Some big news happened last week (no, not that big news). The Supreme Court in a unanimous decision, written by Justice Sotomayor, found that the NRA stated a valid legal claim when it alleged Maria Vullo, the former Superintendent of the New York Department of Financial Services (NYDFS), pressured regulated banks and insurance companies to suppress the NRA’s pro-gun advocacy. (Full disclosure: I co-authored an amicus brief in support of cert and in support of the NRA on the merits with Prof. George Mocsary and Trent McCotter of Boyden Gray PLLC)

The NRA alleges that Vullo used her power over regulated financial institutions to harm the NRA’s ability to advocate for Second Amendment rights. Although the NRA is a Second Amendment group, this case hinged on the scope of its First Amendment rights.

The opinion of the court is short, taking up 19 pages. Unsurprisingly, given the posture of the case and the fact it was unanimous, the case focuses on First Amendment law and precedent, with limited discussion of financial regulation.

That said, this case does have important implications for financial regulation, even if it didn’t get into the weeds.

The case reached the Court at an early stage of the case, requiring the Court to accept as true the allegations in the NRA’s complaint. The question before the Court is not “what happened” or “did Vullo commit a constitutional violation.” Instead, it is “if what the NRA alleges is true could this be a first amendment violation.”

And the answer was a resounding “Yes!” All the justices agreed that the Second Circuit made a mistake in dismissing the NRA’s lawsuit. The case has been remanded back to the Second Circuit for further proceedings,

What the Court said (and didn’t say) about Financial Regulation

While the Court’s opinion is focused primarily on First Amendment issues, that doesn’t mean however that this case has nothing to say about financial regulators and their conduct.

First, it is notable that the Court dismissed Vullo’s argument that she wasn’t regulating the NRA or speech, but merely the non-expressive conduct of the banks and insurance companies she is expected to regulate.  The Court accepted that regulatory pressure by a state agency could harm an unregulated third-party. The Court’s opinion makes clear that financial regulators cannot use their power over regulated entities as conduits of coercion to do indirectly what they cannot do directly.

It is also notable that the Court rejected out of hand the Second Circuit’s position that Vullo’s alleged actions were simply the legitimate exercise of her authority. The Court rejected the idea that offering of leniency for other violations if insurance companies would drop the NRA and similar groups, or the issuance of guidance documents warning banks and insurers of potential reputation risk of doing business with the NRA or similar groups and reminding them of their legal obligation to manage such risks could not have been coercive and inappropriate.

That said, there are some interesting questions the Court chose not to address. One important one is what happens if a regulator is truly neutral but warns banks and insurers about the reputation risk of doing business with groups who are controversial because of their speech or other constitutionally protected activity?

Imagine a world where the NYDFS issues a warning motivated solely by concern that public backlash against the NRA will harm the financial status of banks and insurers? Banks and insurers would incorporate into their decision whether to drop a client not only the public pressure directly, but also the risk that the regulator would penalize them for insufficient risk management, even if the regulator had no political axe to grind. Would that be ok, or would that amount to the regulator’s action chilling speech?

Vullo was so nakedly hostile to the NRA that this question may not come up in the present case, but a future case where a regulator is more neutral, or at least more subtle, may present it.

Another question is what if there isn’t a First Amendment question, or a constitutional question at all? What about a regulator pressuring regulated entities to cut ties with gun companies, or legal aid societies, or fossil fuel companies, or drug companies that make abortion drugs?

While the logic of Vullo would seem to make it easier to find the regulator responsible for trying to harm a downstream customer by applying pressure to banks and insurers, would that matter outside of the First Amendment context?

The full fallout of the decision remains to be determined. The case was remanded back to the Second Circuit and may be sent back to the trial court for fact finding. A final determination could be years away, but other cases influenced by this one are likely to come up sooner. So, stay tuned.

[This post is cross-posted on the FinRegRag.]