PCAOB Supreme Court Brief Posits Board's Constitutionality in Face of Appointments Clause and Separation of Powers Challenges

The PCAOB has defended its constitutionality in a brief filed with the US Supreme Court in an action alleging that Sarbanes-Oxley’s creation of the Board violated the Appointments Clause and the separation-of-powers principle of the Constitution. The brief, signed onto by the PCAOB’s counsel, Baker & Botts and MoloLamken, noted that the Board regulates public company auditing, precisely the sort of technical function Congress could have assigned to the SEC itself. Thus, Congress did not violate the Constitution by instead vesting that authority in a board that is subject to the SEC’s comprehensive control.

The Appointments Clause does not require that Board Members 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 Commission, not its Chair, is the SEC’s “head” for Appointments Clause purposes. Although the Chair has additional administrative duties, noted the brief, the Commission exercises all the SEC’s important regulatory functions as a collective body. It is the Commission, not the Chair, that promulgates rules, authorizes enforcement actions, reviews sanctions, and supervises SROs.

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 brief, the SEC has broad, pervasive and plenary powers over the Board. For example, no Board rule or sanction takes effect unless the SEC chooses to allow it to do so The SEC can modify Board rules and sanctions as it sees fit, said the brief, and the SEC appoints the Board’s members and controls its budget. The SEC can monitor the Board’s operations and rescind its enforcement authority. Similarly, the SEC can rescind all, or any part, of the Board’s investigative and disciplinary power at any time. Further, since the SEC also has independent authority to investigate and sanction violations, the Commission can reassign rescinded functions to its own staff. Moreover, because the SEC controls Board members’ salaries, it can revoke their compensation upon rescinding their authority.

The SEC’s pervasive control mechanisms under the Act, reasoned the brief, are impossible to reconcile with the petitioners’ theory of independence. Congress made the Board independent from the accounting profession, emphasized the brief, not from the SEC. Congress made the Board separate from the SEC for practical reasons such as salaries and focus, not to free the Board from SEC control.

Similarly, Congress made the Board structurally separate from the SEC because it wanted to create a separately funded entity that was focused solely on audit regulation, and because it wanted the Board to pay private-sector salaries. But Congress did not make the Board independent from the SEC’s control. Whatever inference that could be drawn from the for-cause removal restriction in isolation, it is plainly overcome by the countless other statutory provisions granting the SEC unqualified control.

The brief rejected the claim that Congress violated separation-of-powers principles by giving the SEC rather than the President authority to remove Board members. The Act grants the SEC expansive control mechanisms that are equivalent to at will removal power, posited the brief, and the President has the same authority over the SEC here as elsewhere. The Act thus does not diminish the President’s control in any way.

Furthermore, the removal-follows-appointment rule does not deny the President authority to ensure faithful execution of the laws. It merely requires him to supervise inferior officers in traditional chain-of-command fashion, by supervising the principal officers to whom they report.

Sarbanes-Oxley does not unconstitutionally restrict the President’s traditional chain-of-command authority. The SEC controls each and every exercise of the Board’s authority. And the President has constitutionally sufficient control over the SEC. Indeed, the Act does not diminish the President’s authority over the SEC in the slightest.

And Sarbanes-Oxley grants the SEC multiple powers that are equivalent to at-will removal authority. First, at any time, based on a mere public-interest finding, the SEC can strip Board members of any or all enforcement responsibilities and reassign those functions to its own staff. That unqualified power to abolish an officer’s authority is equivalent to at will removal power.

Petitioners’ concession that the SEC itself is constitutional controls the case. The President has the same control over the SEC’s supervision of the Board that he has over any other SEC function. Because the SEC’s control over the Board is plenary, the President has the same control as he would have if Congress had lodged the Board’s functions in the SEC’s own staff.

If the President has constitutionally adequate control over the SEC, he has constitutionally adequate control over the Board as well. The SEC has ample means to control the Board, including its control over rules and sanctions, its rescission power, its budget control, and its for-cause removal power. If the SEC failed to use any of those myriad tools appropriately, the President could remove the Commissioners for neglect in supervising the Board.

Whatever the precise scope of the President’s authority to remove SEC Commissioners, emphasized the brief, it is capacious enough to enable constitutionally adequate control. Finally, while the Court cannot simply defer to the Executive, acknowledged the brief, the fact that two Presidents have concluded that Sarbanes-Oxley does not undermine their authority surely detracts from the weight of the claim that the Act impermissibly intrudes into the needs of the executive branch.

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