FinRegRant #4: On National Rifle Association of America v. Vullo Part 2
Professor George Mocsary and Brian Knight Discuss the Relevant Details of the Case
Transcript
Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to bbrophy@mercatus.gmu.edu
[00:00:00] Brian Knight: Welcome to the FinRegRant. My name is Brian Knight, and I'm a Senior Research Fellow at the Mercatus Center. You're joining us for Part 2 of a very special series on the ‘National Rifle Association versus Maria Vullo’ Supreme Court case and its implications for financial services law. I am joined today by my good friend and co-author, Professor George Mocsary of the University of Wyoming School of Law, and Ben Brophy, our head of marketing, who will be actually serving as-- I'm going to be turning over my power and authority to Ben for the purposes of this discussion. Ben, the con is yours.
[00:00:38] Ben Brophy: Thanks, Brian. Glad to be in charge again. This is probably the last time you'll let me be in charge, but I'm going to enjoy it while I have it. I've really enjoyed, as a layman, following this case, following your work in the amicus brief. George, I really appreciate you and Brian putting all of that together. I'm interested in at a 30,000-foot level, when did you guys come together to work on this case? How did your interests align? What was that process like?
[00:01:08] Brian: I remember it like it was yesterday. My boss and our mutual friend, Eileen Norcross, connected us, and we started talking, and we bonded over a few different interests. This was 2018, 2019. George, as I recall, I commissioned a paper from you on administrative browbeating in the insurance market because the Vullo guidance had just come out. Our mutual friend, Julie Hill, who wrote a really great paper on bank reputation risk regulation. I read that paper and I'm like, "That's really good. I wish we had something for insurance."
I knew George was a very well-regarded, very well-known insurance law scholar. I asked him to write us a paper, which he did. It's a great paper. It was cited by many of the other amici in the Vullo case. We got that done. Then, when the NRA reached out to me about doing an amicus brief, I was like, "Well, look, I don't know very much about insurance, but I know someone who does." I reached out to George and asked if he'd be willing to co-author with me, and I'm very glad he did. That's my recollection. Now, George, what did I miss?
[00:02:23] George Mocsary: I think that's it. I think you've got it, Brian. The interesting aspect of this for me was that after Brian approached me about doing the paper, which I was very interested in because I had written before at the intersection of firearms and insurance. When I started researching this paper, I saw just how broad this problem was. It wasn't limited to just the NRA and Vullo.
These things had been happening in the insurance space and other areas. Not only the breadth but the depth of what was happening was remarkable, that an entity engaged in perfectly legal advocacy. Something that had been nothing new in this country. As evidence of that, the NRA was founded in the 1800s and has had a membership since then, then an entity around that long just engaging in its legal advocacy and interests with its members would suddenly be attacked so deeply and on such a large scale by the regulatory apparatus in New York State. That, combined with this happening elsewhere in other contexts that I discovered, was really remarkable.
The ability to unearth all of this, and put it into writing, and put it before the public view was a great opportunity. Then, the opportunity to do that again in an amicus brief or actually in a couple of amicus briefs, we did one at the cert petition stage and now, was a great opportunity to really try and do something about this, to not let the administrative apparatus do this to people who are advocating, who are just trying to live, and say, and do what they want, which is perfectly legal, and just live according to their interests and what they want to do.
[00:04:28] Ben: One of the things we talked about yesterday is, in this particular case, it's about advocacy and policy issues around guns, but it could be any issue across the board that could be impacted in the same way, which is why the case is of such paramount importance. One of the questions I have for you, Professor, is the lower court ruled that this guidance wasn't binding.
I'm curious, in your amicus brief, both of you seem to suggest that they miss something there, particularly about the nature of the insurance business, and the banking industry, and how they're going to perceive "non-binding guidance" from a regulator. I'm curious if you can fill in what you think that the lower court missed in making that ruling.
