Monday, December 14, 2009

Supreme Court Oral Argument in PCAOB Case Centers on SEC Control of the Board and Presidential Removal Powers

Supreme Court oral arguments in the case deciding the PCAOB’s constitutionality focused on the SEC’s pervasive control over the Board and the President’s control over the SEC. The case, brought by an audit firm, is before the Court on a grant of certiorari of a split panel ruling of the DC Circuit Court of Appeals that the PCAOB’s creation was constitutional because, under the Appointments Clause of the Constitution, Board Members are inferior officers of the United States who do not have to be appointed by the President and can be appointed by the SEC, as is currently required by Sarbanes-Oxley. (Free Enterprise Fund and Beckstead & Watts v. PCAOB, Dkt. No. 08-861).

The arguments centered on the President’s control over the SEC, the SEC’s control over the Board, and the conclusion that the President had sufficient control over the Board to satisfy the Constitution. Jeffrey Lamken, arguing for the Board, went through a litany of powers that the SEC has over the Board that amount to pervasive authority over every aspect of the Board's operations. For example, Board rules and sanctions have no effect except as the SEC allows, and can be changed by the SEC at any time. In addition, Board inspections and investigations are subject to plenary SEC control. Not only are they conducted under rules that the SEC must approve, he said, but the SEC can threaten or actually rescind the Board's enforcement authority any time it thinks that's appropriate in the public interest. Then there is also the fact that the SEC controls the Board's budget.

To this litany, Chief Justice Roberts noted that the Board can act and the SEC can retroactively veto their actions, but the SEC doesn't propose what actions the Board takes, actions that can have significant, devastating consequences for a regulated firm. Mr. Lamken responded that the SEC has broad authority, in the public interest, to rescind the Board's authority to enforce any devastating action, adding that this is precisely the type of control that powerful executives regularly exercise. If they don't like the way an inferior is doing something, he reasoned, they can take away that authority.

The Chief Justice also questioned Solicitor General Elena Kagan about the for cause removal issue. He noted that the President can remove SEC Commissioners for cause and the SEC can remove Board Members for cause, which the Chief called "for cause squared.’’ You have to have two violations of the for-cause provision, he observed, you have to meet the requirement in two places. When the SEC wants to remove the Board member, they can only do that for cause. And if they decide, well, there isn't cause; I'm not going to do it, then the President, under the Government’s argument, has to remove the SEC commissioners, all of them, not just the chair, and he can only do that for cause.

Justice Alito added the proposition that the more layers of for-cause removal there is the less control the President actually has. Solicitor General Kagan replied that it all depends. The Government is not saying that a double for-cause provision is always constitutional, just as it is not saying that a single for-cause provision is always constitutional. Rather, the question is in what context does that for-cause provision operate. Where it operates in a context like the relationship between the SEC and the Board, being surrounded by a panoply of alternative and equally effective control mechanisms, it simply should not matter that there is another for-cause provision. Removal is just a tool, said the Solicitor General, the ultimate constitutional question is the level of presidential control, and the presidential control here is exactly the same with respect to the Board's activities as it is with respect to the SEC staff's activities.

Arguing for the audit firm, Michael Carvin addressed the Solicitor General's syllogism that because the President can control the SEC somehow he can control those whom the SEC regulates. The New York Stock Exchange has exactly the same relationship with the SEC as does the board, he noted, and no one would argue that the President has the power to direct and supervise the NYSE.

Chief Justice Roberts asked if the SEC could direct the Board not to demand documents from a particular company. The Solicitor General replied that the SEC has full control over the investigative and inspection function of the Board. The Board's investigations and inspections are all done according to rule, she observed, and the SEC can change those rules. The SEC can reach out and abrogate any Board rules, including rules relating to inspections and investigations. The SEC also has power to promulgate its own rules.

The Chief Justice asked if that kind of SEC power over the Board is consistent with the intent of Congress in establishing the PCAOB. The Solictor General said that it is because the intent of Congress was to place the Board under the extremely close and comprehensive supervision of the SEC. The references to independence that one finds throughout the legislative record are almost all references to independence from the accounting industry, not from the SEC.


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