### CONSTITUTIONALITY OF MANDATORY

REGISTRATION OF CREDIT RATING AGENCIES

The Administration’s proposal for mandato ry registration of credit rating agencies, which would include an exemption designed to address First Amendment concerns, would satisfy the First Amendment’s requirements.

October 22, 2009

LETTER OPINION FOR THE A SSISTANT SECRETARY FOR

FINANCIAL INSTITUTIONS

U.S. DEPARTMENT OF THE TREASURY

You have asked us to assess whether the Administration’s proposal for mandatory registration of credit rating agen cies, which would include an exemption designed to address First Amendment concerns, would be constitutional . For the reasons given below, we conclude that the Administration’s registration pr oposal would satisfy the First Amendment’s requirements. 1

Under existing law, a credit rating agency may “ elect[] to be treated as a nationally recognized statistical rating orga nization” by furnishing an app lication demonstrating that it meets certain criteria. 15 U.S.C. § 78 o -7(a)(1)(A) (2006) (emphasis ad ded). A registered credit rating agency receives certain benefits by bei ng a “nationally recognized rating organization” and must abide by certain statutory requirements. See id. § 78 o -7. As we understand it, the

Administration wishes to ame nd the law to make it mandatory for credit rating agencies to register as nationally recognized statistical rating organizations—t o the extent consistent with

the Constitution. The current definition of “credit rating agency” is any person

(A) engaged in the business of issuing credit ratings on the Internet or through another readily accessible means, for free or for a reasonable fee, but does not include a commercial credit reporting company;

(B) employing either a quantitative or qual itative model, or both, to determine credit ratings; and

(C) receiving fees from either issuers, inve stors, or other market participants, or a

combination thereof.

1 Our conclusion assumes that application of the particular requirements and limitations that would be required of registered agencies would be tailored in accord with First Amendment requirements so that there would be no unconstitutional constraints imposed on the speech of registered agencies. We have not had sufficient time to

consider the various particular regulat ory requirements, either under the exis ting statute or in the Administration’s proposal, and we express no view on whether any particular requirement would be constitutionally permissible as applied to the publication or conveyance of particular credit ratings. It is our understanding that, under the Administration’s proposal, those requirements and limita tions would only take effect once the Securities and Exchange Commission issues regulations implementing the new statute—regulations that that would have to reflect any exemptions or limitations the First Amendment may require.Opinions of the Office of Legal Counsel in Volume 33

Id. § 78c(a)(61).

A requirement that all “credit rating agen[cie s]” so defined register with the federal government would implicate the First Amendmen t because such a requirement may impose at least some burden on their speech activities—namely, “issuing credit ratings on the Internet or through another readily accessible means, for fr ee or for a reasonable f ee.” “As a matter of principle,” the Supreme Court ha s explained, “a requirement of re gistration in order to make a public speech would seem generally incompatible w ith an exercise of the rights of free speech and free assembly.” Thomas v. Collins , 323 U.S. 516, 539 (1945); see also id. at 540 (“If the exercise of the rights of free speech and free as sembly cannot be made a crime, we do not think this can be accomplished by the device of requi ring previous registra tion as a condition for exercising them and making such a condition th e foundation for restraining in advance their exercise and for imposing a penalty for violating such a restraining order.”).

In light of these First Amendment concerns, analogous registration requirements in other financial regulatory statutes in clude exemptions designed to avoi d constitutional problems. The Investment Advisers Act, for example, contains an exemption from its registration requirement for “the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation.” 15 U.S.C. § 80b- 2(a)(11). And the Commodity Futures Trading Commission has adopted by regu lation an exemption from the registration requirement of the Commodity Exchange Act for any person that “does not engage in . . . [d]irecting client accounts; or . . . [p]roviding commodity trading a dvice based on, or tailored to, the commodity interest or cash market positions or other circumstances or characteristics of particular clients; or . . . [i]f, as provided for in section 4m(1) of the Act, during the course of the preceding 12 months, it has not furnished commodity trading advice to more than 15 persons and it does not hold itself out genera lly to the public as a commodity trading advisor.” 17 C.F.R. § 4.14(a)(9), (10).

The Administration’s proposal mirrors these other financial regulatory statutes. The proposal would exempt from the re gistration requirement any credit rating agency that satisfies two criteria: (i) it does not provide ratings of securities in excha nge for fees or other forms of compensation from the securities’ issuers; and (ii) it issues credit ratings only in any bona fide newspaper, news magazine or business or financial publication of general and regular

circulation. 2

Although the precise line for First Amendment purposes is not absolutely clear in this area, we believe that a mandatory registra tion requirement for cred it rating agencies that contained such an exemption would comply with the First Amendment. We begin with the prong of the exemption that would require credit rating agencies to issue credit ratings only in any bona fide newspaper, news magazine or bus iness or financial publication of general and regular circulation. This prong of the exemption derives from the Supreme Court’s treatment of

2 The second criterion is adapted from the current Investment Advisers Act, which, as we explain below, the Supreme Court has construed so as to avoid First Amendment concerns. We assume the criterion in the proposed exemption would be given a similar construction.

