1. Can Reform Be Made Feasible?
The Impact of Credit Rating Agencies on Financing for Sustainable Development
December 8, 2014
Economic and Social Council
UNITED NATIONS
Can Reform Be Made Feasible?
John C. Coffee, Jr.
Adolf A. Berle Professor of Law
Columbia University Law School
Director, Center on Corporate Governance, Columbia University Law School

2. Many commentators have noted that the “issuer pays” model for credit ratings creates a conflict of interest: the credit rating agency (“CRA”) needs the loyalty of the issuer more than that of the end user.
Empiricists have also found that increased competition aggravates this problem, and ratings tend to become more inflated as competition increases.
On the international scene, more CRAs compete and the prospect for ratings inflation (and ultimately lost issuer credibility) thus grows.
Also, on the international scene, some believe that unsolicited ratings can be employed to compel issuers to retain CRAs (i.e., the implicit threat is that the rating will be worse if the CRA is not retained).
Still, the end users of credit ratings (debt purchasers) show little willingness to pay for ratings.
Policy Dilemma: How can the contemporary “issuer pays” model be feasibly reformed so that we can move at least part way to a “subscriber-pays” (or at least a “subscriber chooses”) model for credit ratings?

3. A PROPOSAL:
We need to opt for the least drastic means and legislation is not feasible.
Instead, self-help could work through two steps
The formation of a voluntary, non-for-profit organization created by the major institutional investors who purchase debt securities in global markets—the “Council of Investors in Debt Securities” (or “CIDS”);* and
The entry by CIDS into a Code of Ethics and Best Practices that would be entered into with most CRAs and major debt issuers (including sovereign issuers).
This Code of Ethics and Best Practices would provide:
No Threats or Suggestions that Retention of a CRA Will Produce an Improved Rating (But it would not bar unsolicited ratings).
Consultation Before a Ratings Release or Downgrade: the CRA would agree to meet and discuss its proposed action with the issuer.
*Such a body could resemble the “Council of Institutional Investors” (“CII”)—a highly
effective organization of equity investors in the U.S.

4. Recognition of the Right of Debt Purchasers to Chose a “Lead CRA”
Recognition of the Right of Debt Purchasers to Chose a “Lead CRA”. A Steering Committee of the CIDS would select a “Lead CRA” for each debt offering by an issuer that was a signatory to the Code of Ethics. This would not preclude the issuer from retaining an additional CRA or CRAs, but the issuer (if it paid any fee) would agree to pay the “Lead CRA” a reasonable fee comparable to that paid by it to other CRAs.
Separate Ratings Would Be Given to Reflect “Sustainability” Criteria. That is, the CIDS would ask CRAs to prepare two ratings: one to reflect “creditworthiness” and the other to reflect “sustainability.” The premise here is that one rating cannot sensibly measure both.
Enforcement Would Be Voluntary and the CIDs Would Investigate and Report on Noncompliance. In effect, the CIDS would be giving its “seal of approval”, which would be intended to enhance the credibility of ratings (and thereby reduce the cost of capital).