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In investment, the  c

 assesses the credit worthiness of a corporation's debt
issues. It is analogous to credit ratings for individuals and countries. The credit rating is a
financial indicator to potential investors of debtsecurities such as bonds. These are assigned by
credit rating agencies such as Moody's, Standard & Poor's, and Fitch Ratings to have letter
designations (such as AAA, B, CC) which represent the quality of a bond. Bond ratings below
BBB/Baa are considered to be not investment grade and are colloquially called junk bonds.

 c  !c "

c cc
#$c$c#$c$c#$c$c cc
Aaa AAA AAA Prime
Aa1 AA+ AA+
A-1+ F1+
Aa2 AA AA High grade
Aa3 AA- AA-
A1 A+ A+
A-1 F1
A2 A A Upper medium grade
A3 A- A-
P-2 A-2 F2
Baa1 BBB+ BBB+
Baa2 BBB BBB Lower medium grade
P-3 A-3 F3
Baa3 BBB- BBB-
Ba1 BB+ BB+
Non-investment grade
Not prime B B speculative
Ba3 BB- BB-
B1 B+ B+ Highly speculative
B2 B B
B3 B- B-
Caa1 CCC+ Substantial risks
Caa2 CCC Extremely speculative
In default with little
Ca prospect for recovery
/ D / DD / In default
/ D


c 1 Credit rating agencies

c 2 Credit Rating Tiers
ac 2.1 Investment grade

c 3 Criticism

c § Municipal Bonds

c Õ Default Rates

c Ú See also

c ï References

c r External links

See also: Credit rating agency

Credit rating agencies registered as such with the SEC are known as ³Nationally Recognized
Statistical Rating Organizations.´ The following firms are currently registered as NRSROs: A.M.
Best Company, Inc.; DBRS Ltd.; Egan-Jones Rating Company; Fitch, Inc.; Japan Credit Rating
Agency, Ltd.; LACE Financial Corp.; Moody¶s Investors Service, Inc.; Rating and Investment
Information, Inc.; Realpoint LLC; and Standard & Poor¶s Ratings Services. Under the Credit
Rating Agency Reform Act, an NRSRO may be registered with respect to up to five classes of
credit ratings: (1) financial institutions, brokers, or dealers; (2) insurance companies; (3)
corporate issuers; (§) issuers of asset-backed securities; and (Õ) issuers of government securities,
municipal securities, or securities issued by a foreign government.[1]

S&P, Moody's, and Fitch dominate the market with approximately 90-9Õ percent of world
market share.

Moody's assigns bond credit ratings of Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, with WR and NR as
withdrawn and not rated.[2] Standard & Poor's and Fitch assign bond credit ratings of AAA, AA,
A, BBB, BB, B, CCC, CC, C, D.

As of October 1Ú, 2009, there were § companies rated AAA by S&P:[3]

c Automatic Data Processing (NYSE:ADP)

c Johnson & Johnson (NYSE:JNJ)

c Microsoft (NASDAQ:MSFT)

c ExxonMobil (NYSE:XOM)

Moody's, S&P and Fitch will all also assign intermediate ratings at levels between AA and CCC
(e.g., BBB+, BBB and BBB-), and may also choose to offer guidance (termed a "credit watch")
as to whether it is likely to be upgraded (positive), downgraded (negative) or uncertain (neutral).

