CONSTITUTIONALITY OF CRA REGULATION
Constitutionality is an obvious prerequisite for any viable regulation. The state of First Amendment protection for credit rating agencies is to say the least evolving, and may be considered by the Supreme Court at some point in the future. There are two basic schools of thought as to how CRA First Amendment protection should be analyzed. The first is an “actual malice” standard, the exceptions of which have been analyzed by Federal Courts in the context of civil lawsuits. The other is a typical “commercial speech” analysis, which has yet to be attached to any analysis regarding CRAs.
In Abu Dhabi v Morgan Stanley, the Southern District of New York decided to apply an exception to the “actual malice” standard in a negligent misrepresentation case where information had been disseminated to a “select group of investors.” Under traditional “actual malice,” a plaintiff must prove the defendant conveyed information which is known to be false or has a reckless disregard for the truth or falsity of the statement. This recognition by the court in Abu Dhabi that negligent CRA statements can be regulated offers relief to plaintiff investors, except for the caveat that information can only be disseminated to a select group, not the public at large. This caveat, for the time being, seems to have been breached by the decision in Anschutz v Merrill, where the court upheld the validity of a negligent misrepresentation claim against a rating agency on the grounds that dissemination to the investing public does not invalidate its dissemination to a separate confined group. If the “actual malice” standard is determined to be the law of the land, it does create some avenues for plaintiff redress and governmental regulation, but if the decision in Anschutz is overturned, those possibilities will be greatly limited.
The Supreme Court may at some juncture instead impose upon rating agencies a standard of “commercial speech.” Under traditional commercial speech, as has become black letter under the Central Hudson Gas decision, the government can regulate truthful speech where 1.) a substantial government interest is served by the restriction, 2.) the regulation directly advances that interest, and 3.) the regulation is no more restrictive than necessary. This standard would make it easier for legislative forays into CRA regulation, but only time will tell what standard is ultimately adopted. Should the sections of the Dodd Frank bill that create a private right of action and prescribes particular methodologies in ratings be upheld, an additional statute criminalizing recklessness would likely also withstand scrutiny. However, the First Amendment implications of criminalizing the speech of rating agencies are more complex than can be discussed in this paper, and I would refer the reader to a Columbia Law Review article entitled “Talk That Isn’t Cheap…” for enhanced analysis of these issues.
Below is a section of Mark Baserman Jr's Fall 2011 article
regarding White Collar Crime:
Copyright © Mark Baserman. All rights reserved. License for cover image purchased through Adobe Stock on 07/14/2016.