December 09, 2009
Donna Nagy on the PCAOB Case: Part II
Posted by Gordon Smith

Part I of this series is here. Donna Nagy of the Indiana University's Maurer School of Law now offers the following perspective on the Respondent's argument:

Thanks Gordon for providing the opportunity to follow-up on my prior post with thoughts on the Respondents’ oral arguments. As I explained yesterday, I was most interested in the colloquies pertaining to the PCAOB-SEC relationship, which goes to the heart of my forthcoming article, Is the PCAOB a 'Heavily Controlled Component' of the SEC?: An Essential Question in the Constitutional Controversy.

Solicitor General Elena Kagan made clear at the outset that for the PCAOB’s structure to be constitutional, the SEC must have comprehensive control over the PCAOB.

GENERAL KAGAN: Mr. Chief Justice, and may it please the Court: Resolution of this case follows from a simple syllogism and it is this: The President has constitutionally sufficient control over the SEC. The SEC has comprehensive control over the Accounting Board, therefore the President has constitutionally sufficient control over the Accounting Board.

Chief Justice Roberts focused in on the second premise of the syllogism, questioning whether the SEC could direct the PCAOB to withdraw an investigatory request for documents. The government responded that the “SEC has full control over the investigative and inspection function of the board.”

GENERAL KAGAN: . . [T]he board's investigations and the board's inspections are all done according to rule. And the SEC in a number of ways can change those rules. The SEC can reach out and abrogate any board rules, including rules relating to inspections and investigations. The SEC also has power to promulgate its own rules.

Thus, in the view of the government, the SEC has pervasive authority over the Board’s investigative and enforcement functions because it “has authority to set the ground rules by which the Accounting Board does anything and everything” and it has the authority “to take away responsibility from the Accounting Board.” The government also contended that the “for-cause” removal limitations in the statute must be viewed in conjunction with its “panoply of other control mechanisms.” Accordingly, General Kagan emphasized that “[i]t’s clear that the SEC has control over everything that the board does or could have control over everything the board does.” This view was echoed repeatedly by Jeffrey Lamken for the PCAOB, who maintained that the “SEC can threaten or actually rescind the board’s enforcement authority any time it thinks that’s appropriate in the public interest.”

Under the Supreme Court’s precedent in Edmond v. United States (1997), to be an “inferior officer” within the meaning of the Appointments Clause, the work of the officer must be “supervised and directed at some level by others who were appointed by Presidential nomination with the advice and consent of the Senate.” Ultimately, then, the question of whether the SEC has comprehensive control over the PCAOB’s investigative and enforcement authority – whether it supervises and directs the exercise of that authority within the meaning of Edmond -- may boil down to whether the SEC’s power to “set ground rules” and “take away responsibility” constitutes constitutionally sufficient supervision and direction.

Several Justices indicated that this type of power may not constitute sufficient supervision and direction of the PCAOB by the SEC.

JUSTICE SCALIA: Excuse me, but, you know, Congress -- Congress can change the statutory authority of any agency just like that. Does that mean that Congress is controlling the agency?

GENERAL KAGAN: Well, it's certainly part of Congress's control mechanisms, and this, too is part of the SEC's control mechanisms with relation to the Accounting Board. The Accounting Board can take -

JUSTICE SCALIA: I'm not sure that -- that the ability to take away responsibility for an agency -from an agency, is the same as controlling what authority that agency does exercise. It seems to me they are two different things.

Chief Justice Roberts then questioned whether a hypothetical SEC rule specifying pre-approval of PCAOB investigations would “be consistent with the intent of Congress in establishing the PCAOB,” and Justice Kennedy expressed skepticism as to whether the SEC would ever exercise such a theoretical power.

JUSTICE KENNEDY: . . .But the history and tradition of boards like this is that their investigative powers are independent. Now, you say that there could be a rule, but that just isn't the way it works. And if you refer us to history and tradition for other purposes, we ought to look at the operational principles, operational assumptions of this board.

Questioning Lamken, Chief Justice Roberts interjected that while the SEC can “retroactively veto” PCAOB action, “the SEC doesn’t propose what actions the board takes, actions that can have significant, devastating consequences for the regulated bodies.” Lamken responded that “the SEC has broad authority in the public interest to rescind the – the board’s authority to enforce the action, enforce the law in any respect.”

JUSTICE SCALIA: But you can say the same thing -- you can say the same thing about Congress. I mean, this is not the kind of control that an executive officer normally is supposed to have over inferior officers; when they do something, you can take away their authority. Congress can do that.

Justice Scalia may have had in mind the Court’s statement in Bowsher v. Synar (1986) that the “Constitution does not contemplate an active role for Congress in the supervision of officers charged with the execution of the law it enacts.” I argue in my article that Congress’s unexercised ability to limit the functions of an agency, and its unexercised ability to abolish an agency entirely, does not constitute congressional supervision and direction of administrative agencies (indeed, it cannot under Bowsher). The securities law professors’ Supreme Court Amici Brief makes this point as well. A majority of the Court could conclude that the SEC’s authority under Sarbanes-Oxley to “set ground rules” and “take away responsibility” with respect to investigations and enforcement does not constitute “comprehensive control” of the PCAOB by the SEC. And that conclusion would defeat the validity of the government’s syllogism.

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