c %%
c c

An obligor has EXTREMELY STRONG capacity to meet its

financial commitments.
An obligor has VERY STRONG capacity to meet its
Aa1 AA+ AA+ financial commitments. It differs from the highest rated
obligors only in small degree.
Aa2 AA AA "
Aa3 AA- AA- "
An obligor has STRONG capacity to meet its financial
commitments but is somewhat more susceptible to the
A1 A+ A+
adverse effects of changes in circumstances and economic
conditions than obligors in higher-rated categories.
A2 A A "
A3 A- A- "
An obligor has ADEQUATE capacity to meet its financial
commitments. However, adverse economic conditions or
Baa1 BBB+ BBB+ changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial
Baa2 BBB BBB "
Baa3 BBB- BBB- "
An obligor is LESS VULNERABLE in the near term than
other lower-rated obligors. However, it faces major ongoing
Ba1 BB+ BB+
uncertainties and exposure to adverse business, financial, or
economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitments.
Ba2 BB BB "
Ba3 BB- BB- "
An obligor is MORE VULNERABLE than the obligors rated
'BB', but the obligor currently has the capacity to meet its
B1 B+ B+ financial commitments. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity
or willingness to meet its financial commitments.
B2 B B "
B3 B- B- "
An obligor is CURRENTLY VULNERABLE, and is
Caa CCC CCC dependent upon favourable business, financial, and economic
conditions to meet its financial commitments.
C C nonpayment. May be used where a bankrupcy petition has
been filed.
An obligor has failed to pay one or more of its financial
obligations (rated or unrated) when it became due.
Preliminary ratings may be assigned to obligations pending
e, p pr Expected receipt of final documentation and legal opinions. The final
rating may differ from the preliminary rating.
Rating withdrawn for reasons including: debt maturity, calls,
WR puts, conversions, etc., or business reasons (e.g. change in
the size of a debt issue), or the issuer defaults. [2]
This rating was initiated by the ratings agency and not
unsolicited unsolicited
requested by the issuer.
This rating is assigned when the agency believes that the
obligor has selectively defaulted on a specific issue or class
SD RD of obligations but it will continue to meet its payment
obligations on other issues or classes of obligations in a
timely manner.
No rating has been requested, or there is insufficient
information on which to base a rating.

%c()c c

A bond is considered
)c  or (* if its credit rating is BBB- or higher by Standard
& Poor's or Baa3 or higher by Moody's or BBB(low) or higher by DBRS. Generally they are
bonds that are judged by the rating agency as likely enough to meet payment obligations that
banks are allowed to invest in them.
Ratings play a critical role in determining how much companies and other entities that issue debt,
including sovereign governments, have to pay to access credit markets, i.e., the amount of
interest they pay on their issued debt. The threshold between investment-grade and speculative-
grade ratings has important market implications for issuers' borrowing costs.

Bonds that are not rated as investment-grade bonds are known as 

 bonds or more
derisively as junk bonds.

The risks associated with investment-grade bonds (or investment-grade corporate debt) are
considered noticeably higher than in the case of first-class government bonds. The difference
between rates for first-class government bonds and investment-grade bonds is called investment-
grade spread. It is an indicator for the market's belief in the stability of the economy. The higher
these investment-grade spreads (or risk premiums) are, the weaker the economy is considered.


Until the early 19ï0s, bond credit ratings agencies were paid for their work by investors who
wanted impartial information on the credit worthiness of securities issuers and their particular
offerings. Starting in the early 19ï0s, the "Big Three" ratings agencies (S&P, Moody's, and
Fitch) began to receive payment for their work by the securities issuers for whom they issue
those ratings, which has led to charges that these ratings agencies can no longer always be
impartial when issuing ratings for those securities issuers. Securities issuers have been accused
of "shopping" for the best ratings from these three ratings agencies, in order to attract investors,
until at least one of the agencies delivers favorable ratings. This arrangement has been cited as
one of the primary causes of the subprime mortgage crisis (which began in 200ï), when some
securities, particularly mortgage backed securities (MBSs) and collateralized debt obligations
(CDOs) rated highly by the credit ratings agencies, and thus heavily invested in by many
organizations and individuals, were rapidly and vastly devalued due to defaults, and fear of
defaults, on some of the individual components of those securities, such as home loans and credit
card accounts.


 c c
Municipal bonds, instruments issued by local, state, or federal governments in the United States,
have a separate naming/classification system which mirrors the tiers for corporate bonds.

%c+, c& c
The historical default rate for municipal bonds is lower than that of corporate bonds. The
Municipal Bond Fairness Act (HR Ú30r)[Ú], introduced September 9, 200r, included the
following table giving bond default rates up to 200ï for municipal versus corporate bonds by
rating and rating agency.

