I need help understanding why does US legal system affords journalistic protection of free speech to credit rating agencies (CRA), especially those which rated mortgage backed securities (MBS) and were heavily involved in the global financial crisis of 2008. I could buy that story if CRAs were publishing their unsolicited opinions on their web-site. But what CRA actually did regarding rating of MBS was solicited and paid expertize that did not only express opinion of future performance of the product, but also actively participate in the design of the product (example, see Levin report p. 287[1])

On another occasion in March 2007, a Moody’s analyst emailed a colleague about problems she was having with someone at Deutsche Bank after Moody’s suggested adjustments to the deal: “[The Deutsche Bank investment banker] is pushing back dearly saying that the deal has been marketed already and that we came back ‘too late’ with this discovery .… She claims it’s hard for them to change the structure at this point.

(emphasis mine)

That is not what journalists do but more akin to, let say, if I hire a civil engineering firm to design me a bridge. Construction firm observes the project to the letter and builds me one. But the design is so bad that bridge collapses with the very first wind. Why can’t they say - hey, it was only our 1st Amendment protected opinion that the bridge can hold its own weight and function as a traffic infrastructure, holding us responsible if it didn’t would be a denial of the freedom of speech.

On the other hand, CRAs did just that. They inspected the product and gave it highest rating available. Investors would pour money and security would fail a few months later, but it seems that CRAs hold court tested immunity for whatever they say. It should also be noted that these securities were failing for intrinsic reasons - simply , teaser rates ran out for underline obligations or they were unable to refinance or documentation was so lacking that proper assessment could not be made, but that can not exonerate CRAs as all those information was available at the time of rating.

So what is the key legal difference that distinguishes CRA and all other professionals that are actually responsible for their work?

[1] Wall Street and Financial Crisis: Anatomy of a Financial Crisis, US Senat PSI

  • Where exactly do you get the idea that this was a free speech issue...?
    – Stackstuck
    Mar 9 '18 at 9:02
  • Credit Rating Agencies: Self-regulation, Statutory Regulation and Case Law ... by Mohammed Hemraj, section 6.7.1. where is claimed: "The CRA First Amendment will continue to remain CRAs' core defence in the US as Congress is barred from curtailing freedom of speech, or freedom of the press.". There is a copy in Google Books goo.gl/vdJx5b Mar 9 '18 at 9:45
  • 1
    What responsibility do you think they have? Do you believe there is a criminal statute they have violated, or are you wondering why no one has gone after them for civil damages? It would help if you specify which action you believe should be taken which has not been taken. Mar 9 '18 at 22:01
  • @IllusiveBrian Follow-up googling showed that several civil cases against CRAs were raised and that First Amendment was not as solid defense as once were but is still their go-to move when sued. As far I can tell most of these cases get settled and verdict on 1stA defense is seldom delivered. As for your question, I'm going to argue below that solicited, for profit, expert advisory on specific subject should not be afforded same protection as journalistic speech. To my mind, there should be SEC enforced regulation in place regarding CRAs. Mar 11 '18 at 9:35
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    You say that CRAs have claimed First Amendment protection as a defense, but has that defense ever been sustained in a judicial ruling? I.e., is there any law establishing that they have immunity? Entities can claim all sorts of immunity; that doesn't mean they have it. As I understand: following the 2008 crisis there was a great deal of (extra-judicial) renegotiation of the role and terms under which CRAs can act, and one would have to scrutinize the settlements and regulatory changes to find what law was in fact accepted and applied.
    – feetwet
    Mar 11 '18 at 16:39

@DavidSiegel aptly analyzes the constitutional issue presented here. But, it isn't necessary to reach the constitutional issue to make it a close case.

The common law rule is that someone making a statement can be liable for false material statements about presently existing material facts, but cannot be liable for statements of opinion, because statements of opinion are inherently neither true nor false.

The question presented with respect to common law liability is whether a too high credit rating is a statement about a presently existing material fact, which is actionable, or an opinion, which i not actionable.