[00:05:17] George: Without ascribing motives to the lower court, for why it missed it, let's say, what the lower court didn't discuss in its opinion is that there's really no such thing as non-binding guidance, certainly not in a highly regulated industry like insurance or in banking. The industries and the individual industry players themselves have close relationships with their regulators. They work with them on a daily or at least a weekly basis. They understand very well, especially in areas like insurance and banking where regulators have such broad powers, nearly plenary power over the industry players, over the individual players in each industry or individual companies to, in the case of insurance, prohibit them from even doing business in the state if they want to. The lower court missed that there's no such thing as non-binding guidance. Every guidance is binding, and everyone knows that. That's common knowledge. There's nothing surprising about that.
The regulators also make that clear. They make clear that we can do this the easy way, or we can do this the hard way. The firms, who have employees whose livelihoods are on the line, really don't have a choice but to comply with the "non-binding guidance" that they're issued. I would also say that looking at this so-called non-binding guidance, looking at the memoranda, the guidance memoranda that were sent to the insurers and the banks. The two are almost identical in their language.
They're written in this exceedingly zealous tone, this tone that is meant to "other," the National Rifle Association, gun owners, guns, anyone whose opinion about firearms ownership is different from that of the regulators in New York State. It's really, "Demonize and villainize them." Only at the end of this memo does it actually talk about anything the insurers should do, or that the banks should do, or any impact it might have on their business. At the risk of making a pun, it's this rant against a certain group of people that happen to be the political enemies of the New York establishment.
At the very end, there's some token hand-waving at the health of the businesses and the industries, and maybe you should do this because it's good for your business, or it helps your financial soundness or something like that. The memoranda themselves are so transparent in not really being about a meaningful guidance or not being an effort to help the safety and soundness of the insurance market, which is what insurance regulators are supposed to do, that the lower court here really, at best, missed what was going on in this situation.
[00:08:53] Ben: Just to clarify a little bit for those of us who haven't followed the cases closely, the memoranda that you're talking about. Essentially, the regulators in New York wrote a letter or a memo, and then they sent it to various insurance and banking companies saying, "Guns and gun makers, they're not going to be looked on favorably. You're going to incur reputational risk if you associate with these people. Nothing official, but you should think twice before you do that." I'm obviously paraphrasing here, but is that essentially what this non-binding guidance was?
[00:09:28] George: Correct. Correct. The term it used was gun promotion organizations. In effect, it said if you do business with these "gun promotion organizations," this parade of horribles will happen.
[00:09:43] Brian: It's actually even a little bit more aggressive than the way George is describing it because there is language that says, to paraphrase, as a regulated insurance company or bank, you have an obligation to perform risk management, including reputation risk. It's four paragraphs of the people of New York demand justice, and they demand safety, and they want gun control. Certain groups like the NRA and other gun promotion organizations are on the wrong side of history, and businesses should be at the forefront of making the world better.
Those that don't are going to be not looked upon kindly by people. You have an obligation to think about that and consider reputation risk. It's interesting. Hopefully, we can get to the Solicitor General's amicus brief a little bit later in more detail. What's interesting is the Solicitor General's brief, which was in support of neither party, but conceded some important points to the NRA.
When they're talking about the guidance documents, their position, which I don't fully agree with, was like-- Look all that prefatory stuff is fine. It's when they mentioned the actual regulatory obligation that it became a problem because these insurance and banks, they do have this obligation and it's the NYDFS that enforces it. It is a little hard, I think, to view that guidance as certainly non-binding or at least not intended to be binding.
[00:11:24] Ben: One follow-up question on that, Brian, again, for the layman like me. When we say reputational risk, it sounds a bit amorphous. What is that exactly?
[00:11:34] Brian: It sounds a bit amorphous because it is a bit amorphous. Reputation risk, banks and insurance companies, it's risk-based regulation. There are different types of risks. Most of them are fairly straightforward. Credit risk, if you make a bunch of bad loans, and they all default, and you as a bank lose a bunch of money, that could harm your stability. Compliance risk, the law requires you to do a thing, you don't do it, you get into trouble with the law. That's a problem.
