In credit ratings, the issuer-pays model is the arrangement under which the company or government borrowing money pays the credit rating agency to grade its debt. It funds nearly every rating the major agencies produce and has been the industry standard since the early 1970s. The appeal is that once a rating is published, any investor can read it for free. The problem is just as obvious: the entity being judged is writing the check, and that tension has shaped decades of federal regulation, contributed to a financial crisis, and kept reform proposals circulating ever since.
How Issuers Pay and What They Pay For
When a corporation or government entity wants to issue bonds, it contracts with a rating agency to evaluate the debt. Fees vary with the type of security and the complexity of the analysis. Moody’s discloses that its fees range from $1,500 to $2,400,000 per engagement.1Moody’s Investors Service. Moody’s Investors Service Disclosure A plain corporate bond sits at the low end; a complex structured finance product backed by thousands of underlying loans commands far more work and a much larger fee.
Beyond the initial rating, issuers typically pay annual surveillance fees so the agency keeps monitoring the debt over its lifetime. Those ongoing fees cover analyst salaries, data infrastructure, and the periodic reviews that lead to upgrades or downgrades. The combined revenue from initial and surveillance fees is what lets agencies publish ratings freely. That is the core trade: issuers subsidize the system, and the broader market gets credit information without a paywall.
Federal rules draw a hard line between rating work and consulting. An agency cannot advise an issuer on how to structure its business, assets, or liabilities and then turn around and rate the result.2eCFR. 17 CFR 240.17g-5 – Conflicts of Interest The no-advice rule exists precisely because the issuer-pays relationship would otherwise invite agencies to help design a product and then stamp it with a favorable grade.
Why the Industry Switched From Investor-Pays
For the first seven decades of the credit rating industry, investors paid the bill. Agencies like Moody’s and Standard & Poor’s sold thick printed manuals to banks and institutional buyers through subscriptions. The model broke down in the early 1970s for practical reasons. Photocopiers made it easy to share ratings for free, which gutted subscription revenue. Around the same time, the Penn Central Railroad’s sudden bankruptcy in 1970 shook the debt markets and created urgent demand for broader, more widely available credit analysis. Agencies flipped the model, charged issuers instead of investors, and made ratings public.
That solved the distribution problem and created the conflict regulators have been managing ever since. When the entity being graded signs the check, the agency has an incentive to keep the client happy. The pressure stayed mostly theoretical until the structured finance boom of the 2000s turned it into a crisis.
The Conflict of Interest at the Heart of the Model
The problem is straightforward. If one agency refuses to give the rating an issuer wants, the issuer can take its business to a competitor. Agencies know this, so there is constant commercial pressure not to be the one that says no. The structured mortgage boom made the pressure acute. In the years before the 2008 collapse, agencies assigned top-tier grades to complex mortgage-backed securities that turned out to be far riskier than advertised. Moody’s alone downgraded tranches in over 94% of the subprime mortgage securities it had rated in 2006. The agencies earned enormous fees from the banks packaging these products, and the competitive dynamics of issuer-pays made it dangerous to be the holdout.
Congress responded with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which found that inaccurate ratings on structured products “contributed significantly to the mismanagement of risks by financial institutions and investors” and “adversely impacted the health of the economy in the United States and around the world.”3Office of the Law Revision Counsel. 15 USC 78o-7 – Registration of Nationally Recognized Statistical Rating Organizations Dodd-Frank created the SEC’s Office of Credit Ratings, expanded examination authority, mandated a look-back review for analysts who move to firms they rated, and lowered the bar for investor lawsuits.
The Guardrails Federal Rules Put Around It
Rather than replace the issuer-pays model, the regulatory response has been to build fences around it. The SEC oversees credit rating agencies through a registration system for Nationally Recognized Statistical Rating Organizations, with Section 15E of the Securities Exchange Act of 1934 providing the legal foundation.4U.S. Securities and Exchange Commission. About the Office of Credit Ratings As of early 2026, eleven agencies hold NRSRO registration, though three dominate the market: S&P Global Ratings, Moody’s Investors Service, and Fitch Ratings.5U.S. Securities and Exchange Commission. Current NRSROs Several specific rules target the conflict directly.
Data Sharing on Structured Finance
SEC Rule 17g-5 requires that when an agency rates a structured finance product, the issuer must maintain a password-protected website containing all the information provided to the hired agency. Any other registered NRSRO can access that site and produce its own unsolicited rating using the same data.6eCFR. 17 CFR 240.17g-5 – Conflicts of Interest If a competitor can see the same inputs and might publish a different grade, the hired agency has less room to inflate the rating without drawing scrutiny.
