Tag: Free Enterprise Fund v. PCAOB

PCAOB is Fixed – May Take Other Agencies Down (or get Fixed)

In the Free Enterprise vs. PCAOB decision, the Supreme Court found that a double layer of limitation of firing for cause is unconstitutional. You can’t have an agency where the officers are only removable for cause under another federal agency whose members are only removable for cause. One level of protected tenure is acceptable, but two is not.

In his dissent, Justice Breyer argued that PCAOB is not the only agency that had two level of protected tenure. He goes on to name names. He identifies four other appointments that have more than one level of protection.

Federal Labor Relations Authority: Foreign Service Labor Relations Board
“The Chairperson [of the FLRA, who also chairs the Board] may remove any other Board member . . . for corruption, neglect of duty, malfeasance, or demonstrated incapacity to perform his or her functions . . . .” 22 U. S. C. §4106(e)

General Services Administration: Civilian Board of Contract Appeals
“Members of the Civilian Board shall be subject to removal in the same manner as administrative law judges, [i.e., ‘only for good cause established and determined by the Merit Systems Protection Board.’] ” 41 U. S. C. §438(b)(2)

Postal Service: Inspector General
“The Inspector General may at any time be removed upon the written concurrence of at least 7 Governors, but only for cause.” 39 U. S. C. §202(e)(3)

Social Security Administration: Office of the Chief Actuary
“The Chief Actuary may be removed only for cause.” 42 U. S. C. §902(c)(1)

I think Justice Breyer just removed tenure from these positions.  In reading the PCAOB decision, I don’t think these positions are unconstitutional. Merely, they have lost their tenure and can now be removed at-will by the independent boards that appoint them.

PCAOB is Ruled Unconstitutional

This morning, the United States Supreme Court issued its opinion in the case of Free Enterprise Fund v. PCAOB. For me in the compliance world, the case was about the viability of PCAOB under Sarbanes-Oxley. For the constitutional scholars it is an important separation of powers case.

Responding to concerns about accounting that led to the collapses of Enron and WorldCom, Sarbanes-Oxley established PCAOB as an independent body to oversee the firms that do accounting for public companies. The law gave the Securities and Exchange Commission power to name the members of the Public Company Accounting Oversight Board.

The trouble is that the President has no power to remove the Commissioners of the SEC, other than the Chair. The President can only appoint them. Similarly, the SEC selects the board members of PCAOB, but cannot remove them. The Free Enterprise group says that violates a clause of the Constitution giving the president the power to appoint government officials except for certain instances involving inferior officers.

The Supreme Court ruled that the limitations on the power to remove the members of the board is unconstitutional under the separation of powers doctrine. The board members are inferior officers, and the method of appointment under the Sarbanes-Oxley Act violates the Appointments Clause.

The ruling does not seem to shut down PCAOB immediately since the Court declined to allow a broad injunction against PCAOB’s continued operation. The challengers to the method of PCAOB board-member appointment are entitled to a declaratory order “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.”

The Court also found the PCAOB provisions severable from the rest of Sarbanes-Oxley, so they did not invalidate the entire law.

There will have to be some quick tinkering by the SEC and Congress on how to deal with the ruling.

Administrative law professors will need to tinker with their classroom teaching and casebooks to address this case and its implications.

Update – Some key quotes from the Opinion:

We hold that the dual for-cause limitations on the removal of Board members contravene the Constitution’s separation of powers.

The Act before us does something quite different. It not only protects Board members from removal except for good cause, but withdraws from the President any decision on whether that good cause exists. That decision is vested instead in other tenured officers—the Commissioners— none of whom is subject to the President’s direct control.The result is a Board that is not accountable to the President, and a President who is not responsible for the Board.

Second Update

[T]he existence of the Board does not violate the separation of powers, but the substantive removal restrictions imposed by §§7211(e)(6) and 7217(d)(3) do. Under the traditional default rule, removal is incident to the power of appointment. … 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.

