This Term, the Supreme Court will hear the case of the National Rifle Association (NRA) against Maria Vullo, the former superintendent of the New York State Department of Financial Services. The NRA claims that Vullo used the power of her role to “financially blacklist” the NRA. The potential implications of the Supreme Court’s decision are significant and have the potential to vastly influence the regulatory climate.

Maria Vullo was superintendent of the New York State Department of Financial Services from 2016 to 2019. In her role, she led an agency of 1,400 employees and oversaw the regulation of New York’s financial services industry. It was in this prominent position that Vullo spoke out against the gun industry and pro-gun organizations.

In the wake of the 2018 school shooting in Parkland, Florida, Vullo made known her desire that institutions she supervised distance themselves from pro-gun organizations, and she investigated several insurance companies working with the NRA. She also warned banks and insurance companies that doing business with the NRA could lead to heightened “reputational risks.” Vullo’s warnings and investigations caused banks and insurance companies to dismantle their partnerships with the NRA as they feared losing their New York licenses if they continued business as usual.

The initial lawsuit began in May 2018, when the NRA sued both former Governor Andrew Cuomo and Vullo claiming that Vullo “violated its rights to free speech and equal protection” through her warnings and investigations. The district court dismissed all the NRA’s claims except for the First Amendment claims. In 2022, Vullo appealed the court’s ruling to the U.S. Court of Appeals for the Second Circuit. The Second Circuit ruled that Vullo’s actions—“including investigating, negotiating, and resolving apparent violations”—were “plainly reasonable.” The court also proposed that Vullo was not offering official guidance to these banks and insurance companies, but rather expressing her own political opinions.

The NRA asked the Supreme Court to review the Second Circuit’s decision dismissing the case, and the Supreme Court granted review on November 3, 2023. The question presented is: “Does the First Amendment allow a government regulator to threaten regulated entities with adverse regulatory actions if they do business with a controversial speaker, as a consequence of (a) the government’s own hostility to the speaker’s viewpoint or (b) a perceived ‘general backlash’ against the speaker’s advocacy?”

Historically, banking regulators have worked to mitigate risks within the banking system, including “reputational risk.” This term is defined slightly differently by various regulatory bodies. For instance, the Federal Reserve describes reputational risk as the “potential that negative publicity regarding an institution’s business practices, whether true or not, will cause a decline in the customer base, costly litigation, or revenue reductions.” On the other hand, the Federal Deposit Insurance Corporation (FDIC) defines it as “the risk arising from negative public opinion.”

Most often, agencies address reputational risk through non-binding guidance rather than formalizing it in the Federal Register via the notice-and-comment process. Professor Julie Hill notes that the FDIC has consistently maintained that its guidance on reputational risk carries no “binding legal consequences.” Similarly, the Office of the Comptroller of the Currency (OCC) has assured regulated entities that its guidance does not prevent national banks and federal savings associations from engaging in activities identified as carrying greater reputational risk.

The Second Circuit’s opinion raises the question of when non-binding regulatory guidance aimed at mitigating reputational risk begins to resemble coercion. The Brief for Financial and Business Law Scholars as Amici Curiae in Support of the NRA’s Petition for a Writ of Certiorari argues that the Second Circuit’s view overlooks the fact that “the unique relationship between financial regulators and their regulated firms tends to make those firms feel bound, on penalty of sanction, by even the most prosaic sounding guidance.” The amicus brief further explains that failure to comply with non-binding guidance can result in an agency “punishing” a regulated entity, either formally through an enforcement action, or informally though actions like lowering an entity’s regulatory ratings.

The question of how government actors may interact with companies of alternative political beliefs harkens back to Operation Choke Point, an Obama era initiative that targeted specific businesses and industries. This scheme was “created by the Justice Department to ‘choke out’ companies the Administration considers ‘high risk’ or otherwise objectionable, despite the fact that they are legal businesses.” The DOJ worked with the FDIC and other agencies to deny businesses access to banking and financial services if they did not align with Obama administration values. Some of the industries that the FDIC counted as high risk were ammunition sellers, coin dealers, credit repair services, drug paraphernalia sellers, and pornography producers. While banks and financial services companies were legally allowed to work with these companies, they were warned that working with them would lead to a higher risk of fraud and money laundering.

This advice had a substantial impact on the amount of business done with these industries. As a result of Operation Choke Point, many banks severed relationships with companies in the targeted industries due to a fear of “elevated . . . legal, reputational, and compliance risks.” In fact, a survey done by the Financial Service Centers of America found that “14 of the 61 banking relationships reported by survey participants have been terminated since November 2013.” In late January of 2015, the FDIC published a letter that essentially ended Operation Choke Point. However, it was not until August of 2017, during the Trump administration, that Operation Choke Point was officially ended, resulting in the FDIC settling multiple lawsuits and increasing training.

Should the Supreme Court side with the NRA on the merits of its First Amendment claim, the scope and breadth of the Court’s First Amendment holding will determine the impact that the ruling may have on federal regulators’ ability to use moral suasion and the assertion of reputational risk concerns to favor politically aligned regulated entities and punish politically disfavored regulated entities which are otherwise conducting lawful business activities.

Note from the Editor: The Federalist Society takes no positions on particular legal and public policy matters. Any expressions of opinion are those of the author. We welcome responses to the views presented here. To join the debate, please email us at info@fedsoc.org.