Reputation risk is this more amorphous thing of like, "Well, will people not want to do business with you if you develop a certain reputation?" It started off in the '70s and '80s, really focused on the bank's own actions and malfeasance. If you treat your customers badly. Often, reputation risk is derivative of some other risk. If you have really poor cybersecurity and your customers are constantly getting their accounts hacked, well, that's an operational risk, but it's also going to damage your reputation. People may not want to do business with you because they're like, "Oh, those guys can't keep my information safe."
In the past, I don't know, 20 years or so, it has evolved into this thing where it's not just the bank or the insurance company's actions but whether or not they are going to be affiliated or associated with other entities purely as customers. It's like, "Oh, if you do business with an unpopular group, people may not want to do business with you because your reputation with those other potential customers has declined. That's something you need to consider."
The regulators historically have said, "Look, we don't put too much stock in reputation risk on its own," but historically, there's been this sort of shell game almost of like, "Oh, yes, don't worry too much about reputation risk." Then, when they need a justification for something and they can't get it elsewhere, that's what they fall back on.
[00:13:42] Ben: Professor, anything to add to that?
[00:13:44] George: Yes. Obviously, I agree completely. One thing I would add is that the irony of all of this is that this uncertainty created by this amorphous tool that regulators use if they want to go after a regulated entity is that the existence of this risk actually creates risk. The supposed existence of this risk or the enforcement, I should say, the enforcement of this supposed risk actually creates risk. The irony is that the regulatory risk created by this specter of reputation risk that can be deployed at any time against an entity actually creates more risk for the regulated entities.
That risk is not fortuitous. It can't be meaningfully diversified away. It can't be reinsured. It can't even be charged back to the regulator. An insurance company, if it wants to take on a riskier client, can charge a premium that accounts for that risk, can charge a higher premium associated with the risk of whatever activities that insured has. A regulated insurance company can't charge the regulator for the extra risk that is being imposed on it in the guise of regulatory risk. What happens is that rather than increasing or supporting the safety and soundness of the insurance market, the regulators, by deploying reputation risk, actually decrease its safety and soundness, by decreasing the risk associated with being in the business of insurance.
[00:15:20] Brian: If I could just hop on, just step on the grave of reputation risk one more time. Another serious problem with it is, unlike most of those other types of risks that I discussed, most of the other types of risks that regulators look at, it is amorphous. It's not objective. Regulators don't even have some sort of ex-ante intelligible metric that they use. It's kind of, "Well, we know it when we see it."
If you look at more recent guidance from bank regulators, the groups that a bank or an insurance company would need to worry about the reputation with, it's not just customers. It's the customers. It's your employees. It's your shareholders. All right, well, look, I'm not a fan of it, but all of those are directly related to your economic performance. It's other stakeholders. It's the media. It's your community. It's the regulators themselves, which if you think about it, that's weird. It's like, "Oh, if you do something we don't like, that might be a regulatorily significant risk problem.”
The other thing is, at what level of threat does it actually become something that can be enforced against? Is it any potential loss of business? Must there be some sort of threshold criteria? There just isn't. There is not good information about it. In the federal context, there is a circuit split among the different circuits where some circuits say, in effect, "Look, for an issue to be a sufficient reputation risk for the regulator to do an enforcement action, it needs to pose a threat to the stability of the bank. You risk losing so much money that you might fail."
Other circuits say, "No, it's regulator discretion," but that's only for formal enforcement actions. As I'm sure we're going to talk more, and as we talked about yesterday, with banking and insurance, the regulator has so many other ways to punish an entity that are not formal actions that can go be appealed in court, that preventing formal enforcement actions is only going to do a portion of the problem.
[00:17:35] Ben: Yes, that makes sense. Let's take a step up, higher up here. You guys have gotten into the weeds really well. I'm curious, as we look forward to oral arguments in the next month, in mid-March, what is it that you expect Vullo's side to argue. If you can give an overview of what points they're going to make, and then a broad overview of the arguments that the NRA and the lawyers representing them are going to make. Just give us the background on what arguments you expect to make.
