Reserve.
    Mr. EGAN. There are some other changes that are needed, too. The issue of compensation is something that is going to continue to cause problems. There are some issuers that pay multimillion-dollar fees and they are given the benefit of the doubt. If there is a collapse, and there are some problem companies out there right now, it will cause huge problems for investors.
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    The flip side is that there are some corporations that are being basically shaken down by the major rating agencies for their governance ratings, which is wrong. Also, some issuers are not given the opportunity to respond to ratings.
    Mr. KANJORSKI. You have convinced me. You made your argument and you convinced me. Now I am just trying to find a remedy.
    Mr. POLLOCK. Congressman, if I could comment from this end. I support your idea that you ought to go ahead and try to take some action, and that more competition on the regulatory front is not a bad idea either.
    As I read the history of the NRSRO designation, it was something of an accident. It started off as part of the haircut capital rules for securities firms and which ratings you held in inventory determined how big a capital haircut the position got. It grew into this preferred designation of firms. This looks to me something by historical accident, as other regulators then picked up the theme of whose ratings could count for various regulations.
    So I think your notion to do something to move it along is correct.
    Mr. KANJORSKI. Mr. Kaitz?
    Mr. KAITZ. I would also support that at AFP.
    Also the code of standard practice, as we have proposed, as you have suggested, lays out regulatory recommendations for both the issuer as well as the credit rating agencies; talks about transparency in the process; talks about all the issues that have come up here today that need to be addressed by some regulatory body.
    But we would very much support Congress pushing the SEC into some action based upon the code of standard practice, with a limited regulatory framework.
    Mr. KANJORSKI. Do you sense that if we took such action like that it may reflect on what happened with FASB and the stock options question? That at that point the regulatory agencies would run up here to the Congress and at least disclose themselves that they want to maintain a monopoly?
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    Mr. KAITZ. I think you can draw a lot of comparisons to the accounting profession, as well, as has been noted by Sean and the equity analysts on the research side. These are all the same issues of separation of responsibility. They are as critical to global capital markets and U.S. capital markets as those two professions. So I do not know what the SEC would do. Are you referring to the credit rating agencies coming up here?
    The other thing you could speculate is that the SEC does not want to address this issue because they realize they do have regulatory authority here and they would have to enforce that authority to more firms. So I do not know what kind of resources that would take, but it seems to me that there has been a compelling case made for the SEC to take action here today.
    Mr. KANJORSKI. I am particularly impressed with the fact that you make the point that there is a greater cost for capital because of the failure to have competition in a broader rating agency marketplace. I think that is a very compelling argument. We tend to think that five, 10, 15 basis points do not make a difference.
    Mr. EGAN. It is far greater than that.
    A typical company would be Nextel. Nextel is a vibrant, exciting company that is changing the telecommunications industry. It is still not rated investment-grade even though, from the traditional measures, just taking them out 6 or 12 months, it is very clear that this is a strong, vibrant company that has a high chance of being bought out by some of the other highly rated companies in the industry.
    So the bottom line is that it is not just five or 10 basis points. It is closer to about 50 or 100 or 150 basis points, and you are talking about $5 billion to $10 billion worth of debt.
    That is significant, and it is hurting young, growing companies. Sometimes there are older companies that have improved, but it is hurting companies like that, where they do not get a fair chance in the capital markets.
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    Mr. KAITZ. Also, to the extent that the European countries implement their own regulations, which is likely to happen, you are going to have a fragmented process here, and that is definitely going to raise the cost of capital because a U.S. multinational company that wants to raise debt in other countries is then going to have to comply with multiple rules and multiple companies, and you know who is going to be paying for that.
    Mr. KANJORSKI. So you think if we concluded, if the Chairman and I get together and put a piece of legislation together to set up your criteria for a regulation and offer certification of these agencies, that we will either get them to move or appropriately improve the industry.
    Is there anyone here at the table that thinks that this would be injurious to the rating agencies?
    Very good, thank you.
    Chairman BAKER. I thank the gentleman.
    Ms. Brown-Waite?
    Ms. BROWN-WAITE. Thank you very much, Mr. Chairman.
    I would like to ask Mr. Pollock a few questions, and if any of the other gentlemen would like to jump in.
    First of all, I am what is called a freshman, a little old to be a freshman, but I moved to this committee. Has the SEC ever revoked NRSRO designations? And what would you anticipate if you could wave a magic wand? What should be the criteria for such revocation?
