Graduate Conference Follow Up: First Amendment Opportunism

There is something deeply counterintuitive in constitutional rights claims such as freedom of speech that are rooted not in protection of private life, but in mitigating financial losses. The fact that businesses can invoke the First Amendment arguments is not in itself new. In late 70s, the First Amendment was used to protect economic liberty in cases of commercial speech and, more specifically, price advertisement. Frederick Schauer (2000) pointed out quite insightful that people and organizations with a wide array of goals use First Amendment argument when "find that society has not given them the doctrinally or rhetorically effective argumentative tools they need to advance their goals."

The unique problem associated with granting the First Amendment protection to market players and, more specifically, credit rating agencies, is their ability to argue that their function is merely to provide “opinions”. The credit rating agencies long maintained that their core business is financial publishing and, therefore, were generally shielded from liabilities under the securities law unless actual malice is demonstrated. The credit rating agencies had some success in persuading courts that their core activities constitute a matter of public concern and holding a credit rating agency liable for its bond ratings would have an oppressive effect on the publication of important financial information to the public.

My conference presentation illustrated the phenomenon with a series of court cases. Various courts have reached a range of results in cases filed against the rating agencies. Even though the rating business can be positioned as publishing of financial opinions, such a publisher can be held liable for malfeasance. Further, the securities law regulates commercial speech by providing for liability for false and misleading statements. Applicable to the credit rating business, the court have distinguished whether rating agencies were merely collecting and analyzing information or were playing a more significant role in the transaction thus can be qualified as agents of the issuer. On the other hand, the United States Supreme Court has stated that it is difficult to see why the expression of opinion about a marketable security should not also be protected: credit rating agencies do not profit from the sale of the bonds of any company that they rate for creditworthiness and they perform an essential service for economy and efficiency of the capital markets.

In light of the on-going credit crisis fueled, in part, by poor performance of the credit ratings and heightened concerns regarding rating agencies independence, the courts are less likely to establish First Amendment protection of credit rating opinion. We can point out at least two reasons: (1) if a credit rating opinion is not disseminated to investment public at large, but only made available to a limited number of investors (i.e., private ratings) then such an opinion is less likely to qualify a "matter of public concern;" (2) if a credit rating opinion is published in regard to a security that was structured followed an instructive communication process between a rating agency's analysts and underwriters then such a process is less likely to qualify as merely publishing, but could be viewed by the courts as administering a professional advice. In addition, in foreign jurisdictions where the freedom of speech argument is less culturally accepted, credit rating agencies may have to use other argumentative tools to organize the defense.

Schauer, F., 2000, First Amendment Opportunism, KSG Working Paper No. 00-011

Graduate Conference Follow Up: First Amendment Opportunism