August 05, 2009
Nagy on What's Wrong With The PCAOB
Posted by David Zaring

Gordon pointed you to Donna Nagy's brief (and Larry Ribstein's) yesterday for the Free Enterprise Fund v. PCOAB case, in which she and a number of other eminent law professors point out the constitutional problems with the Board, which, they argue, is inconsistent with constitutional separation of powers principles.

I wanted to follow up a bit here, because the Board is a strange entity indeed - a pretty independent creature of the SEC, which is itself pretty independent from presidential control.  There are not many (or even any) agencies set up like it.  How did Congress think it up?  I think the Nagy brief has an interesting point here:

Congress patterned the PCAOB on the securities industry’s self-regulatory model, which has been in place for more than 70 years.....SROs, like the NASD (now FINRA) and the NYSE, are not created by the government, nor are their officials appointed by the government. Accordingly, the NYSE and FINRA, unlike the PCAOB, are not part of the “Government itself” under Lebron v. National R.R. Passenger Corp., 513 U.S. 374, 400 (1995), and NYSE and FINRA officials are not federal officers or employees for purposes of the Appointments Clause. The SRO model is nonetheless useful in analyzing the constitutionality of the PCAOB because, as explained below, the statutory provisions granting the SEC oversight and enforcement authority over the PCAOB are virtually identical to the statutory provisions providing for SEC oversight and enforcement authority over the NYSE and FINRA.

So in other words, PCAOB is set up like an SRO, which is constitutional, but SROs are private entities, while PCAOB is a public entity.  It is the public-private distinction which she thinks has tripped up the government - and it wouldn't be the first time.  While I don't know if this is a dealbreaker, it is an interesting exercise in how laws get made by looking to the old models ... something that would be rationalizers of our financial regulatory system are realizing to their chagrin.

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