(Provisional Translation)
December 14, 2012
Securities and Exchange Surveillance Commission

Recommendation for Administrative Action based on Findings of Inspection of Standard & Poor's Ratings Japan K.K.

1. Contents of the recommendation

Pursuant to Article 20, paragraph (1) of the Act for the Establishment of the Financial Services Agency, the Securities and Exchange Surveillance Commission (SESC) issued on December 11, 2012, a recommendation that the Prime Minister and the Commissioner of the Financial Service Agency shall take administrative action against Standard & Poor's Ratings Japan K.K.* (hereinafter "Company"). This recommendation is based on the findings from the inspection of the Company, whereby the following violations of the law and the regulation were identified.

*Location: Chuo-ku, Tokyo
President and CEO: Yu-Tsung Chang
Capital: 712 million JPY
Number of officers and employees: 84
Registration type: Credit Rating Business

2. Summary of the findings

(1) Inadequate operational management systems where effective measures to verify and update assigned credit ratings in an appropriate and continuous manner were lacking

The following problems were identified with regard to verification and updating (hereinafter "monitoring") of credit ratings assigned by the Company to Synthetic CDO (hereinafter "SCDO") products.

A. Failures to properly confirm important information that affects SCDO credit ratings

The Company recognizes that credit events concerning reference obligations (the obligations related to the underlying assets of an SCDO) are important information in monitoring credit ratings of the SCDO.

The Company also recognizes that a credit event concerning respective reference obligations entails a loss, and that a cumulative increase in such loss amount pertaining to reference obligations may be considered to be a downgrade factor of the SCDO.

However, the Company did not properly take stock of the cumulative loss amount pertaining to the reference obligations that affects the credit rating of SCDOs. The Company did not take measures such as confirming with arrangers of SCDOs whether there had been any credit events relating to the reference obligations.

Therefore, some cases were identified where incorrect credit ratings had been assigned to certain SCDO products for a significant period of time until just before the withdrawal of the credit ratings due to the redemption of those SCDO products.

After the Company identified the above-mentioned inappropriate cases, it requested six arrangers of SCDO products to check whether there had been any credit events relating to reference obligations. However, it is acknowledged that the actions taken by the Company remain insufficient as follows:

(a) Even after receiving arrangers' responses with regard to credit event information, the Company has not appropriately evaluated the rating impact of the increase in the cumulative loss amount caused by such credit events.

(b) Even though the Company has not received any responses from one of the six arrangers, the Company has not urged the arranger to respond. The Company has continued publishing the credit ratings of the relevant SCDOs without confirming whether there were any credit events.

B. Inadequate checking of the notional amount of reference obligations in monitoring the credit ratings of SCDOs

The Company incorrectly maintained until October 2010 a credit rating of a SCDO product that should have been downgraded in January and further in February of that year. This is due to input to the Company's system of incorrect notional amount data in relation to the reference obligations in the monitoring process of the SCDO credit rating.

The Company has not implemented a verification process whereby a second person checks the accuracy of the data input.

Taking into consideration several continuous failures in the monitoring of credit ratings as described in A and B above, it is acknowledged that the Company has failed to implement "the measures so that the Credit Rating Agency will be able to implement the verification and updating of credit ratings already determined, in an appropriate manner and on an ongoing basis," as stipulated under Article 306 (1)(vi)(g) of the Cabinet Office Ordinance on Financial Instruments Business, etc.

Therefore, it is acknowledged that the Company has not established operational management systems for the fair and appropriate performance of its credit rating business, which is a violation of Article 66-33 (1) of the Financial Instruments and Exchange Act (hereinafter "FIEA").

(2) Significant problems with the Company's business operations from the perspective of the public interest and investor protection

The Company has not formulated appropriate internal rules on the public distribution process of credit rating information. The SESC's inspection into the situation of ratings disclosure at the Company has identified significant problems, including releasing an incorrect credit rating different from the one the Company had actually determined.

A. Errors in press releases on rating actions

(a) In January 2011, in a press release on the credit rating of an issuer, the Company mistakenly copied the short-term rating of the issuer's affiliate and published that rating as the short-term rating of the issuer, while the Company had actually not assigned any short-term rating to the issuer.

(b) In December 2011, in a press release on the credit rating revision of a structured finance product, the Company published on its website incorrect information about the previous rating of the product.
With regard to the press releases of (a) and (b) above, the Company has also provided incorrect rating information to its group company and the media.

(c) In November 2011, in an English press release on a credit rating upgrade of a CDO, the Company provided an incorrect credit rating to the group company and the media.

B. Incorrect publication in relation to the distinction between solicited and unsolicited credit rating

The Company makes public the "List of Japanese Issuers receiving Solicited and Unsolicited Ratings" at the beginning of every month. In the list published in January 2011, the Company did not refer to an unsolicited rating as unsolicited. The list was published on the Company's website and provided to the group company and the media.

C. Other problems relating to provision of incorrect rating information

The Company, in its reports that made a more in-depth analysis about a few issuers than press releases, cited for reference incorrect credit ratings of the obligations of some issuers etc., and provided the reports with the errors to the group company and the media.

Although the Company has rules on correcting erroneous publication, it has no rules that require its staff to report such errors to the Compliance Department. In all the cases of erroneous publication mentioned above, no one has therefore reported to the Compliance Department and, thus, preventive measures have not been taken appropriately.

Taking into consideration the facts described in A, B and C above as well as the situation where preventive measures have not been taken against these issues, the Company's business operations in this regard are extremely inappropriate. Therefore, it is acknowledged that the situation is a case where it is "necessary and appropriate for the public interest or protection of investors, with regard to the status of a Credit Rating Agency's business operations", to order the Credit Rating Agency to change its business methods or take other necessary measures for improving the status of business operations, as stipulated under Article 66-41 of the FIEA.

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