Is it Dodd-Frank? Probably, on the federal level, but this has been a year of plenty of action. The SEC did its proxy reform concept release. And in enforcement, the post-Galleon spread of wiretaps looks to make next year a big year for prosecutions - so far we just have Don Chu, which threatens uber hedge fund SAC. The enforcement case of the year this year must be the Goldman Sachs ABACUS deal settlement. Here's Adam Levitin on it.
I don't think the US Supreme Court did a lot of corporate law this year, with business patents and PCAOB decisions that could have gone far resolving very little. But the Morrison case, presuming that the securities laws do not apply extraterritorially (and arguably not reversed by a sort of clumsy effort in Dodd-Frank to reverse it), could be pretty big, here's Richard Painter on both issues. And until the honest services statute is revised, Skilling was good news for corporate executives, here's Christine on the case.
On international deals, the killing of BHP's bid for Potash by the Canadian government may a harbinger of protectionism as an M&A defense, so I say it's pretty notable. Here's Steve Davidoff on one aspect of the affair.
And in international regulation, Basel III's continuing development gets my nod. The Basel Committee just met, plans to promulgate the text of Basel III by the end of the year, and has concluded, as US regulators like Sheila Bair have been urging, that systemically significant "banks should have loss-absorbing capacity beyond the Basel III standards ... work on this topic continues in the Committee and the Financial Stability Board (FSB)."
What have we missed?
Dalia Lithwick and Barry Friedman suggest no in this piece, and Matt Bodie and Orin Kerr disagree. It's not an original insight to me, but I think that part of what motivates these sorts of pieces is a disconnect with those with realist inclinations, who believe that the Supreme Court does in fact follow popular opinion, and decisions like Citizen's United, which Lithwick and Friedman see as terrible, and which polls extremely badly, but which nonetheless may make a big difference in the way elections are financed. There's lots of these sorts of decisions, of course, and they're always a problem for realist jurisprudence projects (which, to be sure, have plenty of other advantages). Bush v. Gore, the flag-burning case, all those beat-downs of the government's anti-terrorism policies, and as far as I can tell, there's not a Court observer out there that thinks that it's impossible that it will find a right to gay marriage pretty soon, even though if you looked at how it polled, and you thought that that was what mattered, you wouldn't worry.
Anyway, other than CU, which was the subject of an interesting conference at Wharton on Friday, with the academics you might expect, along with activist investors and Washington NGOs, none of these cases are business matters. Where, I suspect, the Supreme Court could make almost any decision it liked without worry about polling. Though maybe there are other constraints that would pause the Court before working some serious forfeitures.
The first Monday in October is upon us. Looking ahead to the upcoming Supreme Court term, the pickings of corporate, securities, and financial regulation cases at first blush seem slim. We were spoiled last term by an amazingly rich set of cases in these fields, with Citizens United headlining. We are likely at least two terms away from seeing any Dodd-Frank related litigation on the Supreme Court docket.
The corporate/securities/financial cases generally look to be fairly specific to the industries involved. But, when you are dealing with the Supremes, you can never tell; the Court can unexpectedly uncork a broad, sweeping ruling. Moreover, thanks to the unceasing creativity of lawyers, even stray language in an opinion can have unintended ripple effects
Consider what the docket (so far) does offer. First, there are two securities litigation cases. The first, Matrixx Initiatives, will examine whether drug companies have to disclose “adverse event” reports, even when those reports are not statistically significant. A broad statistical significance bar on 10b-5 claims could conceivably have implications far beyond the pharmaceutical industry. Consider the range of disclosures that financial institutions must make on the financial risk in their portfolios. Or the risk of product liability suits for an automaker. Ultimately, any sophisticated risk management and disclosure is going to involve statistics and perhaps modeling too. So the case could have broad implications for the materiality threshold of risk disclosure (and possibly the scienter element of 10b-5 claims, as well). Or maybe the case will be limited solely to the drug industry and this specific type of report.
Similarly, the second securities litigation case, Janus Capital Group, could just implicate the narrow industry of mutual funds. Or the Supreme Court could look to use the case to add a few more broad brush strokes to its Central Bank/Stoneridge case law limiting liability for Section 10/Rule 10b-5. If the Court frames the question in this case the way the question currently appears on the Court website (see the bottom of this post), a retreat from Stoneridge and a broadening of liability looks less likely. (The court calls an investment adviser to a mutual fund a “service provider” and then asks whether the “service provider” could be primarily liable.)
