Free Enterprise Fund v. Public Company Accounting Oversight Board

Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010), was a case decided by the United States Supreme Court on June 28, 2010. The court held 5-4 that the method through which members of the Public Company Accounting Oversight Board (PCAOB), which supervises compliance with the Sarbanes–Oxley Act, are removed violates the United States Constitution's separation of powers.[1]

Free Enterprise Fund v. Public Company Accounting Oversight Board
Argued December 7, 2009
Decided June 28, 2010
Full case nameFree Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board, et al.
Docket no.08-861
Citations561 U.S. 477 (more)
130 S. Ct. 3138; 177 L. Ed. 2d 706
Case history
PriorJudgment for defendants affirmed, 537 F.3d 667 (D.C. Cir. 2008), cert. granted, 556 U.S. 1234 (2009).
Holding
The dual for-cause limitations on the removal of members of the Public Company Accounting Oversight Board contravene the Constitution's separation of powers, but the unconstitutional limitations are severable from the remainder of the statute. The Board's appointment is consistent with the Appointments clause. Court of Appeals for the District of Columbia Circuit reversed in part, affirmed in part, and remanded.
Court membership
Chief Justice
John Roberts
Associate Justices
John P. Stevens · Antonin Scalia
Anthony Kennedy · Clarence Thomas
Ruth Bader Ginsburg · Stephen Breyer
Samuel Alito · Sonia Sotomayor
Case opinions
MajorityRoberts, joined by Scalia, Kennedy, Thomas, Alito
DissentBreyer, joined by Stevens, Ginsburg, Sotomayor
Laws applied
U.S. const., art. II

Under the Sarbanes–Oxley Act, officers of the PCAOB enjoyed dual layers of "for cause" protection against presidential removal. PCAOB officers could be removed only "for good cause shown" by officers of the Securities and Exchange Commission (SEC). Officers of the SEC could be removed by the President for "inefficiency, neglect of duty, or malfeasance in office." Thus, although the President could remove high-ranking members of the SEC, he could not govern and execute power to the board, thus providing a "dual layer" of protection.

Sarbanes-Oxley Act's dual for-cause limitations on removal of members of PCAOB, under which the President was restricted in his ability to remove principal officers and restricted in his ability to remove an inferior officer even though that inferior officer determined policy and enforced laws of the United States, contravened the US Constitution's separation of powers.[1]

The President could not "take Care that the Laws be faithfully executed" within meaning of Article II if he could not oversee faithfulness of officers who executed them. U.S.C.A. Const. Art. 2, § 1, cl. 1]; U.S.C.A. Const. Art. 2, § 3]; Sarbanes-Oxley Act of 2002, §§ 101(e)(6), 107(d)(3), 15 U.S.C.A. §§ 7211(e)(6)], 7217(d)(3)]. These dual layers of limitation on the President's ability to remove PCAOB officers led to separation of powers violations of the Appointments Clause and instead PCAOB officers exercised executive branch powers by determining policy and enforcing the laws of the United States.

The Court held that:

1] provision of Securities Exchange Act, allowing aggrieved parties to challenge final order or rule of Securities and Exchange Commission (SEC) in a court of appeals, did not strip District Court of jurisdiction;

2] Sarbanes-Oxley Act's dual for-cause limitations on removal of members of Board contravened Constitution's separation of powers;

3] such limitations were severable; and

4] appointment of members of Board by SEC did not violate Appointments Clause.

Affirmed in part, reversed in part, and remanded.

Background

Facts

The Public Company Accounting Oversight Board was created as part of a series of accounting reforms in the Sarbanes–Oxley Act of 2002. It was composed of five members appointed by the Securities and Exchange Commission and was modeled on private self-regulatory organizations in the securities industry, such as the New York Stock Exchange, that investigate and discipline their own members subject to Commission oversight. Unlike such organizations, the Board is a government-created entity with expansive powers to govern an entire industry. Every accounting firm that audits public companies under the securities laws must register with the Board, pay it an annual fee, and comply with its rules and oversight. The Board may inspect registered firms, initiate formal investigations, and issue severe sanctions in its disciplinary proceedings.

In February 2006, the Free Enterprise Fund and Beckstead and Watts, LLP (a small Nevada-based accounting firm) filed a lawsuit in federal court challenging the constitutionality of the PCAOB. According to the lawsuit, the provision of the Sarbanes-Oxley Act establishing the PCAOB violated the "Appointments Clause" of the U.S. Constitution, since PCAOB Board members should be viewed as "officers of the United States" because of the public purposes PCAOB serves, and, as such, must either be appointed by the President of the United States, with the advice and consent of the U.S. Senate, or by the "head" of a "department", whereas PCAOB's board is appointed by the SEC, rather than by the Chairman of the SEC. The lawsuit also challenged the PCAOB as violating the Constitution's separation of powers clause, since the organization has quasi-executive, -legislative and -judicial functions.

