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.
[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.