There are a number of consumer financial protection cases that may affect the landscape that Elizabeth Warren & the Consumer Financial Protection face as they set up shop. (More after the break...)
Notably, in Chase Bank USA v. McCoy, the Court will address whether Regulation Z under the Truth in Lending Act requires that credit card lenders issue a change of terms notice to customers when the interest rate on the account changes (because of a floating rate) Again, if the Court frames the question the same way it appears on its web site (see below), don’t bet on a ruling in this case that requires more credit card disclosure.
Here are synopses of the cases from the Supreme Court web site (check out Scotusblog and scotuswiki for more):
Matrixx Initiatives, Inc. v. Siracusano (09-1156)(Argument not yet scheduled)
Background: Respondents filed suit under § 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, alleging that petitioners committed securities fraud by failing to disclose "adverse event" reports-i.e., reports by users of a drug that they experienced an adverse event after using the drug. The First, Second, and Third Circuits have held that drug companies have no duty to disclose adverse event reports until the reports provide statistically significant evidence that the adverse events may be caused by, and are not simply randomly associated with, a drug's use. Expressly disagreeing with those decisions, the Ninth Circuit below rejected a statistical significance standard and allowed the case to proceed despite the lack of any allegation that the undisclosed adverse event reports were statistically significant.
The question presented is: Whether a plaintiff can state a claim under § 10(b) of the Securities Exchange Act and SEC Rule 10b-5 based on a pharmaceutical company's nondisclosure of adverse event reports even though the reports are not alleged to be statistically significant.
Janus Capital Group, Inc. v. First Derivative Traders (09-525)(Argument scheduled for Dec. 7)
Background: There is no aiding-and-abetting liability in private actions brought under Section 10(b) of the Securities Exchange Act of 1934. Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994). Thus, a service provider who provides assistance to a company that makes a public misstatement cannot be held liable in a private securities-fraud action. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761 (2008). In the decision below, however, the Fourth Circuit held that an investment adviser who allegedly "helped draft the misleading prospectuses" of a different company, ''by participating in the writing and dissemination of [those] prospectuses," can be held liable in a private action "even if the statement on its face is not directly attributed to the [adviser]." App., infra, 17a-18a, 24a (emphases added).
The questions presented are:
1. Whether the Fourth Circuit erred in concluding-in direct conflict with decisions of the Fifth, Sixth, and Eighth Circuits-that a service provider can be held primarily liable in a private securities fraud action for "help[ing]" or "participating in" another company's misstatements.
2. Whether the Fourth Circuit erred in concluding-in direct conflict with decisions of the Second, Tenth, and Eleventh Circuits-that a service provider can be held primarily liable in a private securities-fraud action for statements that were not directly and contemporaneously attributed to the service provider.
Chase Bank USA, N.A., v. McCoy (09-329) (Argument scheduled for Dec.8)
Background: The Federal Reserve Board's Regulation Z, which implements the Truth in Lending Act, requires creditors to provide an initial disclosure statement, before any transaction on an open-end credit plan takes place, containing "each periodic rate that may be used to compute the finance charge." 12 C.F.R. § 226.6(a)(2). Regulation Z also requires that when a creditor later changes any term that it was required to disclose in the initial disclosure statement, the creditor must "mail or deliver written notice" of that change in terms before the effective date of the change. 12 C.F.R. § 226.9(c). Credit card issuing banks generally provide the requisite initial disclosures in or with the contract document that governs the credit card account. Such cardholder agreements commonly specify a standard periodic rate of interest and also that, if the cardholder defaults in a certain manner, then the creditor may increase the periodic rate on the account up to an identified default rate.
The question presented is: When a creditor increases the periodic rate on a credit card account in response to a cardholder default, pursuant to a default rate term that was disclosed in the contract governing the account, does Regulation Z, 12 C.F.R. § 226.9(c), require the creditor to provide the cardholder with a change-in-terms notice even though the contractual terms governing the account have not changed?
