Former SEC Chairmen Defend Constitutionality of PCAOB

Seven former SEC chairmen, including Arthur Levitt, William Donaldson and Harvey Pitt, have filed an amicus brief defending the PCAOB as constitutional in the face of a federal court action challenging the Board’s legitimacy. The other amici chairmen are Bradford Cook, Roderick Hills, David Ruder and Harold Williams. The brief argued that the PCAOB is the centerpiece of the Sarbanes-Oxley Act and exists because of a congressional conclusion that the system of profession-dependent self-regulation of auditing contributed to the corporate financial scandals of the recent past. Nothing in the federal Constitution, emphasized the brief, denies Congress the power to make the policy judgments reflected in the legislative design of the PCAOB-SEC relationship. More broadly, the former SEC chairs pointed out that the Board is squarely within the historical structure of federal regulation of the capital markets, which has relied for decades on a unique combination of public-private institutional relationships under SEC oversight.

A Board-registered audit firm is seeking to have the PCAOB declared unconstitutional as violating the appointments provisions of the Constitution. The firm argued that, while Board members exercise significant, core governmental powers, they are appointed by the SEC rather than in the manner required by Article II of the Constitution. Among other things, the firm contended that Board members are principal officers whose appointments must be made by the President by and with the advice and consent of the Senate. Accordingly, argued the firm, the appointment of Board members by the SEC violates the Appointments Clause of the Constitution. (Free Enterprise Fund and Beckstead and Watts, LLP v. PCAOB, DC of DC, No. 1:06CV00217

The Appointments Clause divides all officers of the US into two categories: principal officers who are appointed by the President with senatorial advice and consent; and inferior officers who may be appointed by Heads of Departments. The brief filed by the former SEC chairs contended that Congress can constitutionally create administrative agencies with diverse structures, including independent entities that function under the control of these agencies. In amici’s view, the Appointments Clause limits Congress only in that Congress cannot retain any legal right to participate itself directly in the appointment or removal of officials who implement federal law, nor can the national legislature retain any right to veto an agency’s policymaking or adjudicatory decisions. Because Congress has granted itself none of these powers over the Board or the SEC, reasoned the former chairs, the Act is constitutional.

The brief also argues that the Appointments Clause permits Congress to give independent agencies, such as the SEC, the power to appoint their inferior officers. Were it otherwise, reasoned the brief, much of the organizational structure of the independent agencies would be unconstitutional. By statute, numerous independent agencies appoint their inferior officers, the former chairs continued, and nothing in the Constitution or any Supreme Court decision requires the illogical conclusion that Congress cannot give an agency the power to appoint its own legal subordinates. The brief also posits that the SEC is a Department within the meaning of Article 2 and the SEC Commissioners are properly the Head of this Department.