Conflicts of Interest and Risk Mitigation

Updated March 2012

Potential Conflicts of Interest

1 Point 1 of Annex I Section B of EU Regulation 1060/2009 on Credit Rating Agencies requires that a credit rating agency shall identify, eliminate or manage and disclose, clearly and prominently, any actual or potential conflicts of interest that may influence the analyses and judgments of its rating analysts, employees, or any other natural person whose services are placed at the disposal or under the control of the credit rating agency and who are directly involved in the issuing of a credit rating and persons approving credit ratings.
2 In accordance with the above, Capital Intelligence identifies the following relationships and situations that could potentially give rise to conflicts of interest:
  1. Capital Intelligence is paid by rated entities or their related third parties for credit ratings.
  2. Capital Intelligence is paid by rated entities or their related third parties for subscriptions to receive Capital Intelligence’s credit rating reports or to attend Capital Intelligence seminars on credit analysis.
  3. Capital Intelligence is paid by persons for subscriptions to receive Capital Intelligence’s credit rating reports, and such persons may own investments that could be affected by a credit rating issued by Capital Intelligence.
  4. Capital Intelligence, its employees, members of an employee’s immediate family and other associated persons, and any other natural person referred to in point 1 above may directly or indirectly own financial instruments of entities rated by Capital Intelligence or of entities related to those rated entities or have other direct or indirect ownership interests in those entities or parties.
  5. Capital Intelligence, its employees, members of an employee’s immediate family and other associated persons, and any other natural person referred to in point 1 above may have, or have recently had, significant business or other relationships with entities rated by Capital Intelligence or with related third parties.
  6. An entity rated by Capital Intelligence may directly own 5% or more of Capital Intelligence.
  7. An entity rated by Capital Intelligence may own or be represented on the board of entities that have shareholdings in Capital Intelligence.
  8. Members of the Company’s Board of Directors, or persons referred to in point 1 may hold positions on the administrative or supervisory boards of entities rated by Capital Intelligence.
  9. A rating analyst may leave Capital Intelligence to join a rated entity, which he or she has been involved in rating, or a financial firm, with which he or she has had dealings as part of his or her duties as a rating analyst.
  10. A rating analyst or other person referred to in point 1 may solicit or receive money, gifts or favours from an entity rated by Capital Intelligence or from its related third parties.
  11. A rating analyst or other person referred to in point 1 may develop personal or other relationships with a rated entity or its related third party that impairs the objectivity of his or her analysis.

