By James Hamilton, J.D., LL.M.
At oral argument before a panel of the federal appeals court for the District of Columbia in the action challenging the PCAOB’s constitutionality, one judge called the Board an independent agency within an independent agency which if upheld would be a ``green light for all sorts of new creations.’’ Judge Kavanaugh also focused on the fact that Sec. 101(e)(6) of Sarbanes-Oxley allows the SEC to remove a Board member only for good cause. The judge was unaware of any inferior officers in independent agencies who are subject to for cause, rather than at will, removal.
In 2007, a federal district judge ruled that the PCAOB is constitutional, rejecting the claims of an audit firm inspected by the Board as nothing more than a hypothetical scenario of an over zealous or rogue PCAOB investigator. The court also rejected the argument that the appointment of PCAOB members violates the Appointments Clause of the Constitution, which empowers the President to appoint officers of the U.S., while allowing Congress to vest the appointment of inferior officers as heads of departments (Free Enterprise Fund, et al. v. PCAOB, Civil Action No. 06-0217, March 21, 2007).
Returning to the for cause removal issue, Judge Kavanaugh said that Board members are two levels of for cause removal away from the President, which is historically unique. Judge Rogers characterized the PCAOB’s position as being that, because the Board is literally subject in everything it does to the SEC, the fact Board members can only be removed for cause as opposed to at will takes on less significance.
Noting that the Board is not a department, Judge Kavanaugh queried how can inferior officers within the Board be constitutional. The Board’s counsel. Jeffrey Lamken, argued that there are no inferior officers within the Board. People like the chief auditor are employees since they are appointed by the Board rather than by the SEC.
In a joint brief with the Justice Department, the SEC had contended that the pervasive authority of the SEC to supervise and control the PCAOB's activities refutes the depiction of the Board as a rogue agency running unchecked over the separation of powers. This theme of SEC oversight was explored at oral argument. Mr. Lamken pointed out that the Board’s entire budget is controlled by the SEC.
After Mark Stern, on behalf of the DOJ, said that the SEC’s level of control over the Board cannot be overstated, Judge Kavanaugh asked if the SEC exercises pre-approval of Board investigations and inspections. The answer is that the Commission does not; but that it has the power to do so. Judge Rogers understood the Board’s position to be that the SEC could require the Board to submit a list of targets that the Board was looking at and condition the beginning of any investigation on SEC pre-approval.
Regarding the SEC’s power to pre-approve Board inspections, Michael Carvin, for appellees, noted that Sarbanes-Oxley spells out when the SEC may impose limitations on the Board. The SEC must find that the Board has violated or is unable to comply with a provision of the act or without reasonable justification or excuse has failed to enforce compliance. More to the point, he continued, even if the SEC could do it, the agency has not done it. The Board is exercising the executive power. Further, he believes that the question to ask is not whether you can stop the Board from doing something, rather the question is whether you can supervise what the Board is doing. More broadly, Mr. Carvin said that the PCAOB is a ``plain violation’’ of separation of powers and, if upheld, would eviscerate any cognizable concept of genuine executive power.