Audit Firm Asserting Unconstitutionality of PCAOB Refutes Exhaustion of Remedies Argument
Taking square aim at the Government’s argument that an audit firm challenging the PCAOB’s constitutionality in federal court failed to exhaust its SEC administrative remedies, the firm told the Supreme Court that it would not invent a fictional controversy with the SEC solely to create a vehicle to challenge the Board’s constitutionality. In its reply brief to the Government, the audit firm said that no case has ever hinted that a standard provision for appellate review of agency rulemaking is the exclusive vehicle for challenging the agency’s, much less another agency’s, constitutionality, thus displacing a federal district court proceeding for injunctive relief. The firm urged the Supreme Court not to allow the Board to convert the most important separation-of-powers case in the last 20 years into a narrow dispute.
The audit firm has asked the Supreme Court to declare the PCAOB unconstitutional because Sarbanes-Oxley Act provisions creating the Board violate the separations of powers and Appointments Clause by essentially stripping the President of all powers to appoint or remove Board members. In its petition, the firm argued that the Board is a congressional attempt to create a ``Fifth Branch’’ of the federal government over which the President has less control than over ``Fourth Branch’’ agencies like the SEC, which currently reflect the outermost constitutional limits of congressional restrictions on the executive. (Free Enterprise Fund v. PCAOB, Dkt. No. 08-861).
Upholding a district court ruling, a split federal appeals court panel decided that the PCAOB is constitutional and rejected claims that SEC rather than presidential selection of Board members violates the Constitution. The panel concluded that Board members are inferior officers of the United States within the meaning of the Appointments Clause; and thus properly appointed by the SEC. The fact that the Sarbanes-Oxley Act limited the SEC’s authority by providing that Board members can only removed for cause did not elevate Board members to the status of principal officers of the US worthy of presidential appointment. Despite the for-cause removal, said the panel, the fact remained that the Act gave the SEC comprehensive and pervasive control of the PCAOB, including the approval of the Board’s budget.
The main government argument before the Court is that the audit firm failed to exhaust its administrative remedies before the SEC; and thus the federal district court lacked jurisdiction to entertain the claim that the creation of the Board was unconstitutional. Congress modeled the Board on the SROs, noted the government’s brief, and the same judicial-review procedures for the SROs are applicable to the Board. Because the district court lacked jurisdiction, the Supreme Court could not reach the merits of the questions presented in the petition, argued the brief, even if review of those questions was otherwise warranted.
In its reply, the audit firm described as disingenuous the Government’s suggestion that it should have challenged a Board sanction because the Board’s investigation of the firm did not result in sanctions. Even more disingenuous, said the firm, is the assertion that it could have brought the challenge by seeking SEC review of the Board’s inspection report on the firm or petitioning the SEC to modify or revoke the Board’s authority, because appellate courts have no jurisdiction over SEC inspection report rulings or refusals to initiate rulemaking.
Moreover, the firm argued that the SEC’s views on the constitutional issues before the Court are not entitled to deference, adding that the Commission lacks institutional competence and authority to opine on separation of powers or invalidate the Board. And, pointed out the firm, the Commission in the lower courts and before the Court, has provided, in the United States briefs it joined, its construction of the Act, just as it would have done in a statutory review case.
The US Supreme Court will hold a conference on May 14, 2009 to decide if the Court wants to hear a case challenging the constitutionality of the PCAOB. Four Justices have to vote in conference to hear the case in order for the Court to take the PCAOB case and ultimately decide the Board’s constitutionality. If the Court decides to grant certiorari in the action, the case will almost certainly be set for oral argument and decision in the 2009-2010 Court term, which begins this October.