On August 22, 2008, the U.S. Court of Appeals for the District of Columbia Circuit upheld the PCAOB as constitutional. The Court found that Board members are inferior officers not required to be appointed by the President, and that the President retains sufficient control of the Board via the SEC that the Board does not violate the separation of powers clause.[2]

The United States Supreme Court granted certiorari on May 18, 2009, to consider three questions:

  1. Whether the Sarbanes-Oxley Act of 2002 violates the Constitution's separation of powers by vesting members of the [PCAOB] with far-reaching executive power while completely stripping the President of all authority to appoint or remove those members or otherwise supervise or control their exercise of that power, or whether, as the court of appeals held, the Act is constitutional because Congress can restrict the President's removal authority in any way it "deems best for the public interest."
  2. Whether the court of appeals erred in holding that, under the Appointments Clause, PCAOB members are "inferior officers" directed and supervised by the [SEC], where the SEC lacks any authority to supervise those members personally, to remove the members for any policy-related reason or to influence the members' key investigative functions, merely because the SEC may review some of the members' work product.
  3. If PCAOB members are inferior officers, whether the Act's provision for their appointment by the SEC violates the Appointments Clause either because the SEC is not a "Department" or because the five commissioners, acting collectively, are not the "Head" of the SEC.[3]

Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board, et al. was argued on December 7, 2009. In addition to the PCAOB, the United States (represented by Solicitor General Elena Kagan) also appeared as a respondent in the case and argued separately, defending the constitutionality of the Sarbanes-Oxley Act. Thirteen amici, ranging from libertarian think-tanks like the Cato Institute to managers of state public-employee pension funds, filed briefs in the case.[4]

The parties agree that the Board is "part of the Government" for constitutional purposes, Lebron v. National Railroad Passenger Corp.,[5] and that its members are "'Officers of the United States'" who "exercis[e] significant authority pursuant to the laws of the United States," Buckley v. Valeo.[6] While the SEC has oversight of the Board, it cannot remove Board members at will, but only "for good cause shown," "in accordance with" specified procedures. [7] The parties also agree that the Commissioners, in turn, cannot themselves be removed by the President except for " 'inefficiency, neglect of duty, or malfeasance in office,' " per Humphrey's Executor v. United States.[8]

The Board members contended that they were insulated from presidential control by two layers of tenure protection: Board members could be removed by the Commission only for good cause, and the Commissioners could in turn be removed by the president only for good cause. They also challenged the Board's appointment as violating the Appointments Clause, which requires officers to be appointed by the President with the Senate's advice and consent, or, in the case of "inferior Officers," by "the President alone,... the Courts of Law, or... the Heads of Departments," Art. II, § 2, cl. 2. The United States intervened to defend the statute. The District Court found it had jurisdiction and granted summary judgment to Board members. The Court of Appeals affirmed. It first agreed that the District Court had jurisdiction. It then ruled that the dual restraints on Board members' removal are permissible, and that Board members are inferior officers whose appointment is consistent with the Appointments Clause.

Law

The case deals primarily with the Appointments Clause in re Executive Power, found in Article II of the U.S. Constitution under which the US President has the power to appoint and remove officers in executive agencies of the US government. Removal of officers by the President if most commonly "for cause" to ensure officers can transition from one presidency to another, with fewer cabinet, agency, and other official replacements occurring every four years (the length of one Presidential term).

Under the traditional default rule, removal of a federal officer is incident to the power of appointment. Article II confers on the President the general administrative control of those executing the laws, and it is his responsibility to take care that the laws be faithfully executed; the President therefore must have some power of removing those for whom he can not continue to be responsible.[9]

Decision

On June 28, 2010, in a five-justice majority opinion written by Chief Justice John G. Roberts, the Supreme Court found the appointment provisions of the Act to be constitutional, but struck down the for-cause removal provision. The Court did not accept petitioners' argument that the constitutional infirmity made all of the Board's prior activity unconstitutional; rather, it simply severed the for-cause removal clause from the rest of Sarbanes-Oxley, leaving the Board itself intact.[10]

Roberts, C.J., delivered the opinion of the Court, in which Scalia, Kennedy, Thomas, and Alito, JJ., joined. Breyer, J., filed a dissenting opinion, in which Stevens, Ginsburg, and Sotomayor, JJ., joined.

See summary holdings 1, 3, 4 above. The second holding is considered the most influential for its executive appointment powers section, and is reprinted below:

2. The dual for-cause limitations on the removal of Board members contravene the Constitution's separation of powers. Pp. 3151 – 3161.

(a) The Constitution provides that "[t]he executive Power shall be vested in a President of the United States of America." Art. II, § 1, cl. 1]. Since 1789, the Constitution has been understood to empower the President to keep executive officers accountable—by removing them from office, if necessary. See generally Myers v. United States, 272 U.S. 52, 47 S.Ct. 21, 71 L.Ed. 160.] This Court has determined that this authority is not without limit. In Humphrey's Executor, supra, this Court held that Congress can, under certain circumstances, create independent agencies run by principal officers appointed by the President, whom the President may not remove at will but only for good cause. And in United States v. Perkins, 116 U.S. 483, 21 Ct.Cl. 499, 6 S.Ct. 449, 29 L.Ed. 700], and Morrison v. Olson, 487 U.S. 654, 108 S.Ct. 2597, 101 L.Ed.2d 569], the Court sustained similar restrictions on the power of principal executive officers—themselves responsible to the President—to remove their own inferiors. However, this Court has not addressed the consequences of more than one level of good-cause tenure.