Cumulative Historic Default Rates (in percent)

 c  !c


Aaa/AAA 0.00 0.Õ2 0.00 0.Ú0
Aa/AA 0.0Ú 0.Õ2 0.00 1.Õ0
A/A 0.03 1.29 0.23 2.91
Baa/BBB 0.13 §.Ú§ 0.32 10.29
Ba/BB 2.ÚÕ 19.12 1.ï§ 29.93
B/B 11.rÚ §3.3§ r.§r Õ3.ï2
Caa-C/CCC-C 1Ú.Õr Ú9.1r §§.r1 Ú9.19
Investment Grade 0.0ï 2.09 0.20 §.1§
Non-Invest Grade §.29 31.3ï ï.3ï §2.3Õ
All 0.10 9.ï0 0.29 12.9r

%cc c

c Credit risk

c Default (finance)

1.c o
2.c ^ ÷ "Moody's Rating Symbols & Definitions" (PDF). p. Õ.
ymbolsand%20Definitions.pdf. Retrieved 2009-09-21. "Withdrawn - WR ... Not Rated -
3.c o§-aaas/
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November 12, 2002


Mr. Jonathan G. Katz

United States Securities and Exchange Commission
§Õ0 Õth Street, NW
Washington, D.C. 20Õ§9-0Ú09

Re: File No. §-§Úï

Dear Sir:

We set forth below Fitch's views on the role and function of rating agencies in the operation of
securities markets provided in anticipation of the hearings on credit rating agencies scheduled for
November 1Õ and 21, 2002.

ë  c

Fitch Ratings traces it roots to the Fitch Publishing Company established in 1913. In the 1920s,
Fitch introduced the now familiar "AAA" to "D" rating scale. Fitch was one of the three rating
agencies (together with Standard & Poor's ("S&P") and Moody's Investors Service ("Moody's"))
first recognized as a nationally recognized statistical rating organization (a so-called "NRSRO")
by the Securities and Exchanges Commission ("SEC") in 19ïÕ.

Since 19r9 when Fitch was recapitalized by a new management team, Fitch has experienced
dramatic growth. Throughout the 1990's, Fitch especially grew in the new area of structured
finance, by providing investors original research, clear explanations of complex credits, and
more rigorous surveillance than the other rating agencies.

In 199ï, Fitch merged with IBCA Limited, another NRSRO headquartered in London,
significantly increasing Fitch's worldwide presence and coverage in banking, financial
institutions and sovereigns. Through the merger with IBCA, Fitch became owned by the French
holding company, Fimalac S.A., which acquired IBCA in 1992. The merger of Fitch and IBCA
represented the first step in our plan to respond to investors' need for an alternative global, full
service rating agency capable of successfully competing with Moody's and S&P across all
products and market segments.

Our next step in building Fitch into a global competitor was our acquisition of Duff & Phelps
Credit Rating Co., an NRSRO headquartered in Chicago, in April, 2000 followed by the
acquisition later that year of the rating business of Thomson BankWatch. These acquisitions
strengthened our coverage in the corporate, financial institution, insurance and structured finance
sectors, as well as adding a significant number of international offices and affiliates.
As a result of Fitch's growth and acquisitions, it today has approximately 1,200 employees,
including over ï00 analysts, in over §0 offices and affiliates worldwide. Fitch currently covers
2,300 banks and financial institutions, 1,000 corporations, ï0 sovereigns and 2Ú,000 municipal
offerings in the United States. In addition, we cover over ï,000 issues in structured finance,
which remains our traditional strength.

The Re  R÷

e esc

Fitch is in the business of publishing research and independent ratings and credit analysis of
securities issued around the world. A rating is our published opinion as to the creditworthiness of
a security distilled in a simple, easy to use grading system ("AAA" to "DDD"). Explanatory
information is typically provided with each rating.

Rating agencies gather and analyze a variety of financial, industry, market and economic
information, synthesize that information and publish independent, credible assessments of the
creditworthiness of securities and issuers thereby providing a convenient way for investors to
judge the credit quality of various alternative investment options. Rating agencies also publish
considerable independent research on credit markets, industry trends and economic issues of
general interest to the investing public.

By focusing on credit analysis and research, rating agencies provide independent, credible and
professional analysis for investors more efficiently than the investors could perform that analysis

Currently, we have over 3,200 institutional investors, financial institutions and government
entities subscribing to our research and ratings and thousands of investors and other interested
parties that access our research and ratings through our free website and other published sources
and wire services such as Bloomberg, Business Wire, Dow Jones, Reuters and Th 

Ratings are used by a diverse mix of both short-term and long-term investors as a common
benchmark to grade the credit risk of various securities.