I'm back from Case Western, which held a conference on the Roberts Court's business law, with papers from Matt Bodie, Brian Fitzpatrick, Thom Lambert, and Adam Pritchard, and commentary from a cast of worthies. One animating question that occupied many of the conference attendees is whether the Court is simply anti-court (that is, anti-plaintiff because they don't think businesses should be sued in court), or if there is more to be said. It could be that in antitrust, error reduction is animating the Court, for example, and Justice Breyer has used error reduction language in the Credit Suisse case. It could be that it is empowering human resources as the delegates who must apply employment law in lieu of district courts. We explored these and other possibilities over the course of the conference, and the whole process turned me from a skeptic into .... maybe a slightly less skeptical skeptic about the Supreme Court.
I often think that paying attention to the Supreme Court is a good way to distract oneself from what the federal courts actually do. But it is true that there's a bit more happening in the Court related to business. There's a growth in antitrust, and the securities cases that are being taken are pretty interesting, even if they aren't increasing apace. So it could be that the Roberts court does turn into a business Court, instead of a place for culture wars and so on.
The NLRB has announced it will rehear 100 cases of the 600 odd decided by it when it was down to two members - the Court ruled that it was statutorily required to have three members. It wasn't clear that the decision would be a big deal (and, like the PCAOB case, it found an agency to be acting illegally for quite a while), given that the agency had one Republican and one Democrat member during this period ... but it turns out that it will be. Basically, if you bothered to petition the the court of appeals on the grounds that two members was too few, the Board will rehear the case. And that number will grow - if you didn't do so, and the matter isn't moot or time barred, you could petition for rehearing now, and still get it.
Whatever it is, it isn't a general order by the NLRB reaffirming through the full board the results of the two member cases.
I've noted that the Supreme Court, like most courts, gets involved in business regulation very late. I think this makes its role a combination of not so important and a bit unsettling. You know, if we'd known that honest services fraud had to be limited, it might have been nice to know that before two decades of broad honest services prosecutions. And if the presumption against extraterritorial securities regulation was so strong, perhaps leaving Henry Friendly's standard on the books for 40 years was perhaps not the best way to stabilize business expectations. But mostly I think that it is easy to overstate the Court's role in setting these rules, because it gets involved so late. Bainbridge and I have had a chat about it.
Larry Ribstein's pretty good Forbes column makes the case that the Court is acting a bit more proactively, and indeed, in a crisis, countermarjoritarianly, as courts should:
I think it is an interesting way to characterize what has been going on. When I see appellate opinions, I often think, "late and sort of irrelevant." I'd stand by that, for this term. But I suppose that if the Supreme Court manages to express a powerful mood, and changes things measurably for future business, perhaps I should keep quasi-live blogging its business decisions after all (Gordon has some more considered observation here). More from Larry here.
David gave us a timely and accurate summary of Free Enterprise Fund v. Public Company Accounting Oversight Board shortly after the opinion was released, and Donna Nagy offered additional commentary. It took me a few days to get to the opinion, but now that I have read it, I have two brief comments:
- What passes for constitutional law in this opinion is a policy decision without (much) empirical foundation. Of course, this isn't the only instance when the Supreme Court is forced to make such decisions, but I thought Justice Breyer framed the central question of the case nicely: "To what extent ... is the Act’s 'for cause' provision likely, as a practical matter, to limit the President’s exercise of executive authority?"
This is an empirical question, and Justice Breyer offer several anecdotes illustrating ways in which a President informally exercises power over administrators, thus suggesting that the "for cause" provision is not unduly detrimental to Presidential power. The majority responds by deflection: "In its pursuit of a 'workable government,' Congress cannot reduce the Chief Magistrate to a cajoler-in-chief." Cute ... but it elides the issue. Where Justice Breyer seeks evidence of the effects of two layers of for-cause tenure, the majority settles for a rough sense of the right limit: "two layers are not the same as one."
I am happy with the majority's outcome because it comports with my sense of the right limit. I might be even happier if they would acknowledge that "one layer is not the same as none." In any event, the more interesting point to me is that a little evidence would go a long way in situations like this. Do for-cause provisions matter in the real world? How much to they change behavior? I don't know if anyone has done this research, but we are seeing more of this sort of scholarship as more law professors with training in empirical methods enter the academy.
- A second empirical question -- albeit one that seems harder to measure than the first -- is whether limitations on Presidential power necessarily result in expansions of legislative power. Again, Justice Breyer frames the issue, citing Freytag v. Commissioner, 501 U. S. 868, 878 (1991): "The Court has said that '[o]ur separation-of-powers jurisprudence generally focuses on the danger of one branch’s aggrandizing its power at the expense of another branch.'" According to Breyer, the statutory provisions in question do not aggrandize power to Congress because "Congress has not granted itself any role in removing the members of the Accounting Board." The majority, by contrast, observes: "Congress has plenary control over the salary, duties, and even existence of executive offices. Only Presidential oversight can counter its influence."