(b) Where this Court has upheld limited restrictions on the President's removal power, only one level of protected tenure separated the President from an officer exercising executive power. The President—or a subordinate he could remove at will—decided whether the officer's conduct merited removal under the good-cause standard. Here, the Act not only protects Board members from removal except for good cause, but withdraws from the President any decision on whether that good cause exists. That decision is vested in other tenured officers—the Commissioners—who are not subject to the President's direct control. Because the Commission cannot remove a Board member at will, the President cannot hold the Commission fully accountable for the Board's conduct. He can only review the Commissioner's determination of whether the Act's rigorous good-cause standard is met. And if the President disagrees with that determination, he is powerless to intervene—unless the determination is so unreasonable as to constitute " 'inefficiency, neglect of duty, or malfeasance in office.' " Humphrey's Executor, supra, at 620, 55 S.Ct. 869.

This arrangement contradicts Article II's vesting of the executive power in the President. Without the ability to oversee the Board, or to attribute the Board's failings to those whom he can oversee, the President is no longer the judge of the Board's conduct. He can neither ensure that the laws are faithfully executed, nor be held responsible for a Board member's breach of faith. If this dispersion of responsibility were allowed to stand, Congress could multiply it further by adding still more layers of good-cause tenure. Such diffusion of power carries with it a diffusion of accountability; without a clear and effective chain of command, the public cannot determine where the blame for a pernicious measure should fall. The Act's restrictions are therefore incompatible with the Constitution's separation of powers.

(c) The " 'fact that a given law or procedure is efficient, convenient, and useful in facilitating functions of government, standing alone, will not save it if it is contrary to the Constitution.' " Bowsher v. Synar, 478 U.S. 714, 736, 106 S.Ct. 3181, 92 L.Ed.2d 583. The Act's multilevel tenure protections provide a blueprint for the extensive expansion of legislative power. Congress controls the salary, duties, and existence of executive offices, and only Presidential oversight can counter its influence. The Framers created a structure in which "[a] dependence on the people" would be the "primary controul on the government," and that dependence is maintained by giving each branch "the necessary constitutional means and personal motives to resist encroachments of the others." The Federalist No. 51, p. 349. A key "constitutional means" vested in the President was "the power of appointing, overseeing, and controlling those who execute the laws." 1 Annals of Congress 463. While a government of "opposite and rival interests" may sometimes inhibit the smooth functioning of administration, The Federalist No. 51, at 349, "[t]he Framers recognized that, in the long term, structural protections against abuse of power were critical to preserving liberty." Bowsher, supra, at 730, 106 S.Ct. 3181.

(d) The Government errs in arguing that, even if some constraints on the removal of inferior executive officers might violate the Constitution, the restrictions here do not. There is no construction of the Commission's good-cause removal power that is broad enough to avoid invalidation. Nor is the Commission's broad power over Board functions the equivalent of a power to remove Board members. Altering the Board's budget or powers is not a meaningful way to control an inferior officer; the Commission cannot supervise individual Board members if it must destroy the Board in order to fix it. Moreover, the Commission's power over the Board is hardly plenary, as the Board may take significant enforcement actions largely independently of the Commission. Enacting new SEC rules through the required notice and comment procedures would be a poor means of micromanaging the Board, and without certain findings, the Act forbids any general rule requiring SEC preapproval of Board actions. Finally, the Sarbanes–Oxley Act is highly unusual in committing substantial executive authority to officers protected by two layers of good-cause removal.

See also

References
  1. Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010).
  2. Hilzenrath, David (2008-12-23). "Sarbanes-Oxley Upheld By Court as Constitutional". The Washington Post. pp. D01. Retrieved 2008-08-24.
  3. United States Supreme Court (2009-05-18). "08-861 FREE ENTERPRISE FUND V. PUBLIC CO. OVERSIGHT BD. (Questions presented)" (PDF). Retrieved 2009-11-28. Internal citations omitted.
  4. United States Supreme Court (2009-11-23). "Docket for 08-861". Archived from the original on October 6, 2009. Retrieved 2009-11-28.
  5. Lebron v. National Railroad Passenger Corp., 513 U.S. 374, 397, 115 S.Ct. 961, 130 L.Ed.2d 902.
  6. Buckley v. Valeo, 424 U.S. 1, 125–126, 96 S.Ct. 612, 46 L.Ed.2d 659.
  7. 15 U.S.C. §§ 7211(e)(6)], 7217(d)(3)].
  8. Humphrey's Executor v. United States, 295 U.S. 602, 620, 55 S.Ct. 869, 79 L.Ed. 1611.
  9. U.S.C.A. Const. Art. 2, § 1, cl. 1.
  10. Russell, Kevin (June 28, 2010). "Provision of Sarbanes-Oxley unconstitutionally interferes with presidential authority". SCOTUSblog. Retrieved 2010-07-05.
This article is issued from Wikipedia. The text is licensed under Creative Commons - Attribution - Sharealike. Additional terms may apply for the media files.