In addition to their ease of use, efficiency and wide availability, we believe that credit ratings are
most useful to investors because they allow for reliable comparisons of credit risk across diverse
investment opportunities.

Credit ratings accurately assess credit risk in the overwhelming majority of cases. Credit ratings
have proven to be a reliable indicator for assessing the likelihood that a security will default.
Fitch's most recent corporate bond and structured finance default studies are summarized below.
The performance of ratings by the three NRSROs is quite similar. We believe this similarity
results from the reliance on fundamental credit analysis by the NRSROs and the similar
methodology and criteria of all of the NRSROs.

Through the years, NRSRO ratings also have been increasingly used in safety and soundness and
eligible investment regulations for banks, insurance companies and other financial institutions.
While the use of ratings in regulations has not been without controversy, we believe that
regulators rely on NRSRO ratings for the same reason that investors do: ease of use, wide spread
availability and proven performance over time.

Although other methods can be used to assess the creditworthiness of a security, such as the use
of yield spreads and price volatility, we believe that such methods, while valuable, lack the
simplicity, stability and track record of performance to supplant ratings as the preferred method
used by investors to assess creditworthiness.

However, we also believe that the market is the best judge of the value of ratings. We believe
that if ratings begin to disappoint investors they will stop using them as a tool to assess credit
risk and the ensuing market demand for a better way to access credit risk will rapidly facilitate
the development of new tools to replace ratings and rating agencies.

The Ce R÷

Pess c

We believe that for the most part credit rating agencies have adequate access to the information
they need to form an independent and objective opinion about the creditworthiness of an issuer.
While the rating agency exemption under Regulation FD helps to promote an uninhibited
response to requests for information, the nature and level of nonpublic information provided to
Fitch varies widely by company, industry and country. Nonpublic information frequently
includes budgets and forecasts, as well as advance notification of major corporate events such as
a merger. Nonpublic information may also include more detailed financial reporting.

While access to nonpublic information and senior levels of management at an issuer is

beneficial, an objective opinion about the creditworthiness of an issuer can be formed based
solely on public information in many jurisdictions. Typically, it is not the value of any particular
piece of nonpublic information that is important to the rating process, but that access to such
information and senior management can assist us in forming a qualitative judgment about a
company's management and prospects.

It is also important that rating agencies not be inhibited in requesting information and thereafter
subjecting that information to vigorous internal analysis and discussion. In that connection it is
critical that the courts afford shield law and journalist privilege protection to rating agencies so
that rating agencies are not unduly burdened by third-party discovery and the confidentiality of
their deliberative processes are respected.

Another factor critical to the adequate flow of information to the rating agencies is the
understanding that information can be provided to a rating agency without necessitating an
intrusive and expensive verification process that would largely if not entirely duplicate the work
of other professionals in the issuance of securities. Thus rating agencies do not perform due
diligence and assume the accuracy of the information that is provided to them by issuers and
their advisors. Since rating agencies are part of the financial media, we believe that our ability to
operate on this assumption, and to exercise discretion in deciding how to respond to
informational concerns, is protected by the First Amendment.

C s  ë ees c

@ees. We do not believe that the fact that the issuer pays a fee to Fitch creates an actual conflict
of interest, i.e., a conflict that impairs the objectivity of Fitch's judgment about creditworthiness
reflected in Fitch ratings. Rather, for the reasons stated below and based on our experience, it is
more appropriately classified as a potential conflict of interest, i.e., something that should be
disclosed and managed to assure that it does not become an actual conflict.

By way of contexti our revenue comes from two principal sources: the sale of subscriptions for
our research and fees paid by issuers for the analysis we conduct with respect to ratingscIn this
we are similar toother members of the media whichderive revenue from subscribers and
advertisers that includecompanies that they cover. Like other journalists, we emphasize
independence and objectivitybecause our independent, unbiased coverage of the companies and
securities we rateis important to our research subscribers and the marketplace in general.

