This is the abstract of an article on tort liability on erroneous credit ratings, which is contained in the Journal of Business Administration & Law, Vol.14 No.2, published in March 2004.
It is a generally accepted practice regardless of individual or institutional investors to refer to the credit ratings on a number of candidate securities in the capital market. If the securities carry an investment grade, investors are willing to believe there would be a little chance of default to maturity. If not, he will go to law against the credit rating agency for a wrongful rating.
So the credit rating agencies make it a rule to remind clients of the caution that the rating on the bonds, commercial papers and other securities is provided only for reference to investment, and does not guarantee the repayment nor solicit the investment of those securities.
However, the Act on the Protection and Use of the Credit Information requires the credit rating agency to take into account the financial status, business operations, various risks involved and other projections of the applicant in a comprehensive manner, and prevents the professional house from conducting credit rating intentionally or out of gross negligence to cause a material loss to investors of those securities. If the forbidden things happen, the company might be subject to the suspension of business or revocation of business authorization, and even the penal punishment. And further, the agency should compensate the damages to the client in case of its fault.
On the other hand, the Securities Transaction Act sets forth that any misrepresentation in the prospectus with respect to the securities or the issuer, which inflicted a loss to investors, shall hold the credit rating agency, that has certified the contents of the prospectus, responsible for the damages. However, the professional liability concerning securities was to be borne by certified public accountants or certified assessors before credit rating agencies were included in the professionals responsible for the erroneous prospectus statements in April 1999 when the amendment to the Securities Transaction Act came into force. It is quite contrary to the situation in the United States. The Securities Act of 1933 and SEC Rule 436 exempt the credit agency from damages for the reason that a credit rating does not constitute a part of the prospectus.
Nowadays the function of the credit rating agency is increasingly important in the capital market. If the agency is held heavily responsible for its rating, then the investors might be protected from the erroneous credit rating. But a few rating company would survive highly changeable capital market. Otherwise, on the contrary, the professional house would go too far without a sense of responsibility.
This article discussed the legal nature of the responsibility of the credit rating agency. Its responsibility to pay for loss or damages inflicted on investors is believed to derive from the provisions of law, breach of contract, professional negligence, or the explicit or implied warranty with regard to the credit rating itself. At the same time, it should be noted that the U.S. court ruled the credit rating report is protected under the actual malice standard set out in a series of the U.S. Supreme Court decisions. The First Amendment on the freedom of expression is interpreted into a principle that a publisher does not incur liability for a false statement unless the statement was made with actual malice, i.e., with knowledge that the statement was false or with reckless disregard for whether or not it was true.