Imagine that Florida’s financial regulators told banks and insurance companies that they should consider the risk that working with Planned Parenthood might pose to them. Or that Texas’s regulators said that banks and insurance companies should consider whether serving organizations that support undocumented migrants might damage their reputations. Alarming, right?
Thankfully none of this happened. But New York did it to the National Rifle Association (NRA), backed up with enormous fines to firms doing business with that organization for technical violations of state insurance laws. This, as readers may know, is far from the only recent example of financial regulation being used as a tool to control broader society and bully political opponents. The NRA is petitioning the Supreme Court to reverse the Second Circuit’s dismissal of its final claim challenging these actions.
Although this case is obviously important for the NRA, its implications are much broader. What happened to the NRA could happen to any other group that draws the ire of the government, whether Republican or Democrat. The threat is universal and must be checked.
In the wake of the 2018 Parkland, Fla., shooting, the superintendent of the New York Department of Financial Services (NYDFS), Maria Vullo, issued two industry letters to banks and insurance companies. In zealous language, she praised the efforts of those calling for stricter gun control, damned the NRA and similar organizations for promoting “guns that lead to senseless violence” and encouraged firms to “continue evaluating and managing the risks, including reputational risk” that comes with doing business with the NRA or other “gun promotion organizations.”
Of course, when a regulator calls out specific risks like this, it is often code for the regulator’s disapproval. For example, When the FDIC targeted banks for working with providers of refund anticipation and payday loans, it couldn’t cite law. Rather, it relied on the concept of risk management, especially reputational risk, as a justification for punishing banks that refused to drop legal, but disfavored, clients or lines of business.
The FDIC didn’t necessarily order banks to stop, but for failing to follow the FDIC’s often informal “guidance,” banks were blocked from pursuing their business plans, subjected to unprecedentedly onerous examinations and threatened by FDIC staff.
Unsurprisingly, the NRA sued. It argued that the NYDFS was trying to suppress its speech by cutting off access to necessary financial services, in part by implicitly threatening financial firms via the guidance. The American Civil Liberties Union filed an amicus brief on the NRA’s behalf. After many twists, the Second Circuit dismissed the NRA’s final claim against Ms. Vullo, without any findings of fact, holding in part that because the guidance did not include an order or explicit threat, no reasonable bank or insurer would feel bound by such guidance or at risk of punishment for failing to abide by it.
But the Second Circuit failed to understand the reality of bank and insurance regulation. Both scholarship and history show that firms consider themselves bound even by informal undirected regulatory guidance. Banks and insurance firms are so dependent on keeping their regulators placated that they cannot go against such guidance without risking significant, if subtle, punishment.
Regulators do not need to bring enforcement actions to hurt banks and insurers. Lesser actions can, as with the refund anticipation and payday lending episode, prevent them from pursuing their business plans, subject them to excessively onerous inspections, make implicit threats and ultimately jeopardize their partner relationships. None of this requires going before a neutral arbiter and can all be done from within an opaque bureaucracy.
This is why we just submitted an amicus brief in support of the NRA’s Supreme Court petition. Whether banks and insurers felt under threat if they didn’t adopt the NYDFS’s view of gun rights groups, and whether the NYDFS intended to use the guidance as a threat, are questions that should be settled at trial with robust factfinding.
More importantly, there must be accountability if regulators seek to use financial services to regulate broader society or suppress speech they dislike. Otherwise, no one is safe from being excluded from the modern economy.
Brian Knight is the director of Innovation and Governance and a senior research fellow at the Mercatus Center at George Mason University. George Mocsary is a professor of law at the University of Wyoming.