    And also, if I understand this correctly, each of the four SEC-approved rating agencies derives the bulk of its revenues actually from fees charged to the companies they rate. Isn't this a blatant conflict of interest? Am I missing something here? Should we be concerned, as we have been about the conflicts created by equity analysts being compensated based on the investment banking business that they bring in?
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    I think if the average investor out there had any clue, they would really use the term, a fox watching over the chicken coop. I would just like to hear your views on this.
    Mr. EGAN. No rating agency has had its NRSRO designation withdrawn. What has happened in the industry is that the firms have consolidated. As of about 5 years ago, there were about seven NRSROs. Three of them merged into Fitch. That was Thompson Bank Watch, Duff & Phelps and a London firm called IBCA. So there has been no withdrawal of the NRSRO designation or threat of withdrawal.
    We tend to think that there should be some basis for threatening that designation. In the case of Enron, it was rated investment-grade 4 days before it went bankrupt. So basically, it just took the time for the bankruptcy attorneys to put together the papers and then it was in bankruptcy. That is outrageous.
    What should have happened, in our opinion, is that their license, if you will, in the investment-grade area or else in the energy or utilities area, should have been on probation for 6-, 12-or a 24-month period. There has to be some threat.
    There are other horror stories in the manufactured housing area, the securitization whereby AAA ratings had been downgraded to junk in the period of just an hour or so. In that case, it shows clear negligence on the part of the ratings firm. There should be some process where the license is suspended or in some kind of penalty box-type area for a period of time when things like that happen.
    Lastly, you mentioned the conflict of interest. That is a problem. It is a huge problem. This industry is basically accepted because of the lack of competition. People throw up their hands and say, well, it is S&P and Moody's; they really designate the ratings; we strongly disagree with that, but they have become the currency, if you will, in this area.
    First of all, that should be disallowed. It might take some time. Maybe they have to do it over a 5-year period, but that should not happen. You are waiting for another huge accident. The incentives are in the wrong place.
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    Secondly, they should not be allowed to use the term ''independent.'' They are not independent. Take it away. You are misleading the people who need the protection the most. They think that these terms are independent and they are being paid huge fees by selected issuers.
    So that is our response to those three issues.
    Mr. POLLOCK. Congresswoman, I would only add, it would be better to have a competitive market instead of having a cliff-type decision that a regular would have to make. ''I am now taking away your license,'' is a very hard decision for people to make.
    The market, if there is poor performance, like the examples just cited, can little by little take the business away if there are in fact alternatives. From an investor point of view, if investors like better the idea of having ratings that the rated entity did not pay for, that they paid for themselves, why then would they gravitate to those ratings. If they thought it was okay to have the issuing company pay for ratings, they could purchase them. But none of that can happen if you do not have alternatives in the market available to the users of ratings, investors and others, to choose from.
    Mr. BAKER. Thank you, Ms. Brown-Waite.
    Ms. McCarthy?
    Mrs. MCCARTHY. Thank you, Mr. Chairman.
    I am just curious, Mr. Chairman, are we going to have another hearing with the SEC and find out why this is happening? Or have you had it and I did not see it. I was not here.
    Chairman BAKER. We had one about 18 months ago which was particularly painful for the SEC at that time.
    Mrs. MCCARTHY. Okay.
    Chairman BAKER. I do not see how we can avoid revisiting this subject at some appropriate time. I need to visit further with my chairman and Mr. Kanjorski on any initiatives that might be contemplated. But be assured, this is the beginning, not the end of our process.
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    Mrs. MCCARTHY. Because again, even though we both came on the committee 18 months ago, I probably had no idea what I was hearing. I am sorry. It takes a while to learn this stuff.
    The questions that I was going to ask actually have been answered in a number of give and take back, so I am not going to bother with that. But it has been a real eye-opener for me on a number of things. Let us face it, the majority of people do not understand it. I did not know there was anything else out there, but the two competitions are there. I thought that was just the way it was, so this has been fascinating for me.
    I thank you for the testimony and I thank you for bringing this hearing forward.
    Chairman BAKER. Thank you, Ms. McCarthy.
    Ms. Biggert?
    Mrs. BIGGERT. Thank you, Mr. Chairman.
    I, too, think that the really basic questions have been asked, so I will just have a couple of questions. The Northern Trust Company submitted a comment in response to the SEC's concept release in which it stated that the major rating agencies have requested payment for unsolicited ratings, and in some instances paid the invoices in order to preserve the goodwill with the rating agency.