That leaves the 15 U.S.C. §7211(e)(6) and 15 U.S.C. §7217(d)(3) out in the cold, but saves PCAOB and Sarbanes-Oxley from destruction in a very narrow ruling. It seems that Congress will not need to take any action since the decision merely grants the SEC the right to remove any Board member for any reason. No longer is removal limited to a firing “for cause.”

There may be some argument that the past rulings and standards set by PCAOB were made by an unconstitutional. That’s heading down a path way beyond my expertise (or interest).

So life will continue on, but the PCAOB board members have  less job security.

Sources:

Tuesday Morning Quarterback of Free Enterprise v. PCAOB

pcaob logo

On Monday, the Supreme Court listened to the oral arguments in Free Enterprise Fund v. Public Company Accounting Oversight Board (08-861). For me in the compliance world, the case is about the viability of PCAOB under Sarbanes-Oxley. For the constitutional scholars it is an important separation of powers case.

Responding to concerns about accounting that led to the collapses of Enron and WorldCom, Sarbanes-Oxley established PCAOB as an independent body to oversee the firms that do accounting for public companies. The law gives the Securities and Exchange Commission power to name the members of the Public Company Accounting Oversight Board.

The trouble is that the President has no power to remove the Commissioners of the SEC, other than the Chair. The President can only appoint them. Similarly, the SEC selects the board members of PCAOB, but cannot remove them. The Free Enterprise group says that violates a clause of the Constitution giving the president the power to appoint government officials except for certain instances involving inferior officers.

If the Supreme Court agrees that PCAOB isn’t constitutional, it could force a revisit of Sarbanes-Oxley, or at least the portion of it that creates PCAOB. In a broader view for constitutional scholarship, the case could also call into question other independent agencies and how they appoint members of those agencies.

David Zaring in The Conglomerate thinks that the Supreme Court is unlikely to get in the way of an important government agencey. After all eliminating an agency is a sever sanction.

Orin Kerr in The Volokh Conspiracy> got the impression that the arguments did not go well for the challengers to the constitutionality of the Public Company Accounting Oversight Board.

Fawn John Johnson and Jess Bravin in The Wall Street Journal look to Justice Kennedy as the key to which way the Supreme Court will decide. The liberal justices are less likely to find fault with the independent agencies. For conservative legal scholars, the case is less about the accounting board itself than about the “unitary executive” theory, which holds that because the president is accountable to the electorate, he must be able to remove federal officials at will.

The transcript and reports seem to focus on how much control the SEC has over PCAOB. Hans Bader points out that the SEC had previously expressed its frustration about how little control it had over PCAOB, seemingly contrary to the arguments made in front of the Supreme Court.

David Zaring in The Conglomerate points out that the number of law review articles referring to “PCAOB”: 1021.  Number referring to “PCOAB”: 29. So much for the higher scholarship and editing of law review articles over blogs.

UPDATE:

Broc Romanek, of The Corporate Counsel.net provides a great first-hand account of the hearing and his experience at the Supreme Court the day of the hearing: My SCOTUS Experience: The Full Monty.

References:

Is PCAOB Constitutional?

vanderbilt law review

Now that Jones v. Harris has been argued, we have to sit and wait for the decision. But there is another compliance case coming up for argument in front of the Supreme Court: Free Enterprise Fund v. PCAOB.

The PCAOB case is much sexier than the Jones case since it involves the president’s constitutional powers of appointment and the separation of powers under the Constitution. (At least as far as compliance is sexy.)

The November 2009 edition of the Vanderbilt Law Review has a quartet of articles that focus on the PCAOB case and the underlying constitutional issues:

Congress created the Public Company Accounting Oversight Board PCAOB under the umbrella of the Securities and Exchange Commission. If PCAOB is a government agency and its members are officers, then the appointment of the PCAOB is very odd. The President can appoint the SEC Commissioners, but only remove them “for cause.” Then in turn the SEC Commissioners appoint the PCAOB members.

The issues arises from the Appointments Clause of the U.S. Constitution U.S. CONST. Art. I, § 2, cl. 2;:

[The President] shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.

