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PCAOB and Sarbox In The Dock
SCOTUS Takes A Close Look At The New Regulatory State
The Supreme Court this morning granted certiorari in Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board, et al., No. 08-861 on the Court’s docket. The case will be briefed over the summer, heard in the Fall (after, among other things, Justice Souter’s retirement, assuming all goes on schedule) and decided some time between next December and July 2010. Given that my firm and/or my clients may well end up being involved in the case, I won’t try to handicap its success or get too far into its merits, but know this: the issue before the Court presents important questions generally about the scope of separation of powers restrictions in economic regulation, and specifically about the constitutionality of a key provision of Sarbanes-Oxley and, potentially, could threaten the entire statute.
Last August, a divided panel of the DC Circuit rejected a separation of powers challenge to the provision of Sarbanes-Oxley governing the Public Company Accounting Oversight Board’s appointment. For the uninitiated, PCAOB promulgates accounting rules for public companies. The core question was whether the PCAOB’s powers were such that constitutionally, its members should have been directly accountable to the President under the Appointments Clause. Judge Judith Rogers, joined by Judge Janice Rogers Brown, found that the statute did not unduly dilute the executive branch’s control over the PCAOB:
We hold, first, that the Act does not encroach upon the Appointment power because, in view of the [SEC]’s comprehensive control of the Board, Board members are subject to direction and supervision of the Commission and thus are inferior officers not required to be appointed by the President. Second, we hold that the for-cause limitations on the Commission’s power to remove Board members and the President’s power to remove Commissioners do not strip the President of sufficient power to influence the Board and thus do not contravene separation of powers, as that principle embraces independent agencies like the Commission and their exercise of broad authority over their subordinates.
Slip op. at 3 (emphasis added). In short, the court found “no instance in which the Board can make policy that the Commission cannot override” and thus no undue intrusion on the President’s power, acting through the SEC, to control the PCAOB. Id. at 33.
Judge Brett Kavanaugh dissented, on essentially similar grounds to Justice Scalia’s masterful (but lone) dissent in the 1988 independent counsel case, Morrison v. Olson (the Independent Counsel case), although he also argued that the constitutional problems here go beyond those in Morrison:
The President’s power to remove is critical to the President’s power to control the Executive Branch and perform his Article II responsibilities. Yet under this statute, the President is two levels of for-cause removal away from Board members, a previously unheard-of restriction on and attenuation of the President’s authority over executive officers. This structure effectively eliminates any Presidential power to control the PCAOB, notwithstanding that the Board performs numerous regulatory and lawenforcement functions at the core of the executive power. So far as the parties, including the United States as intervenor, have been able to determine in the research reflected in their exhaustive and excellent briefs, never before in American history has there been an independent agency whose heads are appointed by and removable only for cause by another independent agency, rather than by the President or his alter ego. But that is the case with PCAOB members, who are removable for cause only by the SEC – and it is undisputed that the SEC as an independent agency is not the President’s alter ego.
The reason why the Free Enterprise Fund’s lawsuit raised particular eyebrows is because of the lack of a “severability” clause in Sarbanes-Oxley, a standard provision that allows a statute to avoid being struck down if just one part of it is declared unconstitutional, thus presenting the possibility that the court would have had to declare the entire Sarbanes-Oxley statute unconstitutional (or, alternatively, raising the question of what power a court has in such a large and complex enactment to strike down only a part of it).