Note: Federal Preemption and the Rating Agencies: Eliminating State Law Liability to Promote Quality Ratings
By Timothy M. Sullivan. Full text here.
The credit rating agencies remain under intense scrutiny amidst the current financial crisis. Congress is currently considering multiple proposals to alter the federal regime for regulating rating agencies. Meanwhile, large-scale investors such as the California Public Employees Retirement Services (CalPERS) have commenced major litigation to recover losses allegedly suffered because of rating-agency failures related to subprime mortgage-backed securities. None of the proposals currently before Congress addresses the role that private litigation based on state law should or should not play in the regime for regulating rating agencies. This Note argues that existing federal law directed at rating-agency regulation preempts state-based claims such as those asserted by CalPERS; however, the preemption provision itself and the lack of illuminating legislative history leave room for disagreement on the scope of preemption. Thus, this Note urges Congress to expressly consider whether state law claims against rating agencies would detract from the goal of improving rating accuracy. Concluding that state law claims against rating agency would work against improving rating accuracy, this Note argues that Congress should amend existing legislation to decisively preempt state law claims against rating agencies.