All very interesting, and I would probably give the nod to the majority, but I was also interested to note soon-to-be-Justice Kagan's views on this issue: “As a practical matter, successful insulation of administration from the President―even if accomplished in the name of ‘independence’―will tend to enhance Congress’s own authority over the insulated activity.” Elena Kagan, Presidential Administration, 114 Harv. L. Rev. 2245, 2271 n. 93 (2001).
The first sentence of Free Enterprise Fund v. Public Company Accounting Oversight Board reads: "Our Constitution divided the 'powers of the new Federal Government into three defined categories, Legislative, Executive, and Judicial.' INS v. Chadha , 462 U. S. 919, 951 (1983)."
We needed a secondary source citation for that proposition? Or maybe the Chief Justice used the quotation for the original way in which Chadha framed the idea?
One of many reasons I dislike reading Supreme Court opinions is that many of them read like they were written by law review editors.
Do you have a citation for that?
I noted that courts have formed an unimportant part of the financial crisis interventions by the government, and that the end of the Supreme Court's most recent term suggests that it gets to matters years, if not decades, after they have become settled law one way or the other.
Is this a bad thing? Bainbridge says no:
When it comes to complex issues like the financial crisis, moreover, why would we want judges being "proactive participant[s] in the regulatory system"? Consider the Supreme Court. Nine old farts with hardly a day of business experience between them. Each has a staff of just four (I think) wet behind the ears law clerks who probably took all con law courses. I dare say there's nobody in the Supreme Court building who could tell you the difference between a CSO and a CBO. They simply don't have the expertise available that Congress and the regulatory bodies possess.
And, of course, the judiciary is the least accountable branch. If you're going to be in a position to plunge the entire world economy into a depression, you ought to be democratically accountable.
I'm not sure I disagree. Legal scholars often focus on courts, which leads me to occasionally post (and write) often about how small a part of the legal picture they are (I say this with all modesty - I could be entirely wrong). Whether you think this is ideal or detrimental depends on whether you think that as an institutional matter, courts are likely to help or hurt. I spend much of my scholarly life ignoring them, so I would probably suggest that they can neither help nor hurt much in almost any particular matter in which I have an interest. But there's no question that for some things they matter, it's just that for things like international economic law and financial regulation, they don't so much. And I suspect the category of stuff for which they really do matter is smaller than most people think.
I suppose there's an implicit "and that's not so bad" in there. In that, Bainbridge and I could probably write a majority opinion on a three blogger panel.
I've only been keeping quarter of an eye on the Kagan hearings, not out of interest, but because I generally find this sort of thing to be a shocking waste of time, and I want to see if I'm right. I don't quite know why the Senate does it. That greatest deliberative body doesn't exactly look like a brace of British MPs when it comes to cut and thrust questioning. But at least Kagan's a little better in the Q&A than was her amazingly pious, and disingenuous, opening statement, which included a lengthy buttering up of the senators ("each of you has been unfailingly gracious and considerate"), groan-inducing filial flag waving ("my parents lived the American dream"), and this sort of sanctimony:
Mr. Chairman, the law school I had the
good fortune to lead has a kind
of motto, spoken each year at graduation. We tell the new graduates that
they are ready to enter a profession devoted to "those wise restraints
that make us free." That phrase has always captured for me the way law,
and the rule of law, matters. What the rule of law does is nothing less
than to secure for each of us what our Constitution calls "the blessings
of liberty" - those rights and freedoms, that promise of equality, that
have defined this nation since its founding. And what the Supreme Court
does is to safeguard the rule of law, through a commitment to
even-handedness, principle, and restraint.
I had the good fortune to attend the law school Kagan would later
have the good fortune to lead, and believe me, I never heard anything
about "wise restraints that make us free." Unless they were the
restraints on the laity that prevented them from practicing law. But
maybe that's because my class spent its time in the library, hiding
critical texts from other students. (It does sound like things changed,
as Erik's prior post attests.) Anyway, I can barely imagine academics
saying this sort of thing without blanching, but Kagan has long looked
more like a politician than a legal scholar to me. A moderate to
conservative one, to boot, which is why I would confirm her even if she
made 7 incredible gaffes during the hearings, if I were a Republican
senator, because the alternatives will all be worse. Which makes the
kabuki theater of the hearings all the more pointless.