Fitch goes to great efforts to assure that our receipt of fees from issuers does not affect our
editorial independence. We have a separate sales and marketing team that works independently
of the analysts that cover the issuers. In corporate finance ratings, analysts generally are not
involved in fee discussions. Although structured finance analysts may be involved in fee
discussions, they are typically senior analysts who understand the need to manage the potential
conflict of interest.
We also manage the potential conflict through our compensation philosophy. The revenue Fitch
receives from issuers covered by an analyst is not a factor in that analyst's compensation. Instead,
an analyst's performance, such as the quality and timeliness of research, and Fitch's overall
financial performance determine an analyst's compensation. Similarly, an analyst's performance
relative to his or her peers and the overall profitability of Fitch determine an analyst's bonus. The
financial performance of analysts' sectors or groups do not factor into their bonuses.

Fitch does not have an advisory relationship with the companies it rates. It always maintains full
independence. Unlike an investment bank, our fees are not based on the success of a bond issue
or tied to the level of the rating issued. The fee charged an issuer does not go up or down
depending on the ratings assigned or the successful completion of a bond offering.

Our fee is determined in advance of the determination of the rating and we do not charge a fee
for a rating unless the issuer agrees in advance to pay the fee. While we do assign ratings on an
unsolicited basis, we do not send bills for them. Any issuer may terminate its fee arrangement
with Fitch without fear that its rating will be lowered, although we do reserve the right to
withdraw a rating for which we are not paid if there is insufficient investor interest in the rating
to justify continuing effort to maintain it.

Rhy ësses Reqes O R÷

s. In the case of Fitch's corporate finance ratings, over 9Õ% of
the companies and financial institutions that we rate requested our rating (or the rating was
requested by the company's financial advisors or investors) and agreed to pay our fee even
though the entity is almost always already rated by both Moody's and S&P.

In structured finance, which accounts for over Õ0% of our revenue, we are frequently one of two
rating agencies rating a security chosen by the issuer from among the three agencies.

In structured finance, issuers select us to rate securities because of the excellent reputation we
have built for transparent, high-quality analysis, extensive research and comprehensive and
timely surveillance. In the case of corporate finance ratings, we believe that companies, financial
advisors and investors request a Fitch rating, and issuers agree to pay us to conduct our analysis,
because of the equally strong reputation of our corporate and financial institutions research.

Issuers chose to use and pay for a Fitch rating because our independent research improves
investor awareness, increases the liquidity of the issuer's securities and reduces the cost of funds.
In corporate finance ratings, academic research also supports the value of a third rating showing
that companies rated by a third rating agency improve their cost of funding.1

Dsse. Charging a fee to the issuer for the analysis done in connection with a rating dates
back to the late 19Ú0s. It is widely known by investors. Fitch firmly believes that the disclosure
of the arrangement by which an issuer pay fees to Fitch in connection with Fitch's ratings of the
issuer is appropriate. Accordingly, Fitch currently discloses that it receives fees from issuers in
connection with our ratings as well as the range of fees paid. This has been our practice for many
years. We do not believe, however, that it is necessary or appropriate to provide disclosure of the
specific fees or any more extensive financial disclosure. We believe that the specific fees we
charge and the revenue we derive from other sources are proprietary and if known by our
competitors, both of whom possess dominant market power in certain markets, would cause us
competitive injury. We believe that the far more important disclosure is that the fee arrangement
exists and the range of those fees.

A sy Se es. We also understand that concerns have been expressed that additional
conflict of interest issues are posed by rating agencies providing consulting or ratings advisory

By way of background,Fitch only recently introduced our Ratings Assessment Service. Since the
introduction of this service in May of this year, we have performed only two assessments.

Traditionally, Fitch received inquiries from time to time from issuers and their financial advisors
about the impact potential major corporate events such as acquisitions, recapitalizations and
major asset sales might have on the issuer's rating. As with all reasonable questions raised by an
issuer, the Fitch analyst receiving the inquiry would discuss the matter internally and attempt to
provide the issuer with an indication of the likely effect the event would have on the rating. We
considered this type of feedback to be a routine part of the rating process. The feedback was
informal and uncompensated.

Over the past few years, issuers and their financial advisors frequently asked Fitch to provide
them with a more definitive response to inquiries regarding the rating effect of major corporate
events. Frequently, they also would request our views on multiple scenarios relating to these
major events. These inquiries began to become more demanding in terms of the time
commitment required to address the inquiries.