One piece I'd love for you guys to talk about, Brian said this a couple of times yesterday. This isn't an insurance case. This isn't a banking case. It's actually a First Amendment case. Explain that a little bit. We've talked a lot about reputational risk and how that plays a role in insurance and banking, but this ultimately is a First Amendment case. I'm curious for those of us who are laymen, how is that? I'll turn it over to you guys. Professor, how about you first?
[00:18:31] George: Sure. It's a First Amendment case because, fundamentally, what's going on here is that the NRA is being attacked for its advocacy. By way of comparison in the article that Brian commissioned and we wrote, I used two case studies. One is this case, and one takes place in Oklahoma where the regulators there engage in some inappropriate behavior to protect an industry in Oklahoma. There was an advocacy involved there. It wasn't about the advocacy in which the extraction industry was engaged. It was about the extraction industry itself.
The First Amendment wouldn't have been an appropriate ground on which to bring a case there. There wasn't speech that was being suppressed. Here, by contrast, the NRA is being gone after by New York State and its regulators because of its advocacy, because of its advocacy about gun rights.
The reason the NRA brought a First Amendment case, and the reason by the way, that the ACLU filed in the lower courts an amicus brief on behalf of the NRA and is actually representing the NRA at the Supreme Court is because here, it's about what the NRA says, about what it advocates for. Just the phrase, for example, gun promotion organizations, that's oozing with speech connotations. The NRA is being attacked not for what it did, but for what it promotes.
[00:20:11] Ben: Brian, anything to add?
[00:20:13] Brian: Well, not really on that front. I think George did a great job. I would just note that when we talk about potential outcomes and all of that, one of the questions that's going to come up, depending on how the Supreme Court rules, is how broadly would any ruling sweep. Is it just First Amendment issues? Would it be something that's tied to some other constitutional activity, or is the court going to get into more nuts and bolts financial regulation? That's going to be an interesting thing to watch.
[00:20:47] Ben: That's a great point, Brian. I'm curious if you guys would give us an overview of the arguments that are going to be made on both sides, both by Vullo and also by the lawyers representing NRA. What can we expect to hear in oral arguments?
[00:21:04] Brian: The NRA has submitted their brief. If I recall correctly, and let me preface by saying, I am absolutely not a First Amendment expert, but it relies heavily on the case, Bantam Books, where a local commission sent out letters to bookstores saying, "Look, if you have obscene books, you should get rid of them." At the bottom, it was, if I recall correctly, it was like, "We have the authority to make referrals to law enforcement." A bookstore sued saying, or maybe it was a book publisher, I guess, saying, "Look, you can't threaten people to try to suppress speech this way."
The NRA is making the argument that the enforcement activity, the offer to go easy on the insurance companies so long as they dropped the NRA and look the other way on basically identical legal problems in other affiliate programs, the guidance documents that we talked about earlier, and then, some very harsh enforcement actions regarding the NRA was all done to scare financial services firms away from doing business with the NRA to harm them.
Even if there wasn't a formal threat, even if there wasn't a formal “this is binding, even on its own,” the enforcement actions or whatever could be justified independently because they were done with this purpose to suppress speech. It harms the First Amendment, or it infringes upon the First Amendment. At least that's my understanding. George, did I miss something?
[00:22:56] George: No, I think that's right. I think a lot of this will happen in the context of looking at the totality of the circumstances, all of the threats. Any given sentence may be okay, but this mass of threats that showed up in these memoranda that were made by the governor and by the commissioner of NYDFS on Twitter, and Facebook, and these places, the tone of the consent agreements with the insurers, together very clearly show that this isn't about the safety and soundness of the insurance or, for that matter, banking markets.
I think one point that will be made at oral argument, and this gets to why there were so many amicus briefs on behalf of the National Rifle Association by organizations that you don't normally associate with gun rights or would never, in fact, associate with gun rights, is that if this is okay, then this can be done to anyone in any state whom the in crowd, potentially as defined by the legislature, or even just the regulator or the executive doesn't like.
Fundamentally, that means that the rule of law is dead, and we can't have that in this country. We can't have that in a nation of laws. I think that point will come up. It came up in many of the amicus briefs, and I'd be surprised if that didn't come up in oral argument.