The argument that a credit rating is more than a "mere opinion" that is incapable of being true or false, is that credit ratings are prepared based upon a careful methodology that is based upon presently existing material facts. Thus, the argument goes, rather than being a mere opinion, a credit rating is better described as a summary or compilation of presently existing material facts, from which presently existing material facts underlying the rating can be inferred, or if it is so discretionary that a credit rating doesn't really imply any underlying basis in presently existing material facts.

The methodology used by credit reporting agencies, the way business people use the credit reports of companies (especially in bond trading), the way that federal securities law regulation uses credit ratings of companies from this agencies, and securities fraud caselaw holding that statements that historically would have been considered opinion in common law fraud cases that imply facts are actionable for statutory securities fraud claims, all argue that credit reporting agencies should be exposed to liability because a credit rating from such an agency can be a misrepresentation (at least if it is far off the mark in light of objective methodological concerns).

The argument in favor of not holding credit reporting agencies liable for inaccurate credit ratings is basically that they have acted in reliance on long standing common law case law holding that there is no liability for statements of opinion, and that the credit reporting agencies didn't bargain for this potential liability when they issued their reports (for fees that were a tiny percentage of their potential liability).

Even if civil liability is rare, a ruling that there is liability for an inaccurate credit rating essentially turns what was a zero liability risk line of business into a business where basically 100% of their work product could expose them to liability if a company with a good credit rating defaults, particularly because the credit reporting agency itself claims argue from historical records, that a credit rating disclosed a percentage likelihood of default, but recognizes that any company with any credit rating could default on its debts.

If credit reporting agencies knew that they were exposed to so much liability for their credit ratings when they charged fees to prepare them, they argue, they would have charged ten times a much or more for this work, in much the way that an attorney preparing an opinion letter on the law that exposes the attorney to liability if the opinion letter is wrong charges much more than their hourly rate for essentially guaranteeing that courts will treat a transaction as the lawyer claims that they should.

Critics of this argument, however, say that it is possible in many clear cases to say that the rating itself clearly made a bad estimate of the probability of default and not just whether there would be a default or not, based upon the standards that credit reporting agencies use to assign the ratings in the first place.

The answer from @DavidSiegel notes that the First Amendment defense failed in many of these cases in preliminary motion practice in these cases. But those decisions didn't resolve those cases on the merits of the claims made, and I'm not aware of how these cases were resolved on the merits. I suspect that many settled, thereby not creating binding case law, but I don't know how they were resolved in the end.

  • Isn't it true that under the common-law rule, even false statement of fact can only result in liability if they cause unjust benefit to the liar, or unjust harm to someone else, and only if it was reasonable others to rely on them, and only if the falsehood was knowing? That last point would, I should think, shield non-negligent credit rating reports,. absent a statute imposing liability. Jul 29 at 0:33
  • @DavidSiegel These are credit ratings of corporate bonds whose interest rates are a direct product of their bond rating. The unjust harm to someone else and the reasonableness of reliance would be easy, and these statements were made for pay providing a benefit, so that is easy too. There is also strong evidence showing knowledge that the ratings assigned were inappropriate based upon their past and current rating standards. They knew about the elephant in the room and disregarded it..
    – ohwilleke
    Jul 29 at 19:26
  • Well, the line "the credit reporting agencies didn't bargain for this potential liability when they issued their reports" reads kinda weak because all CRA need to register as "nationally recognized statistical rating organizations" or "NRSRO" overseen by SEC. By registering, they commit to certain booking and statistical standards of work. Furthermore, local goverments are bound by law to get credit rating from NRSROs before getting loan thus such status affords CRA preferential status in the free market, but also burdens their expression with civil liability. In my humble opinion, anyway :) Aug 1 at 11:11
  • To my mind, there is key difference between expression of opinion and solicited, for profit, expert opinion on specific subject. Free market of providers of expert opinion is legally strictly limited because lawmakers are aware that foul expert opinion can inflict considerable damage. Just because of that, experts, who enjoy restricted competition in open market, should therefore have responsibility to conduct themselves in accordance with professional standards. This is true for medical doctors, civil and electrical engineers, lawyers - should be true for CRAs.In any case, thanks for answers! Aug 1 at 11:23