2Constitutionality of Mandatory Registration of Credit Rating Agencies

the similar Investment A dvisers Act exemption in Lowe v. Securities and Exchange Commission

, 472 U.S. 181 (1985).

In that case, the Securities and Exchange Commission had sought to enjoin Lowe from publishing an investment advice newsletter b ecause it had previously revoked his registration as an investment adviser under the Act, due to hi s conviction for a series of financial crimes. Particularly in light of the “important cons titutional question” ra ised by such a bar on publication, the Court read the Ac t’s exemption for the “publisher of any bona fide newspaper, news magazine or business or fi nancial publication of general and regular circulation” broadly to shield Lowe’s newsletter, which reached an audience of between 3,000 and 19,000 subscribers.

Id. at 188, 185. The Court further held that al though Lowe’s publication of his securities newsletters had not been “regular ” in the sense of consistent ci rculation—in that the newsletters had not been published on a regular semimonthl y basis as advertised—t hey were nevertheless “regular” for purposes of the Investment Advisers Act because there was “no indication that they have been timed to specific market activity, or to events affecting or having the ability to affect the securities industry.” Id. at 209. The Court explained that its reading of the Act was informed by “the apparent intent of Congress to keep the Act free of constitutional infirmities.” Id . at 207. The majority contrasted the character of Lowe’s newsletter publishing, which it implied was entitled to strong First Amendmen t protection, with professional services involving speech that may be subjected to regulation without offending the First Amendment, such as the provision of legal advice by lawyers to their clients. The former, the Court emphasized, involved “communications [with] subscribers [that] remain entirely impersonal and,” unlike the latter, “do not develop into the kind of fiduciary, person-to-person relations hips that were discussed at length in the legislative history of the Act and that are characterist ic of investment adviser-client relationships.” Id . at 210; see also id . at 210 n.57 (noting that it was “significant” that Lowe did not engage in “individualized, investment-related interactions” with his subscribers).

In a separate opinion in Lowe by Justice White, three Justices found that the Act’s statutory “publisher” exemption c ould not be construed to apply to Lowe’s irregular publication, and therefore addressed the First Amendment questi on directly. They obse rved that the “power of government to regulate the professions is not lost whenever the practice of a profession entails speech,” id. at 228, “[b]ut the principle that the government may rest rict entry into professions and vocations through licensing schemes has neve r been extended to encompass the licensing of speech per se or of the press. . . . At some point , a measure is no longer a regulation of a profession but a regulation of speech or of the pr ess; beyond that point, the statute must survive the level of scrutiny demanded by the First Amendment.” Id. at 229-30. In attempting to “locate the point where regulation of a profession leaves off and prohibitions on speech begin,” Justice White wrote,

[o]ne who takes the affairs of a client pe rsonally in hand and purports to exercise judgment on behalf of the client in the light of the clie nt’s individual needs and

circumstances is properly viewed as engaging in the practice of a profession. Just as offer and acceptance are communications incidental to the regulable transaction called a contract, the profe ssional’s speech is incident al to the conduct of the profession. If the government enacts gene rally applicable licensing provisions limiting the class of persons who may practice the professi on, it cannot be said to

3Opinions of the Office of Legal Counsel in Volume 33

have enacted a limitation on freedom of speech or the press subject to First Amendment scrutiny. Where the personal nexus betw een professional and client does not exist, and a speaker does not pur port to be exerci sing judgment on behalf of any particular individual with whose circumstances he is directly acquainted , government regulation ceases to fu nction as legitimate regulation of professional practice with only incidental impact on speech; it becomes regulation of speaking or publishing as such, subject to the First Amendment’s command that “Congress shall make no law . . . abri dging the freedom of speech, or of the press.”

Id. at 232 (emphasis added); see also Thomas , 323 U.S. at 544-45 (Jackson, J., concurring) (“Though the one may shade into th e other, a rough distinction alwa ys exists, I think, which is more shortly illustrated than explained. A state may forbid one without its license to practice law as a vocation, but I think it could not stop an unlicensed person from making a speech about the rights of man or the rights of labor, or a ny other kind of right, incl uding recommending that his hearers organize to support his views. Li kewise, the state may pr ohibit the pursuit of medicine as an occupation without its license, but I do not think it could make it a crime publicly or privately to speak urging pe rsons to follow or reject a ny school of medi cal thought.”).

