By Ria Dutta
“I disapprove of what you say, but I will defend to the death your right to say it.”
One celebrated defense for liberal First Amendment-free speech protection is the importance of maintaining a robust “marketplace of ideas.” But what role does the First Amendment play in the financial market? How does the First Amendment speak to Wall Street?
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 “Big Three” ratings agencies (Standard & Poor’s, Moody’s, 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 from A+ to A. And just last month, S&P put U.S. debt on negative outlook without lowering its AAA rating—the highest rating it gives—despite the fact that the U.S. is more highly-leveraged than Spain, which is on the brink of bankruptcy.
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 of speech is a credit rating? First Amendment protection will hinge on whether credit ratings are “core political” or “commercial” speech.
Core political speech is subject to O’Brien strict scrutiny. If courts determine that credit ratings are core political speech, most government regulation of securities will be subject to strict scrutiny—making regulation nigh impossible. Fortunately, even the agencies will likely concede that credit ratings are not core political speech, but rather commercial speech.
Commercial speech is “expression related solely to the economic interests of the speaker and its audience.” Though credit ratings are clearly economic and commercial in content, this is not what makes them “commercial” 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.
As commercial speech, credit ratings will be subject to the four-factor Central Hudson test:
“For commercial speech to come within [the First Amendment],  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 first step of Central Hudson—whether or not credit ratings are misleading—presents a very clear circularity problem. Currently, there is no objective standard for “misleading speech” 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?
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.