June 28, 2010
Donna Nagy on Free Enterprise Fund v. Public Company Accounting Oversight Board
Posted by Gordon Smith

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.”

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