Proposals Pending to Eliminate Ratings’ First Amendment Protection

February 2, 2010 by · Leave a Comment
Filed under: The Rating Agencies 

The free speech provisions of the First Amendment currently protect rating agency opinions. Although in the past the agencies have been sued for ratings given to investments that did not meet stated objectives, the agencies have never been found liable. This is because the burden of proof is the same as for libel. The plaintiff must demonstrate malice. Suggested legislation, proposed rule changes by the SEC and pending court cases are challenging this protection.

By law, financial statements and disclosures must be factually accurate and complete. However, credit ratings have been exempt from this legal standard since 1981 by the SEC. Proponents of revoking this exception argue that the rating agencies should be held to the same standard and that liability will lead to more accurate ratings.

Opponents have four primary objections: First, the nature of the rating agency’s work is purely speculative and there will always be factors that are impossible to anticipate and will impact investment performance. Second, a rating is an opinion. A person has always been free to accept a rating or reject it. A prudent investor should use a rating as only one of several measures of risk.

Third, removing the protection would lead to extensive litigation that would place an undue burden on the ratings agencies. And finally, future ratings would be designed to avoid legal action and would likely be so indeterminate to pass legal review that they would be virtually useless.

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