Are the PCAOB‟s Members “principal officers” of the United States, whose appointment must, be made by presidential nomination and Senate approval? Even if they are “inferior officers” of the United States, does PCAOB violate the Constitution‟s arrangement for the appointment and removal of such officers because they are put entirely in the hands of the SEC, an independent regulatory commission, beyond the effective reach of presidential oversight?

There are lots of interesting issues discussed in these articles and lots of interesting things the Supreme Court could do in its opinion for the PCAOB case. It could have broader implications to other government commissions, accountants and compliance professionals.

Is the Public Company Accounting Oversight Board Unconstitutional?

pcaob_logo

That question is on the docket for the Supreme Court in October. The Court agreed to rule on the constitutionality of the Public Company Accounting Oversight Board in Free Enterprise Fund v. PCAOB (08-861). The Sarbanes-Oxley Act passed in 2002 created PCAOB as a new government agency to regulate firms that audit the books of publicly traded companies. The key question in the case is whether the Act violated the separation-of-powers doctrine.

This amici brief from a group of law professors says: No, its unconstitutional.

As law professors who have studied and written about the massive accounting and corporate governance scandals that prompted the passage of the Act, we applauded Congress’s decision to establish a new independent regulator to oversee the conduct of the auditors of public companies. We have been concerned, however, that the particular design chosen by Congress accorded the PCAOB substantial discretion and autonomy without imposing constitutionally sufficient accountability. The current economic crisis in the financial markets has raised for us another concern: that Congress may use the design of the PCAOB in creating additional independent financial regulators. Ultimately, we hope that a decision by this Court will prompt Congress to restructure the PCAOB as a regulator that is more accountable and transparent.

The professors in the brief are: Stephen Bainbridge, Robert Bartlett, William Birdthistle, Timothy Canova, Lawrence Cunningham, James Fanto, Theresa Gabaldon, Lyman Johnson, Roberta Karmel, Donna Nagy, Lydie Pierre-Louis, Adam Pritchard, Margaret Sachs, Gordon Smith, and Kellye Testy.

The Cato Institute and law professors Larry Ribstein and Henry Butler came to the same conclusion.

Historically, the power to remove an official “for cause” was seen as “an impediment to, not an effective grant of, Presidential control.” Morrison v. Olson, 487 U.S. 654, 706 (1988) (Scalia, J., dissenting). But at least traditional independent agencies are subject to this control. That much is settled. Here, the Board is protected from Presidential control by two layers of “for cause” removal statutes—rendering removal effectively impossible.

Also lining up against PCAOB are The Washington Legal Foundation, Mountain States Legal Foundation and American Civil Rights Union.

Reference:

Supreme Court to Rule on Sarbanes-Oxley

pcaob_logo

On Monday, the Supreme Court agreed to rule on the constitutionality of the Public Company Accounting Oversight Board. The Sarbanes-Oxley Act passed in 2002 created PCAOB as a new government agency to regulate firms that audit the books of publicly traded companies. The key question in the case is whether the Act violated the separation-of-powers doctrine. The case is Free Enterprise Fund v. PCAOB (08-861).

In this challenge, Free Enterprise Fund and Beckstead and Watts, LLP, LLP contend that Title I of the Sarbanes-Oxley Act of 2002 , 15 U.S.C. §§ 7211-19, violates the Appointments Clause of the Constitution and separation of powers because it does not permit adequate Presidential control of the Public Company Accounting Oversight Board. Congress made the Board’s exercise of its duties subject to the control of the Securities and Exchange Commission. The SEC sets the rules and may remove members. In turn, the President appoints members of the SEC, with the advice and consent of the Senate, and may remove them for cause. In appellants’ view this  scheme vests Board members “with far reaching executive power while completely stripping the President of the authority to appoint or remove those members or otherwise supervise or control their exercise of that power.”

Effectively, they object that the members of PCAOB, an independent agency, are appointed by the SEC, another independent agency, instead of the President. Neither the President of the United States nor a Presidential alter ego possesses any power to remove PCAOB members for cause or otherwise.

The D.C. Circuit did not accept this challenge and ruled in favor of PCAOB and the United States.

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