Like I said, thank goodness that in the Q&A she has come across a
little less preciously. I still don't see the point of these hearings,
but a couple more days of non-answers that at least appear to have
heard the question, without bowing and scraping to people who aren't
going to vote for her anyway, might be a bit reassuring on the "she's
not a total automaton" scale.
Elena Kagan has done a lot for the law students at Harvard (see my own dean, Kevin Washburn’s, recent essay on that topic). But are her hearings – and all Supreme Court confirmation hearings for that matter --undoing some of that good work? Are confirmation hearings bad for law students because they discourage active debate on controversial topics in class?
I remember when I was a law student having the distinct impression that my fellow students were reluctant to talk about hot-button issues like abortion in class for fear of putting themselves on the record should they ever be nominated for a plum job. In other words, you wouldn’t want something in class that could come back to haunt you decades later when some Senator grills you.
Of course that’s a ridiculous attitude. Or is it? Reporters have been combing through Kagan’s senior thesis and newspaper columns at Princeton for clues to what kind of justice she would be. A ridiculous process leads to ridiculous behavior from over-optimistic law students. I’m fairly sure the reluctance to speak in class is not limited to law students at Harvard. Lots of students at every school dream big dreams. Every kid dribbling down at the basketball court on the corner has NBA day dreams. Except in hoops, those daydreams lead to too many circus shots, while in law schools, perhaps the SCOTUS dreams lead to too few.
Perhaps my law school experience is dated (and, in my classes, views on topics like corporate freeze-outs are unlikely to come back to haunt students). Law professors and students, feel free to comment below on whether students are still reluctant to discuss hot topics for fear of future confirmation fights.
In pre-decision speculation, I wondered whether the Supreme Court would foreclose not only f-cubed cases, but all cases involving foreign-market transactions -- even those affecting U.S. investors. Well -- 5-3 on that point, the way I read Justice Breyer's brief concurrence. I would never have expected, though, the way the Court got to that result. Is the case really about the presumption against extraterritoriality? I'm not so sure.
Justice Scalia begins by quoting Aramco on that presumption: "legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States." The presumption can be overcome by a showing that the legislation in question was in fact meant to apply beyond U.S. territory. But hasn't that showing been made, and accepted even by the majority? The classic form of "extraterritoriality," after all, is effects-based regulation -- the application of U.S. law to conduct that occurs in another country on the basis of the harm that results within the United States. The majority would permit this kind of extraterritoriality, since it would permit the application of U.S. law to fraudulent conduct abroad as long as that conduct occurred in connection with a U.S. transaction in securities. In other words, in the Court's view, the issue is not that 10(b) can't apply to foreign fraud -- it's that 10(b) can't apply to any fraud at all (foreign or domestic) in connection with a foreign transaction. (As Bill Dodge has pointed out, it's a little hard to see what the presumption against extraterritoriality has to do with that conclusion about the category of transactions to which the statute applies.)
Now, recognizing that the presumption against extraterritoriality had been overcome would not necessarily have led to a different result in this case. In his fine dissenting opinion in the 1993 Hartford Fire antitrust case, Justice Scalia notes that "if the presumption against extraterritoriality has been overcome ..., a second canon of statutory construction becomes relevant: '[A]n act of congress ought never to be construed to violate the law of nations if any other possible construction remains.'" On that basis, keeping in mind principles of international comity and the need to avoid unnecessary interference with the interests of other nations, the Court (following its approach in Empagran, another antitrust case) could have concluded (properly, as I have argued elsewhere) that it would be unreasonable to apply U.S. securities law in cases so closely connected with other jursidictions.
So why did the Court engage in this convoluted and uncompelling application of the presumption against extraterritoriality rather than rely on traditional analysis of international-law limits on regulatory jurisdiction? Apparently because it had other fish to fry. Or perhaps the more apt expression would be, another goose to cook -- the goose, of course, being the implied right of action under 10(b) and Rule 10b-5. The decision does not merely speak to the reasonableness of applying U.S. antifraud law in certain categories of cross-border cases. Rather, the Court jettisons decades of precedent (admittedly, Second Circuit precedent, not its own) in narrowing the category of interests that, in its view, 10(b) serves. In the end, it seems that the progenitors of this decision are not Alcoa, Hartford Fire, Empagran and other cases addressing international-law limits on the application of U.S. law in situations of jurisdictional conflict. Instead, they are Central Bank of Denver, Dura, Tellabs, Stoneridge, and other cases cutting back the implied right of action.
