Supreme Court Ruling in Free Enterprise Fund v. PCAOB Strikes Down Board's Term Protection
On June 28, the U.S. Supreme Court rejected the argument that the Public Company Accounting Oversight Board ("PCAOB") — which governs certain accounting firms — is unconstitutional and should be enjoined from exercising its powers. But the Court did strike down as unconstitutional the statute providing that the Securities and Exchange Commission could remove a Board member only for cause. It did so on the ground that protecting Executive Department officials with more than one level of good-cause tenure violates Article II's vesting of the executive power in the President. On this basis, the Court held that the SEC may at will remove any PCAOB Board member. This ruling is likely to give the SEC even greater influence over the activities of the PCAOB.
The PCAOB was created by the Sarbanes-Oxley Act of 2002 ("Act") and given broad powers to govern accounting firms that audit public companies under the securities laws. Such firms must register with the Board, pay an annual fee, and comply with its rules and oversight. The Board is authorized to establish rules, and to enforce the Act, the securities laws, the SEC's rules, its own rules and professional accounting standards. Willful violation of any Board rule is considered a federal crime. The Board may inspect registered firms, initiate formal investigations and issue severe sanctions in its disciplinary proceedings. While the statute provided that the PCAOB is a private, non-profit corporation and that Board members and employees are not considered Government officers or employees, for purposes of the analysis in this case the parties agreed and the Court considered the PCAOB to be part of the Government for constitutional purposes, and considered its members to be officers of the United States who exercise significant authority pursuant to the laws of the United States.
The Board's five members are appointed by the SEC. While the SEC has oversight of the Board, the statute provided that the SEC cannot remove Board members at will, but only for good cause shown, in accordance with specified standards and procedures. These required a formal SEC finding on the record, after notice and an opportunity for a hearing, and a formal SEC order which was subject to judicial review. In addition, by law the SEC's Commissioners themselves also have "for cause" tenure; they cannot be removed except for "inefficiency, neglect of duty, or malfeasance in office." The Court held that the double layers of "tenure" protection — with both the SEC Commissioners and the Board members protected from dismissal except for good cause — was unconstitutional because it effectively precluded the Board members from being subject to any Presidential control. Instead of finding the PCAOB itself unconstitutional on this basis, the Court held that the restriction on the SEC's removal of Board members was severable and that henceforth the SEC Commissioners may discharge a Board member at will.
In a 5-to-4 decision, written by Chief Justice Roberts, the Court reasoned as follows. Article II of the Constitution vests the executive power in the President and provides for executive officers to assist the President. The Constitution has been understood to empower the President to keep these officers accountable — by removing them from office if necessary. The courts have recognized Congressional power to establish independent agencies run by principal officers appointed by the President, whom the President may remove only for good cause. The question was whether the President may be restricted 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.
The Court held that such multilevel protection from removal is contrary to Article II's vesting of the executive power in the President, because the President cannot "take Care that the Laws be faithfully executed" if he cannot oversee the faithfulness of the officers who execute them. The President cannot remove an officer who enjoys more than one level of good-cause protection, even if the President determines that the officer is neglecting his duties or discharging them improperly. That judgment is instead committed to another officer, who may or may not agree with the President's determination, and whom the President cannot remove simply because that officer disagrees with him. This contravenes the President's constitutional obligation to ensure the faithful execution of the law. The two-level tenure protection not only protects Board members from removal except for good cause, but withdraws from the President any decision on whether that good cause exists. 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.
The dissenting opinion, by Justice Breyer for four Justices, rejected all attacks on the statute, finding no problem with the double layer of "for cause" tenure protection.
Overall, the Sarbanes-Oxley Act fared well in this case. While the majority focused on the Board-member-removal issue, it recognized that this purported private, non-profit corporation had been given extensive governmental powers over an important aspect of assuring that appropriate information is made available to holders of public securities. And the Court overall avoided any criticism of the Board generally or of the Act itself.
The PCAOB was created by the Sarbanes-Oxley Act of 2002 ("Act") and given broad powers to govern accounting firms that audit public companies under the securities laws. Such firms must register with the Board, pay an annual fee, and comply with its rules and oversight. The Board is authorized to establish rules, and to enforce the Act, the securities laws, the SEC's rules, its own rules and professional accounting standards. Willful violation of any Board rule is considered a federal crime. The Board may inspect registered firms, initiate formal investigations and issue severe sanctions in its disciplinary proceedings. While the statute provided that the PCAOB is a private, non-profit corporation and that Board members and employees are not considered Government officers or employees, for purposes of the analysis in this case the parties agreed and the Court considered the PCAOB to be part of the Government for constitutional purposes, and considered its members to be officers of the United States who exercise significant authority pursuant to the laws of the United States.
The Board's five members are appointed by the SEC. While the SEC has oversight of the Board, the statute provided that the SEC cannot remove Board members at will, but only for good cause shown, in accordance with specified standards and procedures. These required a formal SEC finding on the record, after notice and an opportunity for a hearing, and a formal SEC order which was subject to judicial review. In addition, by law the SEC's Commissioners themselves also have "for cause" tenure; they cannot be removed except for "inefficiency, neglect of duty, or malfeasance in office." The Court held that the double layers of "tenure" protection — with both the SEC Commissioners and the Board members protected from dismissal except for good cause — was unconstitutional because it effectively precluded the Board members from being subject to any Presidential control. Instead of finding the PCAOB itself unconstitutional on this basis, the Court held that the restriction on the SEC's removal of Board members was severable and that henceforth the SEC Commissioners may discharge a Board member at will.
In a 5-to-4 decision, written by Chief Justice Roberts, the Court reasoned as follows. Article II of the Constitution vests the executive power in the President and provides for executive officers to assist the President. The Constitution has been understood to empower the President to keep these officers accountable — by removing them from office if necessary. The courts have recognized Congressional power to establish independent agencies run by principal officers appointed by the President, whom the President may remove only for good cause. The question was whether the President may be restricted 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.
The Court held that such multilevel protection from removal is contrary to Article II's vesting of the executive power in the President, because the President cannot "take Care that the Laws be faithfully executed" if he cannot oversee the faithfulness of the officers who execute them. The President cannot remove an officer who enjoys more than one level of good-cause protection, even if the President determines that the officer is neglecting his duties or discharging them improperly. That judgment is instead committed to another officer, who may or may not agree with the President's determination, and whom the President cannot remove simply because that officer disagrees with him. This contravenes the President's constitutional obligation to ensure the faithful execution of the law. The two-level tenure protection not only protects Board members from removal except for good cause, but withdraws from the President any decision on whether that good cause exists. 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.
The dissenting opinion, by Justice Breyer for four Justices, rejected all attacks on the statute, finding no problem with the double layer of "for cause" tenure protection.
Overall, the Sarbanes-Oxley Act fared well in this case. While the majority focused on the Board-member-removal issue, it recognized that this purported private, non-profit corporation had been given extensive governmental powers over an important aspect of assuring that appropriate information is made available to holders of public securities. And the Court overall avoided any criticism of the Board generally or of the Act itself.
Contributors
Related Services & Industries