Government Brief Defends SEC Appointment of PCAOB Members Against Constitutional Challenge

The merits brief filed by the Government in the Supreme Court case challenging the constitutionality of the PCAOB contends that the fact that the Sarbanes-Oxley Act empowered the SEC rather than the President to appoint Board members did not violate the Appointments Clause of the US Constitution. PCAOB members are inferior officers not superior officers, argued the government, and the Constitution allows Congress to vest the appointment of inferior officers in Heads of Departments and the SEC qualifies as such. The government also said that the audit firm’s failure to fully exhaust special Exchange Act review procedures barred the district court from exercising jurisdiction over the firm’s challenge to the Board’s constitutionality.

The case, brought by an audit firm, is before the Supreme 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. The Supreme Court will hear oral arguments on December 7, 2009 and a decision is expected during this term. (Free Enterprise Fund and Beckstead & Watts v. PCAOB, Dkt. No. 08-861).

When it passed Sarbanes-Oxley in 2002, noted the brief, Congress set up a regime under which the SEC would have comprehensive overview and control of the Board and its activities. For example, the Board’s rules only become effective upon SEC approval, noted the brief, and the SEC may amend or even abrogate those rules at any time. The SEC can review, reject or modify all disciplinary actions of the Board. Having no subpoena power of it own, the Board must seek an SEC subpoena in aid of its investigations, thereby ensuring SEC control over the investigations. The SEC also has sweeping authority to rescind any aspect of the Board’s enforcement authority at any time. Finally, the SEC is authorized to approve the Board’s budget. Thus, the government reasoned that Board members are not principal officers who wield power comparable to SEC Commissioners; and therefore the Appointments Clause does not require that they be appointed by the President.

They are inferior officers that can be appointed by Heads of Departments. The Appointments Clause contemplates that Heads of Departments can be collective bodies like the SEC

The government also said that the audit firm’s failure to fully exhaust special Exchange Act review procedures barred the district court from exercising jurisdiction over the firm’s challenge to the Board’s constitutionality. These special procedures give the SEC a chance to address relevant legal issues in an order or ruling, which is subject to direct review by a federal appeals court. The audit firm bypassed this procedure and directly challenged the Board in district court. That course, argued the brief, was contrary to the bedrock principles of judicial review of administrative action. The government thus contended that, since the firm’s failed to pursue the express statutory mechanism Congress established for challenges to Board actions, the district court could not properly exercise jurisdiction over their suit.

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