SCOTUSblog reports that the Supreme Court has taken cert in Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board, et al., which presents the issue of:
Whether the Sarbanes-Oxley Act is consistent with separation-of-powers principles - as the Public Company Accounting Oversight Board is overseen by the Securities and Exchange Commission, which is in turn overseen by the President - or contrary to the Appointments Clause of the Constitution, as the PCAOB members are appointed by the SEC.
- Opinion below (D.C. Circuit)
- Petition for certiorari
- Brief in opposition for respondents Public Company Accounting Oversight Board
- Brief in opposition for the United States
- Petitioner’s reply
- Brief amicus curiae of Washington Legal Foundation (in support of petitioners)
- Brief amicus curiae of Mountain States Legal Foundation (in support of petitioners)
- Brief amicus curiae of American Civil Rights Union (in support of petitioners)
David Zaring opines:
PCAOB's members can only be fired for cause, and are appointed by the SEC, whose members can also only be fired for cause. That insulates them from politicization, but conservatives think it interferes with the "unitary executive" theory by which the president must have a great deal of control over his bureaucracy, due to his responsibility for taking care that the laws be executed.
PCAOB survived D.C. Circuit review over a fiery dissent by a former aide to independent counsel Ken Starr. I don't think it is very difficult to justify the board on constitutional grounds - the unitary executive theory's best day was when Myers v. United States was decided, in 1926, and ever since, various impositions on the President's removal power have been permitted. But I'd bet on it being thrown out by this Court, given this grant, considering the plaintiff (a libertarian public interest group), and the bona fides of the dissent. PCAOB's defenders will have to make a strong case for the functional necessity of the agency (centrist justices may not wish to throw out a unit that is actually performing a critical function or two); that's what saved the SEC itself from the unitary executive theory during the 1930s. It also saved the independent counsel in the mid-1980s, much to everyone's regret later. HT: Volokh
John Carney observes that:
The reason the court’s decision to hear the case is so striking is that many of the usual reasons a case makes it to the Supreme Court are absent. There isn’t a split between different courts on the matter. There’s only been one constitutional challenge to the law that rose to the appeals court level, and there the court sided with the trial court by throwing out the complaint. The court’s decision to hear the case suggests that several justices have doubts about its constitutionality.
The case was brought by the Free Enterprise Fund and a smaller Nevada accounting firm. They argue that the law violates constitutional requirements on separation of powers because the board exercises executive functions but can’t be removed by the president. Members of the PCAOB are appointed by the SEC and can only be removed by the SEC for cause. ...
The case could serve as an important signal of what kind of constitutional limits the court will place on financial regulations. Many of the proposals for financial regulatory reform have placed little emphasis on the constitutional limitations.
So this seems like an opportune time to reprint my February 14, 2006, column Peekaboo, the Constitution Doesn't See You:
The Free Enterprise Fund, an activist think tank, has filed a law suit claiming that the Public Company Accounting Oversight Board (PCAOB, nicknamed "Peekaboo") created by the Sarbanes-Oxley Act is unconstitutional. (Read the complaint.) The gist of the complaint is that the PCAOB is vested with extensive governmental functions and powers, including a quasi-law enforcement investigatory power and a quasi-judicial power to impose substantial fines for violations of its rules.
The Fund claims that the PCAOB thus violates a number of constitutional provisions, most notably the appointments clause of the US Constitution. The potential constitutional problem is that members of the PCAOB are appointed not by the President but by the SEC.
The Appointments Clause of Article II section 2 of the US Constitution provides that:
[The President] shall have Power, by and with the Advice and Consent of the Senate, to make Treaties, provided two thirds of the Senators present concur; and he shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.
Three questions are thus presented. First, are the members of the PCAOB "Officers of the United States" and thus subject to the appointments clause? Second, if so, are the members of the PCAOB "inferior Officers" whose appointment Congress "may by Law vest" in one of the specified alternative mechanisms other than the advice and consent process? Third, if so, do the SEC Commissioners collectively qualify as a Head of Department for this purpose?
There seems to be surprisingly little guidance on these questions. But I still think there is a strong argument to be made in favor of the Fund's position. As the Fund points out, the PCAOB wields extensive governmental powers, but limited accountability:
[The PCAOB] has enormous powers to levy taxes on public companies and to regulate the accounting business. The board, a regulatory agency in all but name, is composed of five directors, no more than two of whom may have any experience as accountants or auditors.
