Seven Former SEC Chairs Urge Supreme Court to Uphold Constitutionality of the PCAOB

Seven former SEC Chairs appointed by Presidents of both parties, and representing four decades of SEC leadership, have asked the US Supreme Court to uphold the constitutionality of the PCAOB in an action alleging that the Board’s existence runs afoul of the Appointments Clause. Given the SEC’s pervasive power over the PCAOB, said the amicus brief filed by the Chairs, the Board is not an independent federal agency whose members must be appointed by the President. Congress designed the Board to be independent of the accounting profession, noted the brief, but completely subordinate to the SEC. The SEC’s comprehensive power over the Board enables the SEC to direct the Board’s every action and effectively precludes any Board member from defying the Commission’s policy choices. The former SEC Chairs signing on to the brief include Arthur Levitt, Rod Hills, William Donaldson, Harvey Pitt, and David Ruder.

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).

According to the former SEC leaders, the Board’s design is a logical outgrowth of decades of public-private regulatory partnerships that uniquely characterizes US regulation of the financial markets. Industry SROs have long been subject to SEC plenary control, they noted, and provide the regulatory framework within which Congress designed the PCAOB. Congress built upon decades of experience with these structures in an effort to maintain the distinct advantages that flow from the SROs’ public-private nature while providing needed independence from the regulated profession.

The SEC exercise profound power over the PCAOB. For example, the SEC’s is authorized to disapprove PCAOB rules or budget proposals, reverse the Board’s enforcement decisions, remove Board members and censure the Board, or even rescind its duties altogether The SEC’s complete control over the Board’s budget provides the Commission with one of its most potent tools to control all of the Board’s actions. The SEC must approve the PCAOB’s annual budgets, as well as the user fees established each year to fund the Board The SEC has used this budgeting authority as a means to influence and supervise the Board’s rulemaking and inspection activity. Moreover, the Commission’s actual exercise of its authority in practice confirms that the Board is subject to the Commission’s constant control and oversight in every facet of its operations, noted the brief, just as Congress intended.

In the view of the former Chairs, the profound and pervasive power that the SEC exercises over the Board compels the conclusion that PCAOB Members are not principal officers of the United States who wield power comparable to SEC Commissioners; and therefore the Appointments Clause does not require that they be appointed by the President. Rather, they are inferior officers who can be appointed by Heads of Departments. And, the Appointments Clause contemplates that Heads of Departments can be collective bodies like the SEC.

The former Chairs then specifically refuted the audit firm’s argument that the SEC Chair rather than the Commission as a whole is the “Head” of the SEC within the meaning of the Appointments Clause. They noted that, contrary to the firm’s assertion, the Chair alone does not appoint the SEC’s Division Heads and General Counsel. Indeed, no appointment of major SEC personnel can be made unless the Commission approves the appointment, even when the Chair has the power to initiate the process.

Thus, they maintained that, even when the Chair may initiate an appointment, that action casts no doubt on the fact that the Commissioners collectively are the “Head” of the SEC for Appointments Clause purposes. Moreover, citing their decades of experience, the former officials said that even when an SEC Chair is authorized to initiate an appointment, the Chair routinely solicits input on possible candidates from the other Commissioners. Thus, no meaningful distinction exists, in practice, between whether the Chair or the Commission has the formal power to initiate an appointment.

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