Revenue Concentration Cap
The same rule bars an NRSRO from rating any client that provided 10% or more of the agency’s total net revenue in the most recent fiscal year.6eCFR. 17 CFR 240.17g-5 – Conflicts of Interest No single client can become so financially important that the agency cannot afford to give it bad news. Smaller agencies feel this more because their revenue is naturally more concentrated. The SEC has occasionally granted temporary exemptions, but a March 2026 denial of an exemption request from Egan-Jones signals such relief is far from automatic.
Look-Back Review for Departing Analysts
When an analyst leaves an agency to work for a company that analyst previously rated, the agency must review whether the conflict influenced any ratings assigned during the year before the departure. If the review turns up a problem, the agency must revise the rating.3Office of the Law Revision Counsel. 15 USC 78o-7 – Registration of Nationally Recognized Statistical Rating Organizations The rule targets the revolving-door problem of an analyst issuing a generous grade to curry favor with a future employer.
Separation of Analysis and Sales
The analysts who determine a rating are prohibited from participating in fee negotiations or any commercial discussions with the client.3Office of the Law Revision Counsel. 15 USC 78o-7 – Registration of Nationally Recognized Statistical Rating Organizations Every NRSRO must also designate a compliance officer responsible for making sure the agency follows securities laws and its own policies. To preserve independence, the compliance officer’s compensation cannot be tied to the agency’s financial performance, and while serving in that role the officer is barred from performing credit ratings, developing methodologies, or participating in sales and marketing.7GovInfo. 15 USC 78o-7 – Registration of Nationally Recognized Statistical Rating Organizations The officer files an annual report with the SEC covering any material changes to ethics policies.
What Investors Can Do When a Rating Goes Wrong
Before Dodd-Frank, rating agencies were effectively shielded from most lawsuits. They argued successfully that their ratings were opinions protected by the First Amendment, and courts generally agreed. Section 933 of Dodd-Frank changed that. Investors can now pursue claims by showing that an agency knowingly or recklessly failed to conduct a reasonable investigation of the security it rated, or failed to obtain reasonable verification from independent sources. Section 933 also removed the discovery stay that had previously prevented plaintiffs from accessing internal agency documents during the early stages of a lawsuit, which had made cases nearly impossible to build.
In practice, these suits remain difficult. Proving recklessness rather than ordinary error is a high bar. But the threat of litigation is a backstop that did not exist before the financial crisis.
Enforcement in Practice
Dodd-Frank mandated the SEC’s Office of Credit Ratings, which conducts annual examinations of each registered agency and publishes a staff report summarizing its findings.8U.S. Securities and Exchange Commission. About the Office of Credit Ratings The examinations look at internal controls, governance, conflicts of interest, and whether an agency actually followed its own methodology.
The January 2025 staff report, covering examinations through late 2024, showed how issuer-pays conflicts still surface in practice. One large agency failed to enforce its own policies on analyst securities ownership, letting analysts hold securities of companies they were rating. In one case, an analyst voted on a rating committee while owning securities of the company being rated. At another agency, a senior employee involved in sales and marketing pressured an analyst to take rating actions on multiple credits, which led to an expedited and previously unscheduled rating committee.9U.S. Securities and Exchange Commission. 2024 Staff Report on NRSROs
The SEC also brought enforcement actions against multiple NRSROs in 2024 for failing to retain internal and external electronic communications related to rating decisions. Those record-keeping violations matter because without complete records, regulators and investors cannot reconstruct how a rating was reached or whether improper influences shaped it. When agencies violate federal securities laws, the SEC can impose tiered civil penalties that scale with the severity of the conduct and the harm caused.10Office of the Law Revision Counsel. 15 USC 78u-2 – Civil Remedies in Administrative Proceedings It can also revoke an agency’s registration entirely.
Alternatives and Why Issuer-Pays Has Survived
Issuer-pays has outlasted every reform effort since the financial crisis, but several alternatives have been proposed and, in limited cases, implemented.
- Investor-pays, the original model, is still used by Egan-Jones Ratings. Subscribers pay for access, which eliminates the issuer’s ability to shop for favorable grades. The downside is that ratings sit behind a paywall, which limits market transparency, and the model struggles to scale because a single investor’s willingness to pay is small relative to the cost of thorough analysis.
- Platform-pays, sometimes called the “Franken Rule” after Senator Al Franken’s proposed Dodd-Frank amendment, would have issuers pay into a common fund, with an independent board selecting which agency rates each deal. The issuer would have no say in the assignment. The proposal was studied but never enacted.
- Investor-produced ratings have grown at large asset managers like BlackRock and PIMCO, which have developed internal credit assessments for some structured products. These carry weight in the market but are not substitutes for formal NRSRO ratings because they lack the regulatory recognition that many institutional mandates require.
None of these has gained enough traction to displace the dominant model. Free, widely available ratings benefit the market as a whole, and issuer-pays is the only arrangement that has funded that public good at scale. The regulatory response has focused not on replacing the model but on building enough guardrails around it to limit the damage when the incentives push the wrong way.