In Donna Nagy's first post on the PCAOB case, she mentioned being at the Supreme Court with Bob Thompson of Vanderbilt, who is visiting this year at Georgetown. Bob was kind enough to write up some of his own views on the case for publication here. I have been begging Donna and Bob for ages to come aboard as guest bloggers, so I am thrilled that both of them have decided to share something about this case.

From Bob:

Monday’s Supreme Court argument in Free Enterprise Fund v. PCAOB produced spirited discussion as to when and whether the President should call the SEC, an independent agency. Justice Samuel Alito set the question in the context of a current “hot button” issue—that of executive compensation: What if the President read about the salaries of the PCAOB (over $500,000) and said “this is outrageous. I want to change it. How can he do that?” In response to Solicitor General Elena Kagan’s answer that the President or some member of his staff would call and say “I have a problem with this,” Justice Antonin Scalia’s used a bit of humor to characterizer such a limited description of presidential authority, picturing the President saying, “Would you please change it? “ “I could do that,” the Justice said to laughter in the court room. Later when Justice Anthony Kennedy repeatedly pushed the PCAOB’s advocate, Jeffrey Lamken, about whether it is “quite all right for the President to phone them on an ongoing basis and say do this or do that,” Justice Scalia drew on his earlier service as head of the Office of Legal Counsel at the Department of Justice when his advice to the President was that you can’t tell independent agencies you want them to rule this way or that way. “I think there would be an impeachment motion in Congress.”

When the Court rules next year, it likely will not overturn settled precedent on the decision space permitted for independent agencies, but Monday’s questioning suggests a close vote on the somewhat unusual pattern the Congress followed in designing the PCAOB with perhaps a majority the Court willing to rein in some of the specific insulations from executive power in the PCAOB setting. Chief Justice John Roberts, who was the most active member of the Court in questioning the Solicitor General, focused on the extra layer of insulation of the PCAOB against presidential control as “for cause squared” i.e. requiring removal by the President of SEC commissioners for cause, and the SEC removing the PCAOB members for cause in order to change policy.

Solicitor General Kagan’s main argument that there was “constitutionally sufficient” Presidential control over the PCAOB and the SEC and that presidential control is exactly the same with respect to the PCAOB’s activities as it is with respect to SEC staff activities. After several back and forths, the Chief justice observed “I am not worried if it’s the same. I am worried if it’s enough.” [If you are interested in another take on this topic, Lisa Bressman and I have a forthcoming paper, The Future of Independent Agencies that develops different ways agency independence and expertise can fit with presidential accountability, using the financial agencies as a template.]

Justice Kennedy may well be the swing vote on this case. In some past cases he has voted to prevent the president from overreaching with respect to executive branch agencies. In Monday’s argument, he asked about possible harms from the investigatory powers of the PCAOB unmonitored and unchecked by the SEC. He also suggested looking at the actual operation of the Board, suggesting some skepticism at what had been a consistent argument of Kagan and Lamken that the SEC had comprehensive control over the PCAOB.

Justice Kennedy did raise what may be the “sleeper” issue of the argument, - on what basis can SEC commissioners be removed? As followers of administrative and securities law know, the SEC statute is silent about removal, but lower courts interpreted there to be a “for cause” removal similar to the FTC. Justice Kennedy asked that if removal power is implied, why isn’t it “removal power for all purposes?” Solicitor General Kagan acknowledged a perplexity of this law for many decades, but noted that neither side in this case had contested the for cause removal for SEC commissioners. Perhaps it ends up being just a looses thread that doesn’t go anywhere, but it does stir memories of another securities case in which a seemingly settled issue was inserted by the Court—aiding and abetting in Central Bank in 1994, written by Justice Kennedy during a term in which one of his clerk was now Circuit Judge Brett Kavanaugh who wrote the dissenting opinion in Free Enterprise.

Solicitor General Kagan was careful in answering the reach of the “for cause” exception for removal. When the Chief Justice hypothesized that for cause does not include failure to follow policies of the President, she responded “let’s assume that that’s correct” and later answered that the “the President can pick up the phone and fire the SEC commissioners for cause, however ‘cause’ has been defined.” Mr. Lamken in answering another query referred to agency action outside the range of reasonable policy responses that might amount to inefficiency, neglect or malfeasance.

Another issue that might show up in the Court’s opinion is the difference in the power of the SEC Chair and the five commissioners since Sarbox gives the powers related to the PCAOB to the entire commission and during Monday’s argument, several colloquies used the President’s power to remove the chair as a key ingredient in Presidential control. Justice Scalia called this “the knife the President has into the SEC.”

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