The PCAOB, ostensibly a self-regulating organization for the auditing industry, is supported by a general power of taxation over all publicly-held companies. There are early indications that the PCAOB's independence and ability to raise its own revenue through taxation is supporting a dramatic expansion in its size and scope. Its 2004 budget was $103 million, and its staff started the year at 126 employees and ended the year with 262 employees. The PCAOB's 2005 budget is another 30 percent higher, at $136 million, and it expects to end the year with 450 employees.
PCAOB has an enormously broad Congressional mandate to create rules and enforce them under Sarbanes-Oxley. Most regulatory agencies are limited in their reach by the amount of money appropriated to them by Congress -- with its independent power to tax and raise funds as needed, there is hardly any institutional control on the power of the PCAOB.
All of which seems highly problematic under the relevant precedents. In Edmond v. United States, 520 U.S. 651 (1997), for example, the Court (per Scalia) wrote:
By vesting the President with the exclusive power to select the principal (noninferior) officers of the United States, the Appointments Clause prevents congressional encroachment upon the Executive and Judicial Branches. ... This disposition was also designed to assure a higher quality of appointments: The Framers anticipated that the President would be less vulnerable to interest-group pressure and personal favoritism than would a collective body. ... The President's power to select principal officers of the United States was not left unguarded, however, as Article II further requires the "Advice and Consent of the Senate." This serves both to curb Executive abuses of the appointment power ... and "to promote a judicious choice of [persons] for filling the offices of the union," The Federalist No. 76, at 386-387 [(M. Beloff ed. 1987) (A. Hamilton)]. By requiring the joint participation of the President and the Senate, the Appointments Clause was designed to ensure public accountability for both the making of a bad appointment and the rejection of a good one. ...
The PCAOB, by way of contrast, seems almost designed to avoid public accountability. As the W$J recently opined:
... under Sarbox, the President can neither appoint nor remove Peekaboo members. Sarbox requires that the appointed Securities and Exchange Commissioners themselves appoint the oversight Board. Similarly, only the SEC can remove Board members, and then only if they can be shown to have willfully violated federal laws. Nowhere in any of this is there a role for the elected executive.
There is also little oversight. The only way the SEC can undo any of the accounting Board's regulations is by proving that the rules are obviously inconsistent with the Sarbanes-Oxley statute -- a nearly impossible task given its vague wording. The PCAOB is even largely independent of Congressional oversight because its budget is financed from the fees it levies on the companies it regulates. The Justice Department may well argue in response that the Board simply doesn't rise to the level of a "real" agency. But that will surprise corporate America, given that the Peekaboo can fine accounting firms up to $2 million and individual accountants up to $100,000 for violations.
And, of course, familiar principles of agency capture by the industries it regulates suggest that interest group pressures and favoritism are potentially serious problems.
Likewise, the Fund can draw support from Freytag v. CIR, 501 U.S. 868, 884 -885 (1991), in which the Court opined that:
''The Framers understood . . . that by limiting the appointment power, they could ensure that those who wielded it were accountable to political force and the will of the people. . . . The Appointments Clause prevents Congress from distributing power too widely by limiting the actors in whom Congress may vest the power to appoint. The Clause reflects our Framers' conclusion that widely distributed appointment power subverts democratic government. given the inexorable presence of the administrative state, a holding that every organ in the executive Branch is a department would multiply the number of actors eligible to appoint.''
Holding that the SEC is a Department empowered to appoint the PCAOB would threaten precisely these democratic values the Appointments Clause was designed to protect.
In Edmond, the court also held that:
Generally speaking, the term "inferior officer" connotes a relationship with some higher ranking officer or officers below the President: Whether one is an "inferior" officer depends on whether he has a superior. It is not enough that other officers may be identified who formally maintain a higher rank, or possess responsibilities of a greater magnitude. If that were the intention, the Constitution might have used the phrase "lesser officer." Rather, in the context of a Clause designed to p reserve political accountability relative to important Government assignments, we think it evident that "inferior officers" are officers whose work is directed and supervised at some level by others who were appointed by Presidential nomination with the advice and consent of the Senate.
Because the members of the PCAOB are not subject to such oversight except to the very limited extent they are overseen by the SEC, it would seem that the members of the PCAOB likely are not inferior officers.
The Fund thus has a very strong case that the provisions of Sarbanes-Oxley creating the PCAOB are unconstitutional. Because Congress in its rush to adopt SOX failed to include a clear severability provision, moreover, the Fund may well be able to persuade a reviewing court that the entire Sarbanes-Oxley law must be thrown out. Since both Congressman Oxley and Senator Sarbanes are set to retire this year, wouldn't that make a lovely going away present for them?