                       CONSTITUTIONALITY OF MANDATORY 

                    REGISTRATION OF CREDIT RATING AGENCIES 


        The Administration’s proposal for mandatory 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 ASSISTANT 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 agencies, 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 proposal 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 organization” by furnishing an application demonstrating that it
meets certain criteria. 15 U.S.C. § 78o-7(a)(1)(A) (2006) (emphasis added). A registered credit
rating agency receives certain benefits by being a “nationally recognized rating organization”
and must abide by certain statutory requirements. See id. § 78o-7. As we understand it, the
Administration wishes to amend the law to make it mandatory for credit rating agencies to
register as nationally recognized statistical rating organizations—to 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 qualitative model, or both, to determine credit
         ratings; and

         (C) receiving fees from either issuers, investors, 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 regulatory requirements, either under the existing 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 limitations 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[cies]” so defined register with the federal
government would implicate the First Amendment 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 free or for a reasonable fee.” “As a matter of
principle,” the Supreme Court has explained, “a requirement of registration in order to make a
public speech would seem generally incompatible with 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 assembly cannot be made a crime, we do not think
this can be accomplished by the device of requiring previous registration as a condition for
exercising them and making such a condition the 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 include exemptions designed to avoid 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 regulation 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 advice 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 generally 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 registration requirement any credit rating agency that satisfies
two criteria: (i) it does not provide ratings of securities in exchange 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 registration requirement for credit 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 business 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.



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                 Constitutionality of Mandatory Registration of Credit Rating Agencies

the similar Investment Advisers 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 because it had previously revoked his registration
as an investment adviser under the Act, due to his conviction for a series of financial crimes.
Particularly in light of the “important constitutional question” raised by such a bar on
publication, the Court read the Act’s exemption for the “publisher of any bona fide newspaper,
news magazine or business or financial 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 although Lowe’s publication of his securities
newsletters had not been “regular” in the sense of consistent circulation—in that the newsletters
had not been published on a regular semimonthly basis as advertised—they 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 Amendment 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 relationships that were discussed at
length in the legislative history of the Act and that are characteristic 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 could not be construed to apply to Lowe’s irregular publication,
and therefore addressed the First Amendment question directly. They observed 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 restrict entry into professions
and vocations through licensing schemes has never 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 press; 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 personally in hand and purports to exercise
       judgment on behalf of the client in the light of the client’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 professional’s speech is incidental to the conduct of the
       profession. If the government enacts generally applicable licensing provisions
       limiting the class of persons who may practice the profession, it cannot be said to



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                             Opinions 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 between professional and client
         does not exist, and a speaker does not purport to be exercising judgment on
         behalf of any particular individual with whose circumstances he is directly
         acquainted, government regulation ceases to function 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 . . . abridging 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 the other, a rough distinction always 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 any other kind of right, including recommending that
his hearers organize to support his views. Likewise, the state may prohibit 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 persons to follow or reject any school of medical 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 mandatory 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 somewhat 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 did not constitute speech
about a matter of public concern requiring a plaintiff to show “actual malice” in a defamation
suit).3 The distinction between the provision of advice tailored to meet 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 were 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) (rejecting 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 world’ 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 credit 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 transactions 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


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                   Constitutionality of Mandatory Registration of Credit Rating Agencies

clients, on the one hand, and publication of opinions 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 they “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 clients—speech that is constitutionally distinct from
the publication of facts or opinions to the public at large. See Taucher v. Born, 53 F. Supp. 2d
464 (D.D.C. 1999) (Commodity Exchange Act requirement that commodity trading advisors
register with Commodity Futures Trading Commission was unconstitutional as applied to
publishers of general commodity trading information strategy and advice, and trading systems,
who made general buy and sell recommendations not tailored to any 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 services 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 Psychoanalysis 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. Solutions, Inc. v. Sinclair, No. Civ. A.
02-6928, 2004 WL 764834 (E.D. Pa. Mar. 31, 2004) (real estate appraisers); see also Planned
Parenthood of Southeastern Pa. v. Casey, 505 U.S. 833, 884 (1992) (plurality opinion) (rejecting
doctors’ argument that they had a First Amendment right not to provide information to their
patients about the risks of abortion, and childbirth, in a manner mandated by state statute; “To be
sure, the physician’s First Amendment rights not to speak are implicated, . . . but only as part of
the practice of medicine, subject 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 satisfy the general publication criterion described above also support
application of that registration requirement to any credit rating agency that receives fees or other
forms of compensation from issuers of securities in return for its provision of ratings. Just as a
credit ratings agency may be required to register, in accord with the distinction set forth in Lowe,
if it provides individualized advice to client investors, so, too, can registration be required if the
agency provides its ratings (even to a public audience) as a professional service on behalf of
individual issuers of securities. When a credit rating agency 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 which the issuer-client is willing to pay, presumably
because it believes the agency will “exercise 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 the information at issue.”).



                                                        5
                             Opinions 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 First Amendment against liability
for negligent misrepresentation because “[w]hile the Rating Agencies gave ‘opinions,’ they did
so as professionals being paid to provide their opinions to a client”).4

         This conclusion is bolstered by our understanding, based on information provided by
officials at the Treasury Department, 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 opportunity for discussion and exchange 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 characteristics of particular clients.” 17 C.F.R.
§ 4.14(a)(9). To be sure, in developing the rating for the client, the credit rating agency may
provide a neutral and candid assessment, using professional 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 requirement in either case. Although
widespread publication of their ratings may be more central to the service provided by credit
rating agencies than is the less 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 difference of degree rather than of kind. Cf. Lowe, 472 U.S. at
231 (White, J., concurring) (“the distinguishing factor 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 context-
specific analysis courts have followed in assessing 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 would 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 rejected 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 divided 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