I've never met the Ginsburgs, so anything I know of the 50-plus year marriage of Ruth Bader Ginsburg and Martin Gisnburg is from the media or mutual acquaintance. However, their story (as told here and here), sounds familiar to me, yet still rare. How many of us have friends who married in the middle of their educational or professional journeys, moved for one spouse, then the other, then the other again, with one spouse eventually finding a dream job and the other a wildest dream job? These are great partnership stories. I love them. I have one of them.
Much has been said lately about how Justice Sonia Sotomayor and now General Elena Kagan may or may not be good role models for so many working women, particularly working women attorneys, because they have neither spouses nor kids. They may have different daily concerns that push and pull them, but they don't know how we are pushed and pulled. But of course Justice Sandra Day O'Connor and Justice Ginsburg had these pushes and pulls, but we didn't really watch them in real time. Unlike senators and Presidents and reality TV stars, Supreme Court Justices live their private lives mostly private. So, undoubtedly Justice Ginsburg has a lot in common with a other working women I know, but I never really thought about it before.
But back to the Ginsburgs. Their marriage seems to embody the only romantic advice I think I can give my children: Marry your biggest fan. I did.
Donna Nagy of the Indiana University's Maurer School of Law has been commenting on the Glom from time to time Free Enterprise Fund v. Public Company Accounting Oversight Board, which was decided by the United States Supreme Court today. (For previous posts by Donna, see here and here.) Donna also authored an amicus brief in the case, which I signed. Today she offers the following commentary on the opinions:
With regard to the PCAOB, the Court's decision may have effects that are more theoretical than actual. As David Zaring observed, the majority found that the SOX provision limiting SEC removal of PCAOB members to restrictively-defined "good cause" violated the doctrine of separation of powers. The Court then performed judicial surgery rendering the restrictive removal provisions void. Accordingly, the SEC now has the power to remove PCAOB members for any reason -- or for no reason at all. The SEC, however, will be unlikely to make much use of this new-found power, and has a host of reasons for continuing to foster a cooperative and collaborative relationship with the PCAOB.
Yet at the same time, the Court sent Congress a message that double-decker independent entities conflict with the structure of the Constitution and fall below a constitutionally permissible level of accountability. Prior Supreme Court decisions such as Humphrey's Executor and Morrison make clear that the Constitution does not prohibit Congress from creating independent regulatory agencies like the SEC. However, a majority of the Court was unwilling to extend those decisions to support the creation of a regulator like the PCAOB that was even further detached from Presidential control. The PCAOB’s congressional design was thus regarded as a bridge too far.
The Court's decision to excise from the SOX the restrictive removal provisions also allowed for a quick rejection of the Appointments Clause challenge. Here, instead of analyzing the statute as written, the Court analyzed its new post-surgery version. Because the five members of the PCAOB are now removable at-will by the SEC, they can properly be regarded as the subordinates of the SEC’s Commissioners. PCAOB members are therefore "inferior officers" who, pursuant to the Constitution, may be appointed by the SEC. Had the Court not excised the restrictive removal provisions, it is unlikely that it could have affirmed the D.C. Circuit’s Appointments Clause ruling. Indeed, Chief Justice Roberts stated expressly that:
Broad power over Board functions is not equivalent to the power to remove Board members. . . .The Commission cannot wield a free hand to supervise individual members if it must destroy the Board in order to fix it. Even if Commission power over Board activities could substitute for authority over its members, we would still reject respondents’ premise that the Commission’s power in this regard is plenary. As described above, the Board is empowered to take significant enforcement actions, and does so largely independently of the Commission. Its powers are, of course, subject to some latent Commission control. But the Act nowhere gives the Commission effective power to start, stop, or alter individual Board investigations, executive activities typically carried out by officials within the Executive Branch.
But the ability to remove officials at-will and without cause is a “powerful tool for control,” and after today’s decision, the SEC has that authority. The Court thus cited to its precedent in Edmond v. United States where it held that “‘inferior officers’ are officers whose work is directed and supervised at some level” by other officers appointed by the President with the Senate’s consent.”
