Financial Regulators See Win in High Court’s Narrow NRA Ruling

Financial and insurance regulators dodged a major threat to their authority when the US Supreme Court ruled on narrow grounds that a former New York insurance regulator violated the National Rifle Association’s free speech rights.

The high court’s May 30 ruling in National Rifle Association of America v. Vullo reopened the NRA’s First Amendment case against former New York Superintendent of Financial Services Maria Vullo over backroom pressure and guidance she issued warning insurers about the “reputational” risks of doing business with gun rights groups.

But the unanimous decision authored by Justice Sonia Sotomayor still left regulators wide latitude to police financial and insurance companies over customers viewed as potentially high-risk, alleviating concerns raised by former regulators and prosecutors that a broad ruling could take away their powers and expose their nonbinding guidance to costly free speech challenges.

“The court didn’t do anything to undermine regulators’ ability to issue guidance letters with respect to reputational risk,” said former California Insurance Commissioner Dave Jones.

Shooting Aftermath

The Vullo case stems from a series of actions New York’s Department of Financial Services took against major insurers in 2018 following the mass shootings at the Marjory Stoneman Douglas High School in Parkland, Fla.

Vullo’s investigation initially focused on Lockton Co.’s administration of the NRA’s “Carry Guard” insurance program, which offered personal injury, criminal defense, and other coverage to gun owners charged with the wrongful use of firearms. New York and other states bar the sale of insurance coverage for potential criminal acts.

The probe then spread to Lloyd’s of London and Chubb Ltd.

The NRA alleges Vullo strong-armed the companies to stop underwriting the insurance policies, including at a February 2018 private meeting with top Lloyd’s executives, as a way to to punish the gun group for its advocacy work.

Vullo’s agency hit the insurers with consent orders and issued guidance citing the potential reputational risks posed by gun activist groups such as the NRA.

The US Court of Appeals for the Second Circuit in 2022 ruled Vullo didn’t violate the NRA’s First Amendment rights and that she had qualified immunity because she was acting in her official capacity, shielding her from any liability for her actions.

The unanimous Supreme Court last week found that the Second Circuit didn’t do a proper analysis of the facts pleaded so far in the case, which is only at the motion-to-dismiss stage, overturning the appellate court’s ruling and remanding it for further proceedings.

“In sum, the complaint, assessed as a whole, 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 on behalf of the court.

Less ‘Blatant’

Neal Katyal, the Hogan Lovells LLP partner representing Vullo, has argued his client didn’t violate the NRA’s free speech rights.

“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,” he said in a statement after the ruling.

David Cole, the American Civil Liberties Union attorney representing the NRA, said in a statement that the ruling “confirms that government officials have no business using their regulatory authority to blacklist disfavored political groups.”

Legal scholars say the ruling doesn’t go as far as Cole’s statement suggests.

“The takeaway from it is you cannot be this blatant about trying to use reputation risk to suppress speech,” said Julie Hill, the dean of the University of Wyoming College of Law and a former banker.

Regulators will still be able to warn the banks and insurers they oversee about reputational risks their customers might present, but those risks will have to be tied to real compliance problems, not political advocacy, she said.

Crossing a Line

The Supreme Court’s ruling set a line for when regulatory actions can turn into coercion, said Kathleen Engel, a professor at Suffolk Law School who teaches about financial regulation.

“The First Amendment permits government actors to try to persuade companies to take certain actions, but does not permit governments to coerce action. That is exactly what Vullo did,” she said.

There are still some lingering questions about when guidance crosses the line into coercion. But conservative and liberal justices didn’t have to dive too deeply into those issues in the unanimous Vullo decision, said Brian Knight, a senior research fellow at the conservative Mercatus Center at George Mason University who is focused on financial regulation.

“They all agree that wherever that line might be, this went way over it,” he said.

For now, regulators can keep moving forward with reputational risk guidance largely as they’ve done before—though perhaps with more care to ensure that documents and enforcement actions focus on industry conduct broadly, rather than specific companies or advocacy groups, said Jones, the former insurance commissioner.

“It’s possible that a regulator might look at this and decide, ‘I’m going to be very, very, cautious,’” he said.

The case is National Rifle Association of America v. Vullo, U.S., No. 22-842, Opinion 5/30/24.