    So my question from that is, how would enhanced competition in the rating industry prevent this type of abuse? That would probably be for anyone who would like to answer.
    Mr. PUTNAM. I would like to answer that question. First, Northern Trust is a very financially sound organization. It has one of our highest ratings. However, we are not an NRSRO company, so they cannot divert to that. That competition will help in that area.
    I would like, if I can grab the microphone, to make a point that it is not just that some people are paying a very high price for capital. Some of them do not have access to capital markets. The fees charged by Moody's and Standard & Poor's and Fitch are so high for a rating that it may be 5 percent of the issue. Small companies cannot afford to raise capital in that arena. We are providing information to the committee showing that we have rated some companies as small as $23 million in asset size. This is a very serious problem.
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    Another very serious problem that I do not believe has really been addressed by the SEC is that there are billions of dollars of excessive, and I feel the fees are very excessive, fees that are being paid by municipalities and by corporations for these ratings. Competition can bring these prices down considerably if in fact it can be generated. That I think is a very tough thing to do.
    The expertise in a rating agency is very hard to develop. It takes time to do this, and usually these companies, like Sean and myself, we specialize in a certain area. Once you get the NRSRO status, then you can branch out and then hopefully you can bring somebody in that helps you build your company and the SEC or the new regulator allows that to happen. You have to be very proactive in this arena.
    Mr. EGAN. The reason why I think Northern Trust paid those fees is because they are afraid of alienating the two, in their mind, only two firms in this industry. It is another manifestation of the lock that they have on this industry. An example might be if your utility in the dead of winter overcharged you $50 or $100 or $200. You are far more likely to pay that additional amount than be faced with the threat of having the utility cut off.
    That is the case here. These companies, issuers cannot afford to be cut off. This industry has deteriorated to the point where there are only two firms in many participants' minds, and it is highly unhealthy and it is going to cause some additional Enrons in the future. It is going to cause some other companies to continue to pay much more for capital, so it has to be cleaned up.
    Mrs. BIGGERT. Do you think that not only are these firms afraid not to go to these companies, but also do you think that the rating fees then affect the ability of some of the largest rating firms to provide objective rating analysis?
    Mr. EGAN. There is no question that they do. There is another problem that comes up with the issuer compensation, and that is, it was about 8 years ago in the municipal area whereby two municipalities refused to pay Moody's. It is in the Wall Street Journal, and I can send the reference in later. It was in the Wall Street Journal where these issuers refused to pay the rating fees that were being charged by Moody's. And Moody's just said, well, you should participate in our process.
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    The issuer said, no, we are not going to. Moody's said, we have enough information in the public domain and we are going to give you a rating, period. And they gave them what I call a punishment rating, which significantly increased the cost of floating that issue. The municipalities subsequently sued and they were unsuccessful. They were unsuccessful because Moody's said the ratings are opinions and we are entitled to the freedom of speech. So it is just another indication of this unhealthy industry.
    Mrs. BIGGERT. I know that you would like to get into this.
    Mr. EGAN. We already are issuing ratings. There are a number of clients that want to use our ratings for regulatory purposes and we told them they cannot until we get the designation.
    Mrs. BIGGERT. Okay. But the current NRSROs have already absorbed three companies.
    Mr. EGAN. Yes.
    Mrs. BIGGERT. So how are you going to do this?
    Mr. EGAN. There are two things that distinguish us. One is our success, and no one can match that in flagging Enron, WorldCom and these others, number one. And number two, we do not charge the issuers. We think we can continue our success and do very nicely.
    Mrs. BIGGERT. Thank you.
    Thank you, Mr. Chairman. I yield back.
    Chairman BAKER. Thank you, Ms. Biggert.
    I want to just go back for a few brief points. I know other members may have follow-up questions.
    As to the elements that possibly should be considered in our construction of some remedy, it would appear to me that requiring an enhanced standard of disclosure for material facts, that it would seem that the agencies today rely to a great extent on representations made by management, without the benefit of a true audit.
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    To have a requirement on management to disclose to a rating agency in the course of its inquiry any material fact that a reasonable man would assume would have some positive or negative or any impact on shareholder value would be sort of a minimum opening requirement; that in the course of developing whatever standards of review the rating agency determines is appropriate, that the elements that go into a rating determination be made public; the process by which you get from beginning to end.
