{"id":283,"date":"2011-08-15T00:01:46","date_gmt":"2011-08-15T04:01:46","guid":{"rendered":"http:\/\/jlpp.org\/old_blog\/?p=283"},"modified":"2011-08-15T00:01:46","modified_gmt":"2011-08-15T04:01:46","slug":"say-what-you-mean-credit-ratings-speech-and-the-law","status":"publish","type":"post","link":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/2011\/08\/15\/say-what-you-mean-credit-ratings-speech-and-the-law\/","title":{"rendered":"Say What You Mean: Credit Ratings, Speech and the Law"},"content":{"rendered":"

By Ria Dutta<\/a><\/p>\n\n

\n

\u201cI disapprove of what you say, but I will defend to the death your right to say it.\u201d<\/p>\n

\u2013Evelyn Beatrice Hall<\/a><\/p>\n<\/blockquote>\n\"\"<\/a>

One celebrated defense for liberal First Amendment-free speech protection is the importance of maintaining a robust \u201cmarketplace of ideas.\u201d  But what role does the First Amendment play in the financial<\/em><\/strong> market?  How does the First Amendment speak to Wall Street?<\/p>\n

The subprime crash brought this question into stark focus, because of the role credit ratings agencies played in precipitating the asset-backed securities bubble.  The \u201cBig Three\u201d ratings agencies (Standard & Poor\u2019s, Moody\u2019s, and Fitch) failed spectacularly in pricing securities in the months leading up to the subprime crash.  For example, in June 2008, just three months before Lehman Brothers declared bankruptcy, S&P downgraded Lehman debt<\/a> from A+ to A.  And just last month, S&P put U.S. debt on negative outlook<\/a> without lowering its AAA rating\u2014the highest rating it gives\u2014despite the fact that the U.S. is more highly-leveraged than Spain<\/a>, which is on the brink of bankruptcy.<\/p>\n

Many investors who relied upon agency ratings in making investment decisions have brought suit against the agencies for fraud and misrepresentation.  In response, many of the agencies have raised First Amendment defenses.  But what type<\/em><\/strong> of speech is a credit rating?  First Amendment protection will hinge on whether credit ratings are \u201ccore political\u201d or \u201ccommercial\u201d speech.<\/p>\n

Core political speech is subject to O\u2019Brien<\/a> strict scrutiny.  If courts determine that credit ratings are core political speech, most government regulation of securities will be subject to strict scrutiny\u2014making regulation nigh impossible.  Fortunately, even the agencies will likely concede that credit ratings are not core political speech, but rather commercial speech.<\/p>\n

Commercial speech is \u201cexpression related solely to the economic interests of the speaker and its audience.”<\/a>  Though credit ratings are clearly economic and commercial in content, this is not what makes them \u201ccommercial\u201d for speech purposes.  They are potentially commercial speech because they are issued by private companies to be used by investors as part of capital-raising, profit-seeking activities.  Arguments that agencies merely issue ratings to disinterestedly comment on the credit-worthiness of securities are spurious.<\/p>\n

As commercial speech, credit ratings will be subject to the four-factor Central Hudson<\/a> test:<\/p>\n\n

\n

“For commercial speech to come within [the First Amendment], [1] it at least must concern lawful activity and not be misleading. [2] Next, we ask whether the asserted governmental interest is substantial.  If both inquiries yield positive answers, [3] we must determine whether the regulation directly advances the governmental interest asserted, and [4] whether it is not more extensive than is necessary to serve that interest.”<\/p>\n<\/blockquote>\n

The first step of Central Hudson\u2014whether or not credit ratings are misleading\u2014presents a very clear circularity problem.  Currently, there is no objective standard for \u201cmisleading speech\u201d and until one is articulated, it is impossible to determine whether speech is misleading without self-reference to speech itself.  Moreover, credit ratings involve complex methodology and are speculative by nature; how are courts to determine whether the ratings were misleading ex-ante?<\/p>\n

As the law currently stands, Central Hudson provides no protection for injured investors.  The next blog post on this topic will consider legal alternatives for redress outside of the First Amendment.<\/p>","protected":false},"excerpt":{"rendered":"

Ria Dutta explores how the First Amendment may interface with credit ratings, with an eye on recent activity by Standard & Poor\u2019s.<\/p>\n","protected":false},"author":1,"featured_media":358,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[28],"tags":[283,415,416,439,536,656,859,860,927,1201,1305,1317,1654],"class_list":["post-283","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-student-blogs","tag-central-hudson","tag-credit-ratings","tag-credit-ratings-agencies","tag-daniel-guzman","tag-eic","tag-first-amendment","tag-interviews","tag-investing","tag-law","tag-political-speech","tag-reliance","tag-ria-dutta","tag-wall-street"],"acf":[],"_links":{"self":[{"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/posts\/283","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/comments?post=283"}],"version-history":[{"count":0,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/posts\/283\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/media\/358"}],"wp:attachment":[{"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/media?parent=283"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/categories?post=283"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/tags?post=283"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}