In the 2010 blog post "Another Court Rejects Rating Agencies’ First Amendment Defense" author Kevin LaCroix quotes a then-recent district court opinion, which, he says, included the following:

The court rejects Defendants’ arguments that the First Amendment to the United States Constitution preempts Plaintiff’s claims. The right to free speech allows us to give our opinions to things of public concern. The issuance of these SIV ratings is not, however, an issue of public concern. Rather, it is an economic activity designed for a limited target for the purpose of making money. That is not something that should be afforded First Amendment protection and the Defendants are not akin to members of the financial press.

However, the link given by LaCroix to the full opinion is no loner valid, the case name or number is not cited, and I have not been able to find the opinion via a google search.

However, in the somewhat related issue of those credit reporting agencies which report on consumer credit , I found "Court rejects First Amendment attack on credit bureau regulation and other financial follies" mentioning Shamara King v. General Information Services (Eastern District of Pennsylvania, 2012) in which, the article says, a claim that the Fair Credit Reporting act (FCRA) violated the First Amendment was rejected. The actual opinion supports that view, and is at least somewhat relevant to the question asked here.

The District Court opinion says:

GIS challenges section 1681c of the FCRA on First Amendment grounds, arguing that the provision’s restriction on the dissemination of truthful commercial information cannot survive the “heightened” constitutional scrutiny endorsed and applied by the Supreme Court in its recent decision, Sorrel v. IMS Health, Inc., 131 S.Ct. 2653 (2011). GIS contends that the Sorrel decision marks a major shift in the protection afforded to commercial speech, which now requires this Court to apply a stricter standard of review than the one typically applied.

... Where the information is “solely in the interest of the speaker and its specific business audience” and made available to a limited number of subscribers, the credit report information concerns no public issue and therefore warrants a reduced First Amendment protection. Dun & BradStreet, Inc. v. Greenmoss Builders, Inc., 472 U.S. 749 (1985) ...

Applying these principles to the case at hand, this court finds that the consumer report information disseminated by GIS concerns purely private matters. The very fact that GIS compiles consumer reporting information for the purpose of making a profit and its business customers purchase such reports in order to make business decisions supports the proposition that the dissemination of this information is of sole interest to the speaker (GIS) and its audience (business customers). ...

The appropriate test for analyzing the reduced First Amendment protection accorded to consumer report information is the Supreme Court’s commercial speech doctrine. In Central Hudson Gas & Elect. Corp. v. Public Serv. Comm’n of N.Y., 447 U.S. 557 (1980) it was said:

At the outset, we must determine whether the expression is protected by the First Amendment. For commercial speech to come within that provision, it at least must concern lawful activity and not be misleading. Next, we ask whether the asserted governmental interest is substantial. If both inquiries yield positive answers, we must determine whether the regulation directly advances the governmental interest asserted, and whether it is not more extensive than is necessary to serve that interest.

The standard of review articulated in Central Hudson, and long applied by federal courts, is intermediate scrutiny. Yet, the Defendant urges this Court to apply strict scrutiny, in light of the Sorrel decision. ... For support, GIS specifically points to the fact that the Supreme Court declined to decide whether the Vermont law hampered commercial speech or ordinary speech because the outcome was the same regardless of the level of scrutiny. See Sorrel, 131 S. Ct. at 2667. ...

Certainly, the Sorrel decision reaffirms the core meaning of the First Amendment and attempts to guide lawmakers trying to protect privacy interest without unduly suppressing speech. However, the Supreme Court stopped far short of overhauling nearly three decades of precedent, which is clearly demonstrated by the fact that the opinion characterizes commercial speech precedence, including Central Hudson itself, for support ... This alone is enough to find that the typical commercial speech inquiry under intermediate scrutiny remains valid law.