[00:24:33] Ben: Brian, we've talked a bit about the NRA's position. I know Vullo hasn't submitted her brief yet, but what would you expect her side to argue in this case?
[00:24:45] Brian: With the caveat that she hasn't submitted her brief yet, I imagine her argument, I'm going to guess, is going to come down to either some technical arguments about how, "Well, even if there were potential issues in this scenario, it would not be appropriate for the court to second guess it." She may at some point assert that, "Well, I should have immunity."
The bulk of it, I'm going to guess, is sort of like what the Second Circuit said in their opinion, which is, “I was doing my job. I have the obligation and the authority to regulate the financial services space. It is not imaginary that the NRA was deeply unpopular. It's certainly among certain groups in the wake of the Parkland shooting. Whether or not that level of unpopularity would have resulted or translated into actual economic loss is part of the issue. I have the authority and I have the obligation to do this type of action. Whether or not I also enjoyed it is beside the point.”
It's interesting just to make a bridge. Disney lost a motion to dismiss in Florida on the Ron DeSantis tax case. This is a trial court, and the facts are different. One of the things that the trial court mentioned is the idea that we're not going to try to pry into a legislator's mind to see if they have an improper purpose if what they do on paper is okay. Now, as George mentioned earlier, one striking thing about that I think cuts both ways in terms of outcomes or quality of outcomes is that it was pretty blatant that this was politically motivated in a way that is stunning and speaks to confidence or arrogance, depending on how charitable you want to be.
If Vullo had not been so aggressive and if Governor Cuomo had not been so aggressive and so overt about what they wanted to do and why they were doing what they were doing, this might be a much-- It might be a hard case anyway, but it would certainly be a harder case for the NRA to make because you wouldn't have all of this evidence of motive.
That's something to think about depending on however the court comes down. Because even if they do find that this is inappropriate and implicates the First Amendment, as George mentioned, what is the standard? Is it going to have to be like, "Well, you need to be on Twitter, and you need to be on Facebook, and you need to be explicitly saying these guys are terrorists and we don't like what they say," or can you just keep that all to yourself, and that's okay.
[00:27:56] Ben: Professor, anything you would add to that?
[00:27:59] George: Yes, just a thought and not directly on what the state's argument will be, but as I'm listening to Brian speak, I think he's exactly right. It occurs to me that one thing that makes the defendants here so dangerous is exactly that they lack so much self-control. They seem to have no self-control at all in bullying and regulatorily brutalizing their political enemies.
Their Twitter, and Facebook, and press release activity as evidence of that. Maybe that makes them all the more dangerous. There's all the more reason for this to be stopped at this point. To the risk of repeating what I said earlier, that probably explains why so many amici that you wouldn't ordinarily expect to defend the NRA are here as well, but I agree completely with Brian on the line drawing and the argument that they'll make.
[00:29:01] Ben: With all of that said, I imagine there's a range of outcomes possible, but what are some of the potential outcomes we might see when the decision comes down in a few months?
[00:29:14] Brian: With this very strong caveat that I'm certainly not predicting how the court's going to come down. Down that way lies folly, but on a range of outcomes from bad to good as I see it, the worst possible outcome to my mind is that the court just endorses everything Vullo did and says, "You know what? There's no problem here. This is entirely fine. She's the bank regulator. That's okay. She has at least a prima facie reason to do it. We're not going to second guess. Vaya con Dios," because that's just going to ring the dinner bell.
It'll just empower politicians of all political persuasions to use the financial regulatory system as a tool to punish your enemies and reward your friends. From my perspective, a bad-ish outcome would be that the Supreme Court says, "Okay, the offering to go easy on the insurance companies on their other equally illegal problems in exchange for dropping the NRA, that's a problem, but the guidance stuff is fine."