The Court invalidated the for cause removal protections enjoyed by the PCAOB today, and in doing so, it illustrated how to find an agency to be unconstitutional, without really doing anything important at all. As Tom Goldstein predicted, CJ Roberts wrote the 5-4 opinion.
- Here's the removal protection enjoyed by the Board that the Court struck down, as summarized by the Court:
- A Board member cannot be removed except for willful violations of the Act, Board rules, or the securities laws; willful abuse of authority; or unreasonable failure to enforce compliance—as determined in a formal Commission order, rendered on the record and after notice and an opportunity for a hearing. §7217(d)(3); see §78y(a). The Act does not even give the Commission power to fire Board members for violations of other laws that do not relate to the Act, the securities laws, or the Board’s authority.
- The reason this matters is because of a line of jurisprudence suggesting that the president must have the power to execute the laws passed by Congress. But if he can't fire some bureaucrats with responsibility over those laws, he doesn't have control over how they execute them. This is a separation of powers problem:
- The Constitution that makes the President accountable to the people for executing the laws also gives him the power to do so. That power includes, as a general matter, the authority to remove those who assist him in carrying out his duties. Without such power, the President could not be held fully accountable for discharging his own responsibilities; the buck would stop somewhere else.
- So the Board's protections from removal are unconstitutional. Does that invalidate everything the Board has done? Seems logical, as it was an unconstitutionally created agency. As Bainbridge notes, SOx doesn't come with a severability clause, and the petitioners wanted everything PCAOB has ever done to be nullified. That would have been a sorta big deal, at least if you tink that PCAOB itself is doing important work. But no:
- The remaining provisions are not “incapable of functioning independently,” Alaska Airlines, 480 U. S., at 684, and nothing in the statute’s text or historical context makes it “evident” that Congress, faced with the limitations imposed by the Constitution, would have preferred no Board at all to a Board whose members are removable at will.
- So the Board survives, just not its job protections. Moreover, in an appointments clause challenge to the Board, the Court explicitly brought the SEC within the confines of constitutional law, making it the equivalent of a head of a department within the executive branch:
- As a constitutional matter, we see no reason why a multimember body may not be the “Hea[d]” of a “Departmen[t]” that it governs. [And]
- 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.
- So really, the Court didn't do anything at all to PCAOB, which will continue exactly as before, only with its members removable by the President SEC, and took care to suggest that the SEC itself was an ordinary part of the executive branch, even though its members also enjoy for cause protections:
- Concluding that the removal restrictions are invalid leaves the Board removable by the Commission at will, and leaves the President separated from Board members by only a single level of good-cause tenure. The Commission is then fully responsible for the Board’s actions, which are no less subject than the Commission’s own functions to Presidential oversight.
- The remedy is the key, and although the Court didn't explain the remedy too clearly, it basically excised the removal protections, making members of the PCAOB removable at will by the President SEC (this may be defined a bit more clearly on remand by the DC Circuit), and handed petitioners a pretty empty declaratory victory:
- petitioners are not entitled to broad injunctive relief against the Board’s continued operations. But they are entitled to declaratory relief sufficient to ensure that the reporting requirements and auditing standards to which they are subject will be enforced only by a constitutional agency accountable to the Executive.
- It underscored that the opinion had nothing to do with the ordinary job protections of the civil service. It wrote cautiously in general:
- We do not decide the status of other Government employees, nor do we decide whether “lesser functionaries subordinate to officers of the United States” must be subject to the same sortof control as those who exercise “significant authority pursuant to the laws.” Buckley, supra, at 126, and n. 162.
- It's an unconventional remedy, actually, and it makes this decision much less dramatic than it threatened to be. What the majority and dissent are left to argue about, really, are purely symbolic questions of whether we are being drowned by bureaucrats v. whether Congress shouldn't have the power to structure the government essentially as it wants. I predict these stirring words will often be quoted from Roberts's opinion:
- One can have a government that functions without being ruled by functionaries, and a government that benefits from expertise without being ruled by experts. Our Constitution was adopted to enable the people to govern themselves, through their elected leaders. The growth of the Executive Branch, which now wields vast power and touches almost every aspect of daily life, heightens the concern that it may slip from the Executive’s control, and thus from that of the people.