Many commentators have been weighing in on yesterday's oral argument in Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board, and we are privileged to have our own eyes at the Supreme Court. Donna Nagy of the Indiana University's Maurer School of Law offers the following perspective on the Petitioner's argument:
Many thanks Gordon for inviting me to post on yesterday’s oral argument in Free Enterprise Fund v. PCAOB. Since the enactment of Sarbanes-Oxley in July 2002, I’ve been researching and writing about constitutional issues pertaining to the PCAOB. So I made the trip to DC to attend the oral argument. Bob Thompson, visiting this year at Georgetown, also attended and we had an enjoyable lunch critiquing the morning’s arguments.
Michael Carvin from Jones Day argued for the Petitioners. The Respondents divided their argument, with Solicitor General Elena Kagan arguing for the United States (as intervenor) and Jeffrey Lamken from MoloLamken LLP for the PCAOB.
Several Justices focused their questions on the structural relationship between the PCAOB and SEC, an issue that was central to the Supreme Court Amici Brief submitted by a group of corporate and securities law professors (including Gordon and myself) in support of Petitioners. I also focus on that issue in an article forthcoming in the Pittsburgh Law Review, Is the PCAOB a 'Heavily Controlled Component' of the SEC? It should therefore come as no surprise that during the argument, my attention was riveted on colloquies pertaining to the nature of the relationship between the PCAOB and the SEC. In this post, I’ll focus on the Petitioners’ argument; I’ll discuss the Respondents’ argument in a later post. Here is the full transcript.
Justice Ginsburg launched into the “control” issue at the outset of Carvin’s argument:
JUSTICE GINSBURG: . . . [T]his is a board that has a relationship with the SEC, where it can't do anything that doesn't have the SEC's approval.
MR. CARVIN: There is a buffer between the President and the board, and that's called the SEC, and the board can do many things without the approval of the SEC. Most notably, it can conduct inspections and investigations. There is no statutory –
JUSTICE GINSBURG: It can't even issue a subpoena without the SEC's approval.
Carvin responded that because auditing firms and their associated persons are obligated under Sarbanes-Oxley to cooperate with the PCAOB’s requests for documents and testimony (15 U.S.C. §7212(b)(3)) , the PCAOB has substantial investigative power in its own right without the need for SEC subpoenas. Subpoenas are necessary only when the PCAOB seeks information from third parties outside auditing firms who refuse to cooperate voluntarily. Justice Ginsburg pressed on:
JUSTICE GINSBURG: So the SEC really could stop anything?
MR. CARVIN: It cannot, for example, stop what happened to the Petitioners here. There is no mechanism in the statute, in any way, shape, or form, for the SEC to stop an inspection or investigation as it is ongoing.
Justice Breyer then asked Carvin for other examples of areas in which the SEC lacks control over PCAOB functions and decisionmaking.. Carvin pointed out that the PCAOB also inspects and investigates auditing firms outside the U.S., but other Justices jumped in taking Carvin in a different direction. Carvin returned to this “control” question in his rebuttal, emphasizing the PCAOB’s substantial discretion and autonomy in their prosecutorial determinations.
MR. CARVIN: . . . This notion that they [the SEC] could pass rules to govern the investigative activities of the board is a myth. The attorney general in Morrison [v. Olson] had the ability to promulgate rules for prosecution, but he couldn't tell Alexi Morrison how to proceed in that individual case. He couldn't say: Anything she does with respect to Mr. Olsen, I need to pre-approve. Why? Because the independent counsel, under that statute, had the prosecutorial authority. Under this statute, the board has the prosecutorial authority, and everyone knows you can't govern the kind of manifold decisions that prosecutors need to make through some kind of bulky notice and comment rulemaking. And that is why it is utterly mythical to pretend that they have this power.
None of the Justices focused much on the PCAOB’s substantive rulemaking power (as opposed to procedural rulemaking directed to PCAOB functions). However, with respect to the PCAOB’s power to promulgate rules and set standards governing auditing firms, our brief and my article emphasizes that the PCAOB establishes its own rulemaking initiatives and priorities. The SEC has review power over final PCAOB rules, and no PCAOB rule can take effect over the SEC’s objection. But the PCAOB has substantial discretion and autonomy with respect to its own rulemaking agenda.
Thanks again for the opportunity to share these thoughts. I’ll post again later this afternoon on the Respondents’ arguments.
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