In accord with the majority and concurring opinions in Lowe regarding the line between impermissible regulations on speech and “merely permissible regulation of a profession,” we

think the First Amendment concerns that a ma ndatory registration requirement may raise are addressed by an exemption for agencies that supply ratings tailored to meet the needs of individual clients. The Court has adopted a so mewhat similar line in determining whether credit reports constitute matters of public concern warranting heightened protection in defamation

actions. See Dun & Bradstreet v. Greenmoss , 472 U.S. 749, 761-63 (1985) (plurality opinion) (concluding that a credit report issued confidentially to five subscribers di d not constitute speech about a matter of public concern requiring a pl aintiff to show “actual malice” in a defamation suit). 3 The distinction between the provision of advice tailored to m eet the needs of individual

3 In accord with Dun & Bradstreet , lower courts considering credit rating agencies’ First Amendment defenses to claims for defamation, fraud, and various other business torts (as well as breach of contract in at least one instance) have looked in part to whether the reports we re distributed to a public audience or tailored to a discrete group of clients. See

, e.g., Compuware Corp. v. Moody’s Investors Servs., Inc ., 499 F.3d 520, 525-34 (6th Cir. 2007) (affirming grant of summary judgment in favor of credit rating agency defendant on defamation and breach of contract claims based on “actual malice” requirement where ratings were made available to the public); Abu Dhabi Commercial Bank v. Morgan Stanley & Co., Inc. , No. 08-Civ-7508(SAS), 2009 WL 2828018, *9 (S.D.N.Y. Sept. 2, 2009) (rejecting First Amendment defense to various common law tort claims, including fraud, in part because “plaintiffs have plainly alleged that the . . . ratings were never widely disseminated, but were provided instead in connection with a private placement to a select group of investors”); In re Nat’l Century Fin. Enters., Inc., Inv. Litig. , 580 F. Supp. 2d 630, 640 (S.D. Ohio 2008) (rejec ting First Amendment defense to securities fraud and various common law claims in part because ratings disseminated to a “select class of investors”); In re Enron Corp.

, 511 F. Supp. 2d 742, 820 (S.D. Tex. 2005) (finding that the First Amendment shielded credit rating agency from negligent misrepresentation claim where the “credit rating reports regarding Enron by national credit rating agencies were not private or confidential, but distributed ‘to the wo rld’ and were related to the creditworthiness of a powerful public corporation that operated internationally”). At least one court of appeals has invoked the same consideration as one of its reasons for ruling that a cred it rating agency could not avail itself of a statutory state-law journalist’s privilege to refuse to comply with a subpoena. In re Fitch, Inc. , 330 F.3d 104, 109 (2d Cir. 2003) (“[u]nlike a business newspaper or magazine, which would cover any tr ansactions deemed newsworthy, Fitch only ‘covers’ its own clients”); see also id. at 110 (“Fitch’s information-disseminating activity does not seem to be based on a

4Constitutionality of Mandatory Registration of Credit Rating Agencies

clients, on the one hand, and publication of opini ons to a wide audience, on the other, supports the second prong of the Administration’s proposed exemption, i.e., that credit rating agencies would be exempt from registration only if th ey “issue credit ratings only in any bona fide newspaper, news magazine or business or financial publication of general and regular circulation.” If a credit rating agency provides ratings to select investor clients, tailoring the speech it undertakes to those clients’ needs, it is engaged in the sort of speech akin to that of other professionals when they advise their client s—speech that is constitutionally distinct from the publication of facts or opini ons to the public at large. See Taucher v. Born , 53 F. Supp. 2d 464 (D.D.C. 1999) (Commodity Exchange Act requi rement that commodity trading advisors register with Commodity Futures Trading Commission was unc onstitutional as applied to publishers of general commodity trading informa tion strategy and advice, and trading systems, who made general buy and sell r ecommendations not tailored to a ny specific individuals, and never had contact with individual investors).

Indeed, federal courts have repeatedly rejected First Amendment challenges to professional licensing statutes as applied to persons who provide se rvices to particular clients, and do not simply offer published advice or information to the general public. See

, e.g. , National Ass’n for the Advancement of Psychoanal ysis v. California Bd. of Psychology , 228 F.3d 1043, 1053-55 (9th Cir. 2000) (psychologists/psychoanalysts); Lawline v. American Bar Ass’n , 956 F.2d 1378, 1386 (7th Cir. 1992) (lawyers); Accountant’s Soc’y of Va. v. Bowman , 860 F.2d 602, 603-05 (4th Cir. 1988) (accountants); Fidelity Nat’l Info. Solu tions, Inc. v. Sinclair , No. Civ. A. 02-6928, 2004 WL 764834 (E.D. Pa. Mar. 31, 20 04) (real estate appraisers); see also Planned Parenthood of Southeastern Pa. v. Casey , 505 U.S. 833, 884 (1992) (plura lity opinion) (rejecting doctors’ argument that they had a First Amendm ent right not to provide information to their patients about the risks of aborti on, and childbirth, in a manner ma ndated by state statute; “To be sure, the physician’s First Amendmen t rights not to speak are impli cated, . . . but only as part of the practice of medicine, subjec t to reasonable licensing and regulation by the State.”). These precedents provide support for the application of the registration requirement to credit rating agencies that do not limit their issuance of credit ratings only to any bona fide newspaper, news magazine or business or financial publication of general and regular circulation.

