On June 28, 2010, the U.S. Supreme Court issued a much anticipated decision in Free Enterprise Fund v. Public Company Accounting Oversight Board (No. 08-861). Free Enterprise Fund challenged the constitutionality of the Public Company Accounting Oversight Board ("PCAOB") on a number of constitutional grounds, sought to have the PCAOB declared unconstitutional, and sought to enjoin the PCAOB from exercising its enforcement powers. The Supreme Court, in a 5-4 decision, ruled that the Sarbanes-Oxley Act of 2002 violates the Constitution's doctrine of separation of powers by creating a dual for-cause limitation on the removal of the board members of the PCAOB. The opinion was delivered by Chief Justice Roberts. Justice Breyer delivered an opinion for the dissent and was joined by Justices Stevens, Ginsburg and Sotomayor. Although at first blush this holding seems to be quite significant, it has little practical effect on the PCAOB, as the Supreme Court found the offensive tenure provisions severable from the remainder of the act. The ruling does not limit or constrain the PCAOB's investigative or enforcement powers; nor does it invalidate any actions taken by the PCAOB. It merely invalidates certain provisions of the authorizing statute that address the removal of PCAOB members.
BACKGROUND
The PCAOB was created in the Sarbanes-Oxley Act of 2002 ("SOX") to oversee the auditors of publicly traded companies. The PCAOB consists of five members who are appointed by the U.S. Securities and Exchange Commission ("SEC"). Every accounting firm that audits public companies under the securities laws must register with the PCAOB, pay an annual registration fee, and comply with its rules and oversight. The PCAOB has authority to inspect registered firms, initiate formal investigations, and issue sanctions for violations of its rules. The SEC has oversight of the PCAOB, but it cannot remove members without good cause.
The petitioners in Free Enterprise Fund, who found themselves under formal investigation by the PCAOB, sued the PCAOB and its members seeking a declaratory judgment that the PCAOB is unconstitutional and an injunction preventing the PCAOB from exercising its powers. The basis of the suit rested on petitioners' claim that the PCAOB members were insulated from Presidential control by two layers of tenure protection: PCAOB members could only be removed by the SEC for good cause, and the Commissioners of the SEC could in turn only be removed by the President for good cause. The petitioners also claimed that the appointment of the PCAOB members violated the Appointments Clause of the Constitution.1
The U.S. District Court for the District of Columbia granted summary judgment to the defendants. The plaintiffs appealed, and the U.S. Court of Appeals for the District of Columbia affirmed the decision of the district court. The plaintiffs petitioned for writ of certiorari to the U.S. Supreme Court, and certiorari was granted on May 18, 2009.
ISSUES ON APPEAL
The two issues before the Supreme Court were: (1) whether the provision of SOX that provides that PCAOB members may only be removed by the SEC for good cause violates the Constitution's doctrine of separation of powers and (2) whether the appointment of PCAOB members violates the Appointments Clause of the Constitution.
Issue 1: Whether the PCAOB tenure provisions of SOX violate the Constitution's doctrine of separation of powers?
Although the Supreme Court has determined that certain limits to the Presidential removal power exist2, the issue in Free Enterprise Fund—dual-level, good cause tenure—is one of first impression. In all other cases before the Supreme Court related to the Presidential removal power, only one level of protected tenure separated the President from an officer exercising executive power. In this instance, the Supreme Court determined that the limitation imposed on the President's power to remove PCAOB members was unconstitutional.
The majority explained that the executive power created by the Constitution allows the President to keep executive officers accountable by removing them from office, if necessary. The majority in Free Enterprise Fund found that SOX "not only protects PCAOB 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 the SEC Commissioners, who are not subject to the President's direct control and cannot be removed by the President but for good cause. The majority explained that because the SEC cannot remove a PCAOB member at will, the President cannot hold the SEC fully accountable for the PCAOB's conduct. The majority disagrees with the respondents' claim and the minority's opinion that the SEC's broad power over PCAOB functions equates to the power to remove PCAOB members. In the majority's view, altering the board's budget or powers is not a meaningful way to control an inferior officer.
The majority concluded that the PCAOB tenure arrangement contradicts Article II's vesting of the executive power in the President and stated that "without the ability to oversee the [PCAOB], or to attribute the PCAOB's failings to those whom he can oversee, the President is no longer the judge of the [PCAOB's] conduct." Accordingly, the majority held that the dual for-cause limitations on the removal of PCAOB members contravene the Constitution's separation of powers.
The majority went on to conclude that the unconstitutional tenure provisions are severable from the remainder of SOX and do not defeat or affect the validity of the remaining provisions of the act. Therefore, the PCAOB may continue to function as before, but now its members are subject to at will removal by the SEC.
Issue 2: Whether appointment of PCAOB members violates the Constitution's Appointments Clause?
With respect to the second issue before the Supreme Court, it held that the PCAOB's appointment is consistent with the Appointments Clause of the Constitution. Congress may vest in a head of a department the power to appoint inferior officers (i.e., officers whose work is directed and supervised at some level by superiors appointed by the President with the Senate's consent). With the removal of the dual-level tenure limitations, the SEC possesses the power to remove PCAOB members at will. Thus, PCAOB members are directed and supervised by the SEC, which is a "department" for purposes of the Appointments Clause and of which the SEC Commissioners jointly serve as head. For the foregoing reasons, the majority found no violation of the Appointments Clause of the Constitution.
CONCLUSION
The Supreme Court's decision in Free Enterprise Fund is a pyrrhic victory for the petitioners, as it has no practical effect on the PCAOB's powers nor the validity of its actions. However, there may be broader implications of the rule of law and the analysis adopted by the majority. As noted by the dissent, there are more than 500 (and possibly thousands, depending on how "inferior officer" is defined) government officials who can only be removed for good cause by higher-level officials, who in turn can only be removed for good cause by the President. While the Supreme Court's decision in Free Enterprise Fund demonstrates that there is little to be gained in successfully challenging such a dual layer structure, a change in a government official's tenure structure (i.e., removal of one "good cause" layer) may encourage such official to succumb to inappropriate political pressures in an effort to keep his or her job. Based upon the dissent's observations regarding the number of inferior officers affected by the ruling, Free Enterprise Fund could have a profound effect on the future of federal administrative bodies.
Footnotes
1. The Appointments Clause of the Constitution 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, or the heads of departments.
2. The Supreme Court has approved two "good cause" limitations on the President's removal authority: (1) the President may not remove high-level officials without good cause and (2) high-level officials, whom the President may remove at will, may not remove lower level employees without good cause. Humphrey's Executor v. United States, 295 U.S. 602; Morrison v. Olson, 487 U.S. 654.
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