As I have observed before, I believed the most serious and valid argument raised against the constitutionality of the Public Company Accounting Oversight Board was that sounding under the Appointments Clause of the Constitution:
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 were thus presented by the Free Enterprise Fund's challenge to the Act creating the PCAOB. 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?
I believed there was a strong argument to be made in favor of the Fund's position. As the Fund pointedout, 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 $136 million, and it expects to end the year with 450 employees.
PCAOB has an enormously broad Congressional mandate to create rules and enforce them under Sarbanes-Oxley. Most regulatory agencies are limited in their reach by the amount of money appropriated to them by Congress -- with its independent power to tax and raise funds as needed, there is hardly any institutional control on the power of the PCAOB.
All of which seemed highly problematic under the relevant precedents. In Edmond v. United States, 520 U.S. 651 (1997), for example, the Court (per Scalia) wrote:
By vesting the President with the exclusive power to select the principal (noninferior) officers of the United States, the Appointments Clause prevents congressional encroachment upon the Executive and Judicial Branches. ... This disposition was also designed to assure a higher quality of appointments: The Framers anticipated that the President would be less vulnerable to interest-group pressure and personal favoritism than would a collective body. ... The President's power to select principal officers of the United States was not left unguarded, however, as Article II further requires the "Advice and Consent of the Senate." This serves both to curb Executive abuses of the appointment power ... and "to promote a judicious choice of [persons] for filling the offices of the union," The Federalist No. 76, at 386-387 [(M. Beloff ed. 1987) (A. Hamilton)]. By requiring the joint participation of the President and the Senate, the Appointments Clause was designed to ensure public accountability for both the making of a bad appointment and the rejection of a good one. ...
The PCAOB, by way of contrast, seems almost designed to avoid public accountability. As the W$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 could 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 preserve 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 had a very strong case that the provisions of Sarbanes-Oxley creating the PCAOB were unconstitutional.
The Supreme Court's majority opinion (per Chief Justice John Roberts), however, focused solely on the narrow question of the removal provisions of the act violated the President's power to oversee the executive branch. Opinion here. Earlier blog post on decision here.
Despite the severe limits on oversight of the PCAOB, the majority had "no hesitation in concluding that under Edmond the Board members are inferior officers whose appointment Congress may permissibly vest in a 'Hea[d] of Departmen[t].'” The Court utterly failed to grapple with the accountability issues raised by the structure of the PCAOB.
Next, the majority held that the SEC is a Department and that the 5 commissioners acting collectively constitute a Head of said Department: "Because the Commission is a freestanding component of the Executive Branch, not subordinate to or contained within any other such component, it constitutes a “Departmen[t]” for the purposes of the Appointments Clause." The trouble, of course, is that the SEC really is part of the so-called Fourth Branch--the independent agencies. The President's powers to remove members of the SEC are far more limited than his powers to remove, say, a Cabinet Secretary. The independent agencies are, in Scalia's apt phrase, a "headless fourth branch."
Update: Rick Pildes comments that:
The big battle over the "unitary executive branch" view has always been whether independent agencies are constitutional. To see how removed from that battle today's decision, notice the irony of where the Court ends up: to protect the President's power to control administration of the laws, an independent agency, the SEC, must have greater power to fire the people who work under it, such as Board members. The opinion has some of the most robust language in 90 years in support of the unitary executive branch view, but for now at least, the fight is really at the margins of this issue, as today's decision confirms. One way to view the decision is that unitary executive branch proponents have lost the war, over independent agencies, but the unique structure of the SEC-Board relationship provided them an opportunity to at least draw a line somewhere. But anything is possible, and if the Court majority wants to revive the larger battle at some point, the language of today's opinion could be put in service of that mission.
