Supreme Court, siding with the NRA, wades into the de-banking debate

Gun Rights
Supreme Court - NRA
The Supreme Court’s ruling kicks the case back to a lower court, which must now evaluate the facts of the National Rifle Association’s allegations.

A Supreme Court decision in a case involving the National Rifle Association could make it harder for regulators to discourage banks from doing business with specific industries.

The case, decided unanimously on Thursday, touches on a hot-button topic in banking supervision: the extent to which, and under what circumstances, regulators can attempt to influence banks’ decisions about which customers are acceptable.

The debate over so-called de-banking was particularly intense during the Obama administration, when the Department of Justice launched an initiative known as Operation Choke Point, which aimed to mitigate fraud by identifying high-risk bank customers and pressuring banks to cut them off from the payment system. Payday lenders led the backlash to both Choke Point and related efforts by the Federal Deposit Insurance Corp.

Last week’s Supreme Court decision involved another unpopular constituency in left-leaning circles: the NRA. The gun-rights advocacy group sued New York state officials, including former Department of Financial Services Supervisor Maria Vullo, after certain insurance companies that are subject to that state’s regulation curtailed their business ties to the NRA.

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The lawsuit alleges that Vullo pressured insurance companies — in violation of the First Amendment — to help stifle the NRA’s gun-rights advocacy.

In an opinion written by Justice Sonia Sotomayor, the court agreed with the NRA’s legal theory, concluding that the lawsuit “plausibly alleges that Vullo threatened to wield her power against those refusing to aid her campaign to punish the NRA’s gun-promotion advocacy.”

“If true, that violates the First Amendment,” Sotomayor wrote.

The NRA, which had legal representation from the American Civil Liberties Union, declared victory.

“The opinion confirms what the NRA has known all along: New York government officials abused the power of their office to silence a political enemy,” William Brewer III, one of the NRA’s lawyers, said in a press release. “This is a victory for the NRA’s millions of members and the freedoms that define America.”

However, the 9-0 decision is not the final word. The Supreme Court assessed the constitutional argument under the assumption that the NRA’s claims are true. Now, a lower court must hash out whether the advocacy group’s factual allegations have merit.

Vullo, who was the sole defendant in the Supreme Court appeal, could also still prevail based on a legal doctrine called “qualified immunity,” which can shield government officials from legal liability.

Neal Katyal, a lawyer at Hogan Lovells who represented Vullo, expressed disappointment in the Supreme Court’s decision. “Ms. Vullo did not threaten, coerce or retaliate against anyone in the performance of her duties,” he said in a written statement. 

“This case will now go back to the 2nd Circuit, which threw out the lawsuit on qualified immunity grounds before,” Katyal said. “The Supreme Court did not address the qualified immunity decision of the 2nd Circuit, and we are confident Ms. Vullo’s claim of qualified immunity will be reaffirmed.”

New York’s response to a mass school shooting

The events at issue in the lawsuit played out against the backdrop of the Feb. 14, 2018, mass killing at Marjory Stoneman Douglas High School in Parkland, Florida. Then-New York Gov. Andrew Cuomo was among the Democratic politicians who denounced the NRA.

In April 2018, the Cuomo administration issued a press release that referenced the Parkland shooting and stated that the governor had “directed the Department of Financial Services to urge insurance companies, New York State-chartered banks and other financial services companies licensed in New York to review any relationships they may have with the National Rifle Association and other similar organizations.”

The same day, the Department of Financial Services issued letters to state-regulated banks and insurers, providing guidance regarding “risk management relating to the NRA and similar gun promotion organizations.”

“DFS is encouraging regulated entities to consider reputational risk and promote corporate responsibility in an effort to encourage strong markets and protect consumers,” the Cuomo administration said in its April 19, 2018, press release. “A number of businesses have ended relationships with the NRA following the Parkland, Florida, school shooting in order to realign their company’s values.”

Before the Parkland shooting, the New York State Department of Financial Services had been investigating an insurance policy offered to NRA members. The investigation found that the policy insured gun owners from intentional criminal acts in violation of New York law, and that the NRA promoted the policy without the required insurance producer license.

In its lawsuit, the NRA alleges that less than two weeks after the Parkland shooting, Vullo met with senior executives at Lloyd’s of London, which underwrote insurance policies that the NRA offered as a benefit to its members. In the meeting, Vullo allegedly implied that the regulator would forgive certain infractions if the insurance company dropped gun group clients, “especially the NRA.”

Katyal, the attorney who represents Vullo, described the NRA’s allegations about the Lloyd’s meetings as “false.”

“Ms. Vullo did not violate anyone’s First Amendment rights,” Katyal said in his written statement. “Ms. Vullo enforced the insurance law against admitted violations by insurance entities, and industry letters such as those issued by Ms. Vullo are routine and important tools regulators use to inform and advise the entities they oversee about risks.”

Todd Phillips, a bank regulation law professor at Georgia State University and former FDIC lawyer, said he fears the Supreme Court’s ruling will inhibit bank regulators from issuing important guidance.

In the case against Vullo, the NRA says that it was punished for its gun-rights advocacy. How courts might respond to similar First Amendment claims by other industries, such as cryptocurrency firms, fossil fuel companies or payday lenders, is unclear.

“The fact of the matter now is that if there’s any financial institution, or a customer of a financial institution, who can claim that what they’re doing is protected by the First Amendment, that may result in regulators being unable to effectively protect the American public,” Phillips said.

Reputational risk, de-banking and the First Amendment

Brian Knight, senior research fellow at the pro free market Mercatus Center at George Mason University, agreed that the high court’s ruling will encourage clients of banks and insurance companies to sue regulators on First Amendment grounds.

“I think you’re going to see customers be more likely to sue regulators claiming that there’s been regulatory pressure to de-bank them, because the court seemed to give the green light to that,” Knight said.

Phillips noted that although the Supreme Court decision may embolden plaintiffs that can make First Amendment claims, a court must still decide whether Vullo truly did violate the Constitution.

“The Supreme Court has made a ruling about what the First Amendment means,” Phillips said. “Now the NRA needs to actually prove its case, and that’s just going to be a different animal.”

The case against Vullo has certain parallels with the decade-ago fight over Operation Choke Point. In both cases, a targeted industry alleged that regulators were trying to hide their political or ideological motivations. Both situations involved the contested concept of reputational risk for regulated financial institutions. And in both cases, the regulators defended their use of guidance as a tool to influence regulated companies’ decision-making.

During the fight over Choke Point, payday lenders and gun manufacturers accused policymakers of seeking to blackball politically disfavored business sectors. The Obama administration’s defenders noted that many companies in the sectors targeted by Operation Choke Point exhibited red flags for high levels of consumer fraud.

In an amicus brief filed in support of Vullo, financial regulation and administrative law scholars, including Phillips, disputed the comparison between the NRA’s case and Operation Choke Point. 

“While [Operation Choke Point] has ‘taken on symbolic and mythic proportions in partisan discourse about regulation generally and regulation of the financial sector specifically,’ it was in reality a fairly transparent, rational response to the growing threat posed by internet-abled financial crime,” the brief said.

Knight said that he thinks the NRA’s case and Operation Choke Point both show that guidance from regulatory agencies influences industries and companies that rely on access to the financial system. He hopes the decision will limit future regulator warnings.

“I think regulators should take from this that they have to be more circumspect about using guidance and soft regulation, or persuasion, or pressure, aimed at groups or activities that are legal but disfavored by the regulator,” Knight said.

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