I forgot. One argument Vullo is going to make is that she has a speech right to say what she wants to say. If I recall correctly, the Second Circuit grounded that in the First Amendment, which is weird. I think the NRA in their brief, written by the ACLU, points out they're like, "No, government needs to have an ability to express its preferences, and its views, and defend its policies, but that's not the same thing as an individual First Amendment right." That would be bad because all regulators need to do then is just be a little bit smarter.
A not great outcome but livable, for me at least, would be the court does what the Solicitor General suggested they do, which is basically just like, "Look, focus on the offer to go easy. That's all you need. That is a First Amendment problem. Don't touch any of this other stuff. Just don't deal with it." I think that'd be bad because this case is going to get remanded back to the trial court. It's possible we're just going to have to be right back here later, and you still don't have the-- The court is not touching the jawbone in question, the veiled threat question.
A good outcome would be that they say all of this stuff is constitutionally prohibited. A great outcome would be they go even further, and I don't think we're going to get this, but they go even further saying, "Oh, by the way, this concept of reputation risk is nonsense on stilts, and you just can't do it." I don't think we're going to get that. Probably best-case scenario, we maybe get a concurrence where someone's like, "Yes, we need to look into this as well." That's how I see the ranges of potential outcomes. George, what do you think?
[00:32:27] George: I think that's right. I might add one that goes somewhere in the middle there, hard to say exactly where on the range it is. The court might take issue with the unequal treatment of the NRA and other entities out there that were engaging in the same kind of business with the same insurers. The NRA was participating or working with the insurers, I should say, in what's called an affinity program where the NRA offers a certain kind of insurance with some certain set of benefits and the insurance companies market them. Insurance companies, referred to broadly here to include the insurers, the ones that do the affinity programs, and so on.
At the same time the NRA was doing it, other entities were also engaging in the same kind of affinity relationship with the insurers, with the insurance industry, and continued to do so even after NYDFS shut down the NRA's affinity activities, and continued to do so for years afterward. The court may look at that and say, "Hey, we don't really believe that this isn't about speech because you allowed these other activities that are identical to happen for years after the one that you shut down and said was in violation of all these individual New York insurance laws." There might be a kind of equal protection-like argument that comes into the opinion or that comes into the reasoning of the court as well.
[00:34:06] Ben: Thank you guys. That's all the questions I have. Any final or concluding thoughts before we wrap up this particular rant?
[00:34:13] Brian: It's an exciting case, and it is a deceptively important case. It'll be very interesting to see how the court comes down, how broadly its opinion sweeps, and where the next frontiers might be. One thing we talked about earlier is just that okay, this is clearly tied to a very important constitutional right. What about a scenario where it isn't tied to the First Amendment?
You can imagine it being tied to another amendment like gun makers in the Second Amendment or legal services firms and access to counsel. What if there's no meaningful federal state constitutional right at play, like oil companies, or at least at the federal level, abortion providers, or something like that? Will the rules be different in those cases where browbeating is still okay in those cases but not in this? Is the court going to look at this concept of jawboning and browbeating more broadly and rein it in?
[00:35:19] Ben: Professor, I'll give you the last word. Any concluding thoughts?
[00:35:22] George: Yes, I agree. I agree. I think deceptively important is a great way to describe this. If what New York State did here is okay, then no one is safe from this as Professor Julie Hill pointed out. Churches and coal mines have been subject to reputational risk, and that was the area on which she was focusing specifically.
Other industries have had their tax breaks removed or companies have had their tax breaks removed because they've said bad things about such and such or have said-- Let's try that again. Companies have had their tax breaks taken away because they've said things that legislators didn't like about their favorite interest. If what happened in New York is okay, in the form it happened, which was so extreme, then nothing is off the table at this point.
[00:36:28] Ben: Thank you, gentlemen, for joining me on this episode of the Rant. With this, I will hand back my dictatorial powers to Brian and let him send us out.
[00:36:39] Brian: Thank you very much. I want to thank George for joining us. Ben, you've done such a good job. I might have to deputize you permanently.
[00:36:48] Ben: I serve at the will of the people. I'm a people's champion, whatever it takes.
[00:36:54] Brian: Thank you so much for joining us and talk to you next time on the next Rant.