Both of our competitors (S&P and Moody's) have for sometime been offering a similar paid
service to issuers. Several issuers and major financial advisors also told us that we were at a
competitive disadvantage because we did not offer a ratings assessment service. After significant
internal discussion, we launched our new service in reaction to issuer demand for more certainty
in the process of assessing the rating impact of a major corporate event.

Fitch does not tell issuers what they have to do to get a specific rating. The engagement letter
used for this service also asks the issuer to acknowledge that Fitch is not acting as its advisor in
this process and that a material change in the information provided, transaction structure,
economic environment or business conditions of the issuer may affect the final rating.

Based upon these procedures and the clear understanding of the issuer that the final rating can
change if circumstances change, Fitch believes that it will be at complete liberty to issue a
different final rating if circumstances change between the issuance of the conditional rating and
the final rating.

We are, however, mindful of the need to assure the independence of our ratings and we welcome
any suggestions as to how we might improve the rating assessment service to avoid or mitigate
any potential conflicts of interest.

C e ÷  B÷es  E y c

Fitch believes that our emergence as a global, full service rating agency capable of competing
against Moody's and S&P across all products and market segments has created meaningful
competition in the ratings market for the first time in years. Fitch's challenge to the
Moody's/S&P monopoly has enhanced innovation, forced transparency in the rating process,
improved service to investors and created much needed price competition.

Academic research confirms our belief that innovations in the ratings industry have often "been
initiated by the smaller rating firms [Fitch and its legacy firms], with the larger two [Moody's
and S&P] then following."2 At Fitch, we are particularly proud of the work that we have done in
the development of innovative methodologies to analyze new structured finance securities. These
innovations in the securities markets have had substantial economic benefits. For instance,
academic research has found that securitization has had a positive impact on both the availability
and cost of credit to households and businesses.3

Fitch firmly believes in the power of competition. We also believe that there is always a demand
for insightful, independent credit research. The NRSRO system is designed, appropriately in our
view, to assure that recognized organizations possess the competence to develop accurate and
reliable ratings and protect against the establishment of rating organizations that would
haphazardly issue investment grade ratings to low quality securities at any time. Without a
system to recognize rating organizations for their competence, many important capital adequacy
and eligible investment rules used in financial institution regulation would be ineffective.

We believe that the SEC should formalize the process by which a rating organization is
recognized. The criteria for recognition should include an evaluation of the organization's
capability, resources and independence, use of the organization's ratings by market participants
and studies of the performance of the ratings over time. We believe these are the reasons that
market participants widely use NRSRO ratings, whether or not they are subject to regulations
that refer to ratings. We also believe that the SEC should consider continuing the practice of
limited recognition that acknowledges the special expertise of smaller organizations in selected
areas of specialty such as the recognition of IBCA and BankWatch for their expertise in rating
banking and financial institutions.

While the NRSRO system is often cited as a barrier to entry for new rating organizations, we
believe that the debate over the NRSRO system ignores the single most important barrier to entry
in the ratings market: the Moody's/S&P monopolies.

Moody's and S&P are a dual monopoly, each possessing separate monopoly power in a market
that has grown to demand two ratings. Each engages in practices designed to perpetuate its
market dominance and extend it to otherwise competitive markets such as structured finance. As
we have publicly stated for more than a year, through their discriminatory practice known as
"notching", Moody's and S&P are successfully altering competition in the commercial and
residential mortgage-backed securities market by leveraging their monopoly position in other

No matter what the ultimate outcome is in the debate concerning the NRSRO system, new
entrants will have limited success competing with Moody's and S&P until their anticompetitive
behavior is appropriately addressed. Despite a decade of effort, multiple mergers and millions of
dollars of expense devoted to our effort to become fully competitive with Moody's and S&P,
Fitch may still be marginalized in formerly competitive markets because of the monopoly power
Moody's and S&P wield.

If the SEC wishes to address barriers to entry in the ratings market, the Commissioners should
consider enacting rules prohibiting anticompetitive conduct by NRSROs and precluding
NRSROs from discriminating against the ratings by other NRSROs for the purpose of preserving
market share.

Please feel free to contact me here at Fitch if you have any questions regarding Fitch or this

Very truly yours,

Stephen W. Joynt
President and Chief Executive Officer


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