Talk that Isn't Cheap: Does the First Amendment Protect Credit Rating Agencies' Faulty Methodologies from Regulation?
Caleb M. Hayes-Deats
United States Department of Justice - Southern District of New York
February 4, 2010
Columbia Law Review, Forthcoming
The Restoring American Financial Stability Act of 2010 enacted unprecedented regulation of rating agencies’ methodologies and created a new standard governing agencies’ private liability. Less than a year before the passage of that Act, however, Abu Dhabi Commercial Bank v. Morgan Stanley & Co. reaffirmed that rating agencies receive robust First Amendment protection under “typical circumstances,” even as it denied such protection where agencies “disseminated their ratings to a select group of investors.” How do these actions by coordinate branches of government fit together? Specifically, what bounds does the First Amendment place on Congress’s ability to regulate rating agencies, and how do those bounds affect the Restoring American Financial Stability Act of 2010? These questions are especially relevant given rating agencies’ roles in precipitating the financial crisis of 2008.
This Note argues that, given developments in the rating industry and the regulation that has applied to it, courts should reject the test outlined in Abu Dhabi and instead analyze certain, problematic ratings as commercial speech. Such analysis offers rating agencies limited protection that accommodates the First Amendment’s concern for the free flow of information, yet still allows Congress to both regulate agencies’ methodologies and impose a liability standard that deters misconduct. Analyzed under the commercial speech framework, the Restoring American Financial Stability Act of 2010 is consistent with the First Amendment.
Keywords: Credit Rating Agencies, First Amendment, Actual Malice, Commercial Speech, Moody's, S & P, Abu Dhabi Commercial Back v. Morgan Stanley & Co.
Date posted: April 1, 2010 ; Last revised: July 3, 2010