Measures to Eliminate or Manage Conflicts of Interest

3 Capital Intelligence has adopted policies, procedures and organisational and administrative arrangements to mitigate the risk of rating analysts developing conflicts of interest vis-à-vis the entities they rate and to manage the potential trade-off between quality standards and profitability. In particular:
  1. Capital Intelligence ensures that its business and commercial functions are kept separate from its credit rating activities.
  2. Rating analysts are prohibited from participating in fee negotiations or in the solicitation of new business (other than to explain the rating process or rating methodology). Employees in the accounting and marketing departments are not permitted to discuss rating fees with rating analysts.
  3. Capital Intelligence does not provide consultancy or advisory services to rated entities or their related third parties regarding the corporate or legal structure, assets, liabilities or activities of those rated entities or related third parties.
  4. Credit ratings are assigned by a rating committee composed of several rating analysts and not by any individual analyst.
  5. The compensation of a rating analyst is not linked to the amount of revenue generated from the entities he or she rates.
  6. Capital Intelligence will not issue a credit rating, or in the case of an existing credit rating will immediately disclose, if Capital Intelligence or persons referred to in point 1 directly or indirectly own financial instruments of the rated entity or a related third party or have any other direct or indirect ownership interest in that entity or party, other than holdings in diversified collective investment schemes, including managed funds such as pension funds or life insurance.
  7. Capital Intelligence will not issue a credit rating, or in the case of an existing credit rating will immediately disclose, if the rated entity or a related third party is directly or indirectly linked to Capital Intelligence by control.
  8. Capital Intelligence will not issue a credit rating, or in the case of an existing credit rating will immediately disclose, if a person referred to in point 1 is member of the administrative or supervisory board of the entity or a related third party.
  9. Capital Intelligence will not issue a credit rating, or in the case of an existing credit rating will immediately disclose, if a rating analyst who participated in determining a credit rating, or a person who approved a credit rating, has had a relationship with a rated entity or a related third party which may cause a conflict of interest.
  10. Rating analysts and other persons referred to in point 1, as well as associated persons (such as members of their immediate family), may not buy or sell or engage in any transaction in any financial instrument issued, guaranteed, or otherwise supported by any rated entity within their area of primary analytical responsibility, other than holdings in diversified collective investment schemes.
  11. Rating analysts and other persons referred to in point 1 may not participate in or otherwise influence the determination of a credit rating of a rated entity if they or associated persons own financial instruments of the rated entity, other than holdings in diversified collective investment schemes.
  12. Rating analysts and other persons referred to in point 1 may not participate in or otherwise influence the determination of a credit rating of a rated entity if they or associated persons own financial instruments of any entity related to the rated entity, the ownership of which may cause or may be generally perceived as causing a conflict of interest.
  13. Rating analysts and other persons referred to in point 1 may not participate in or otherwise influence the determination of a credit rating of a rated entity if they or associated persons have had a recent employment, business or other relationship with the rated entity that may cause or generally be perceived as causing a conflict of interest.
  14. Rating analysts and other persons referred to in point 1 are prohibited from soliciting or accepting money, gifts or favours from anyone with whom Capital Intelligence does business.
  15. A rating analyst may not serve as the primary analyst for the same rated entity for more than four consecutive years and may not be re-assigned as the primary analyst to that rated entity for a period of at least two years (this policy applies prospectively from September 2010).
  16. A person referred to in point 1 is prohibited from taking a key management position with the rated entity or its related third party within six months of the credit rating.
  17. Capital Intelligence will review the past two years’ work of any rating analyst that leaves the Company to join a rated entity which he or she had been involved in rating, or a financial firm with which he or she had significant dealings as part of his or her duties at Capital Intelligence.

Public Disclosures in relation to Conflicts of Interest

4 Where Capital Intelligence detects or becomes aware of a conflict of interest vis-à-vis a rated entity arising from a breach or infringement of the provisions of point 3, or a look-back review is undertaken in accordance with 3 (q), Capital Intelligence will immediately disclose on its website which credit rating is potentially compromised and why, and will assess whether there are grounds for re-rating or withdrawing the existing rating. If the rating is revised or withdrawn following such a review the reason for the review will be disclosed in the credit rating announcement. If the violation is detected before the rating has been published, Capital Intelligence will not issue the rating.
5 Capital Intelligence will disclose, in accordance with its Code of Business Conduct and Code of Ethics and the EU Regulation, the names of the rated entities or related third parties from which it receives more than 5% of its annual revenue. This information will be posted on Capital Intelligence’s website and updated annually.
6 Capital Intelligence will disclose in the relevant credit rating reports and credit rating announcements the names of any members of its Board of Directors who hold positions on the administrative or supervisory boards of entities rated by Capital Intelligence.
7 Capital Intelligence will disclose in the relevant credit rating reports and credit rating announcements any ancillary services provided for the rated entity or related third party.
8 Capital Intelligence will disclose the names of all significant direct and indirect shareholders. This information will be included in Capital Intelligence’s Transparency Report, which will be published on the Company’s website and updated annually, within three months of the end of each financial year.
9 Capital Intelligence will disclose the names of rated entities that have an ownership interest in or are represented on the administrative board of any company that owns shares in Capital Intelligence. This information will be included in Capital Intelligence’s Transparency Report, which will be published on the Company’s website and updated annually, within three months of the end of each financial year.