The same reasons that support the constitutionality of mandatory registration for credit ratings agencies that do not sati sfy the general publication crite rion described above also support application of that registration re quirement to any credit rating agen cy that receives fees or other forms of compensation from issuers of securities in return for its provision of rati ngs. Just as a credit ratings agency may be required to regist er, in accord with the distinction set forth in Lowe

, if it provides individual ized advice to client investors , so, too, can registration be required if the agency provides its ratings (even to a public au dience) as a professiona l service on behalf of

individual issuers of securities. When a credit rating agen cy is hired by a particular issuer to rate a particular security, it is providing a particular client with a valuable professional service tailored to that client’s needs, one for whic h the issuer-client is willing to pay, presumably because it believes the agency will “exercis e judgment on behalf of the client,” Lowe , 472 U.S. at 232 (White, J., concurring), in order to advance the issuer’s own commercial goals. Cf.

judgment about newsworthiness, but rather on client needs. We believe this weighs against Fitch being able to assert the privilege for th e information at issue.”).

5Opinions of the Office of Legal Counsel in Volume 33

Commercial Fin. Servs., Inc. v. Arthur Andersen LLP , 94 P.3d 106, 110 (Okla. Civ. App. 2004) (rating agencies sued by issuer that hired it not protected by Fi rst Amendment against liability for negligent misrepresentation b ecause “[w]hile the Rating Agenci es gave ‘opinions,’ they did so as professionals being paid to provide their opinions to a client”). 4

This conclusion is bolstered by our unde rstanding, based on information provided by officials at the Treasury Departme nt, that a payment by an issuer to a credit rating agency in exchange for issuance of a rating ordinarily entails receipt of the rating by the issuer in advance of public disclosure, and the oppor tunity for discussion and exch ange between the issuer and agency during the development of the rating. In this respect, this criterion of the proposed exemption would appear to be similar to an element of the exemption under the Commodity Exchange Act for “commodity trading advice based on, or tailored to, the commodity interest or cash market positions or other circumstances or char acteristics of particular clients.” 17 C.F.R. § 4.14(a)(9). To be sure, in developing the ratin g for the client, the credit rating agency may provide a neutral and candid assessment, using pr ofessional methods. But the same is true of accountants and other professionals when they give their clients advice, and yet those professionals may be required to register consistent with the First Amendment. Admittedly, even issuer-paid agencies typically convey their ratings to the public. But other professionals who may be required to register also may subsequently convey to a wider audience some of the information the client has retained them to provide . It is the fact of the individualized provision

of a service to a client that supports the registration requireme nt in either case. Although widespread publication of their ra tings may be more central to the service provided by credit rating agencies than is the le ss frequent public speech by members of regulated professions acting on behalf of their clients (such as when a lawyer publicly discloses an advice-of-counsel letter), this appears to us to be a di fference of degree rather than of kind. Cf

. Lowe , 472 U.S. at 231 (White, J., concurring) (“the distinguishing fact or was whether the speech in any particular case was ‘associat[ed] . . . with some other factor which the state may regulate so as to bring the whole within official control’” (quoting Thomas , 323 U.S. at 547)). In light of the contextspecific analysis courts have followed in assess ing First Amendment protections in such cases, we believe findings reflecting the realities of how credit rating agencies operate in providing ratings, such as those that w ould support the representations made to us by the Treasury Department, would bolster the legal basis for a mandatory registration requirement.

/s/

DAVID J. BARRON Acting Assistant Attorney General

4 We recognize that at least two lower courts, in determining whether a credit rating agency was entitled to the benefit of a statutory journalist’s privilege, have reject ed the significance of the fact that the agency had been hired by the issuer. See In re Pan Am Corp.

, 161 B.R. 577 (S.D.N.Y. 1993); In re Scott Paper Company , 145 F.R.D. 366 (E.D. Pa. 1993). But the lower courts are divide d on that issue, even in the context of that analogous statutory question. See In re Fitch, Inc. , discussed supra note 3. Moreover, the considerations relevant to the application of the statutory journalist’s privilege may differ from those that determine the constitutional permissibility of a registration requirement.

6