    I also think it is important to disclose whether or not nonpublic information is utilized. Not that you disclose it, but simply the statement that we are using only publicly available information would tell any outside observer, they are only feeding us back what is readily available in the market, or we have insight to information you do not have, therefore this rating is based on that information. I think those are very helpful tools.
    And then finally, before reaching the ultimate rating determination, that that decision not be made available to the subscriber before it is being made available to the public. This goes back to our old analyst-investment banker problems where we had people able to get access to important information even hours, much less days ahead of time, seems to be an obvious, well, I hate to say impropriety, but certainly something that needs to be addressed.
    Then the rating outlooks that are made available by the agencies are troubling. Now, we are making a determination about current value based on representations of management without an audit. So at best, you can say the critical analysis of present-day value ought to be carefully examined, but we are going to permit a national rating agency to do a forecast for the next 18 months?
    There seems to be a little problem here in my mind with just sending someone an invoice for services you did not ask for, and the ability to forecast what you are going to look like 18 months from now. Now, I do not know if that bothers you, but I am from Louisiana and I can see that one coming.
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    And then lastly, it was an issue in Sarbanes-Oxley, consulting services. It seems to me to be highly questionable as to whether or not you ought to be able to consult with someone for whom you are being asked to issue a public rating on which others may make their investment decisions, which certainly speaks directly to the issue of fees and the appropriateness of fees being paid to great extent for someone who is going to give you your report card.
    Any adverse comments about those observations or problematic observations, anyone?
    Mr. KAITZ. I would just say that almost all the issues that you addressed, Mr. Chairman, have been included in the code of standard practices, both for the credit rating agencies, as well as the issuers. So we would be very supportive of your framework.
    Mr. PUTNAM. I think a very serious problem with the existing NRSRO companies, if they issue ratings, they do not show the date necessarily that the rating was issued, nor do they show the data from which the rating was derived. I think that is very, very important, because if you do that and you show that for many other companies as well, and one rating does not adjust to that data, you can see that something is wrong.
    In our comments to your committee, we had made a suggestion that one way, I do not think the fee problem is going to be resolved right away. We do not charge for our credit ratings. We do charge for new issue ratings. You cannot help but do it. The financial analyst involved in this and the discussions with management are just so important.
    But one point that you made, I do not think a rating agency worth its salt should ever take what management says they are going to and base a rating on that. You have to judge the financial condition of an institution based on its financial soundness. LACE comes from liquidity, asset quality, capital and earnings. Those are the major determinants of financial soundness.
    If you take those and you show these determinants, along with the rating, that helps. Plus, these rating agencies, existing NRSROs should rate more frequently. They charge so much money. The balance sheets and income statements of these companies are put out quarterly. They are generally audited, and you can take that information and you can confirm or deny a rating, rather than just change that rating somewhere in the timeframe of a company. But if you show that information, you are going to bring more credibility to the rating process.
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    Chairman BAKER. What is it that is gained from a rating company analysis that is not already available from the quarterly statement?
    Mr. PUTNAM. Interpretation, analyst interpretation.
    Chairman BAKER. So if we went back and looked at the outlook forecast for S&P and compared it to say the analyst community, we ought to be astounded by how well S&P is able to forecast.
    Okay, thank you. I think I have exercised all the time I should take.
    Any further questions? Ms. McCarthy?
    Mrs. MCCARTHY. Thank you.
    I think part of the question was answered, because when you said earlier conflict of interest on the pay, and then you came back, because I was sitting here wondering how do you guys make any money.
    Mr. EGAN. We get paid by institutional investors.
    Mrs. MCCARTHY. Okay.
    Mr. PUTNAM. We get paid by subscribers primarily, but about 20 percent of our revenues are derived on new issue ratings, and we do charge for that. But we do, as I have said, show those ratings every quarter. I provided to the committee, on some of the pools that we rate for structured preferred stocks, for community banks.
    We will actually follow that pool each quarter, re-rate the pool each quarter, and re-rate every member of the pool each quarter. We have a follow-up rating report that does that. It is the most advanced report in the industry that exists. That has been supplied to the committee. That is what should be done.
    Mrs. MCCARTHY. Okay. Thank you.
    Chairman BAKER. There being no further questions, I want to express my appreciation to each of you for your participation. You have been most helpful. As I have indicated earlier, this is just another step in our review of this sector. We do have a lot of additional work ahead of us, and we appreciate your contribution.
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    The meeting is adjourned.
    [Whereupon, at 11:20 p.m., the subcommittee was adjourned.]