Monday, June 28, 2010

PCAOB's Dual Insulation from President's Authority Violates Constitutional Separation of Powers Doctrine

The PCAOB’s double layer of insulation from presidential removal of its members is an unconstitutional violation of the Separation of Powers doctrine, ruled the US Supreme Court. Board members are appointed by the SEC, which is constitutional the Court said, but their two separate layers of for cause tenure protection, SEC and PCAOB, restrict the President in his ability to remove a principal officer, who is in turn restricted in his ability to remove an inferior officer, even though that inferior officer determines the policy and enforces the laws of the United States. Congress cannot deprive the President of adequate control over a Board that is the regulator of first resort and the primary law enforcement authority for a vital financial sector of the economy. But the Court also ruled that the Board’s unconstitutional tenure provisions are severable from the remainder of the Sarbanes-Oxley Act. (Free Enterprise Fund v. PCAOB, Dkt. No 08-861).

Concluding that the removal restrictions are invalid leaves the Board removable by the SEC at will, noted the Court, 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. Thus, the Court said that the Sarbanes-Oxley Act remains fully operative with these tenure restrictions excised.

Since the Board members were validly appointed by the full Commission, the Court refused to broadly enjoin the Board’s continued operations. The audit firm challenging the Board’s constitutionality was entitled to declaratory relief 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 central issue in the case is that the PCAOB’s second layer of tenure protection matters when the President finds it necessary to have a subordinate officer removed, and a statute prevents him from doing so. The Court ruled that the Board members’ multilevel protection from removal is contrary to Article II’s vesting of the executive power in the President. The President cannot “take Care that the Laws be faithfully executed” if he cannot oversee the faithfulness of the officers who execute them, reasoned the Court.

Regarding the PCAOB, the President cannot remove a Board member who enjoys more than one level of good-cause protection, even if the President determines that the officer is neglecting his or her duties or discharging them improperly. That judgment is instead committed to SEC Commissioners who may or may not agree with the President’s determination, and whom the President cannot remove simply because they disagree with him. In the Court’s view, this situation contravenes the President’s constitutional obligation to ensure the faithful execution of the laws.

While the Court has allowed limited restrictions on the President’s removal power, the Court could not allow two levels of protected tenure to separate the President from an officer exercising executive power. The Sarbanes-Oxley Act 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 SEC 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.

The added layer of tenure protection makes a difference, said the Court, because without it, the SEC could remove a Board member at any time, and therefore would be fully responsible for what the Board does. The President could then hold the Commission to account for its supervision of the Board, to the same extent that he may hold the Commission to account for everything else it does. The Commissioners are not responsible for the Board’s actions. They are only responsible for their own determination of whether the Act’s rigorous good-cause standard is met. And even if the President disagrees with their determination, he is powerless to intervene unless that determination is so unreasonable as to constitute inefficiency, neglect of duty, or malfeasance in office.

In the Court’s view, this novel structure does not merely add to the Board’s independence, but transforms it. Neither the President, nor anyone directly responsible to him, nor even an officer whose conduct he may review only for good cause, has full control over the Board. The President is stripped of the power and the ability to execute the laws because his ability to hold his subordinates accountable for their conduct is impaired.

The Board’s second layer of tenure protection compromises the President’s ability to remove a Board member the Commission wants to retain. Without a second layer of protection, the SEC has no excuse for retaining an officer who is not faithfully executing the law. With the second layer in place, the Commission can shield its decision from Presidential review by finding that good cause is absent, a finding that, given the SEC’s own protected tenure, the President cannot easily overturn. No one has explained to the Court why the Board’s task, unlike so many others, requires more than one layer of insulation from the President.

The current PCAOB-SEC arrangement is contrary to Article II’s vesting of the executive power in the President. Without the ability to oversee the Board, or to attribute the Board’s failings to those whom he can oversee, the President is no longer the judge of the Board’s conduct. He is not the one who decides whether Board members are abusing their offices or neglecting their duties. He can neither ensure that the laws are faithfully executed, nor be held responsible for a Board member’s breach of faith. This violates the basic principle that the President cannot delegate ultimate responsibility or the active obligation to supervise that goes with it, because Article II makes a single President responsible for the actions of the Executive Branch.

Without a clear and effective chain of command, said the Court, the public cannot determine on whom the blame or the punishment of a pernicious measure ought really to fall. By granting the Board executive power without the Executive’s oversight, Sarbanes-Oxley subverts the President’s ability to ensure that the laws are faithfully executed and the public’s ability to pass judgment on his efforts. The Act’s restrictions are incompatible with the Constitution’s separation of powers.

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