Furthermore, the Sorrel decision is particular to the Sorrel facts. Sorrel features the clashing interests of the State of Vermont and the pharmaceutical industry during a period of spiraling healthcare costs. In an effort to reduce its growing healthcare expenditures, Vermont embarked on a targeted cost-containment campaign and enacted a statute that unambiguously regulated the use of prescriber identifying information in order to curb the use of brand name drugs. 131 S. Ct. at 2660-61. The Supreme Court found that, “[t]he law on its face burden[ed] disfavored speech by disfavored speakers” and “ha[d] the effect of preventing detailers – and only detailers – from communicating with physicians in an effective and informative manner.” ... Hence, the Sorrel decision largely rested on the fact that Vermont was restraining a certain form of speech communicated by a certain speaker solely because of the State’s disagreement with it.

The instant matter, however, has nothing to do with the federal government trying to “tilt the public debate” in order to favor one form of speech over another. Here, the federal government enacted section 1681c of the FCRA to provide businesses with the most accurate and relevant information while simultaneously protecting the privacy rights of consumers. More important, section 1681c’s speech restriction is appropriately justified. ...

The stated purpose of the FCRA is “to require that consumer reporting agencies adopt reasonable procedures for meeting the needs of commerce . . . in a manner which is fair and equitable to the consumer.” 15 U.S.C. § 1681(a)(4).

... By barring consumer reporting agencies from disclosing adverse pieces of information after a certain period of time, section 1681c directly advances the governmental interest in protecting individuals’ privacy in potentially harmful and embarrassing information. ...


... Given the fact that Congress seeks to protect individuals’ personal privacy in potentially harmful information, restraining the dissemination of such information under appropriate circumstances is a reasonable step towards achieving such an objective.


Why does the US afford First Amendment protection to CRAs? Because it can not legally do otherwise.

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

Freedom of speech is not absolute -- it has a couple of limitations from common law. (You can't commit fraud or perjury, for example.) But it's pretty damn close. This isn't some special protection offered to CRAs -- every person in the US has it -- and limitations on what anyone can report would infringe the First Amendment.

What makes CRAs different from you or me is that they use that freedom. They depend on it. They need it, for all of the same reasons journalists need it -- it is precisely their job to say things that certain people might not want said.

The key difference between CRAs and journalists is that a credit rating is not a statement of fact. It is one company's opinion of the subject's ability to meet future obligations. A "forward-looking statement" (ie: prediction) is inherently a statement of opinion; it literally can not be false at the time it is made (as there isn't even any way to prove or disprove the proposed future until the actual future has happened). And the First Amendment arguably protects opinions more than any other type of expression.

(Now, if "their opinion" was based on an unreported conflict of interest, then they might be liable (and probably in violation of SEC regulations as well). But absent that, you can't be sued just for having stupid opinions.)

Your bridge builders and architects don't get that protection because bridge building isn't speech. The First Amendment might protect the process and the bridge inasmuch as they can be considered "expression", but no further. And since that bridge will presumably be used by the public, the government has a vested interest in not letting you create a death trap.

  • Thanks for responding, I'll give a quick follow-up in an answer. Mar 11 '18 at 9:36
  • That's not what answers are for, so your reply is likely to get deleted. I've copied it, and will address in more detail later. But architects don't just draw pics -- in designing for someone who wants a particular type of structure, they imply that the structure is fit for that purpose. (They might even have to explicitly certify that; i'm not an architect, so i don't know how that all works.) But the soundness of the design can be verified by physics equations. If those equations show it's unsound, then the architect has not done the job they were contracted, and thus legally bound, to do.
    – cHao
    Mar 11 '18 at 18:14
  • I wasn't aware I crossed the line, I'd delete it myself but it seems I don't have delete button available. Mar 11 '18 at 21:25
  • I tried to delete it but it only changed color. Mar 11 '18 at 21:26
  • Yeah, it'll get a colored background. You can still see your own deleted answers, but others can't.
    – cHao
    Mar 11 '18 at 21:35

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