In a June 28, 2010 decision (here), the Supreme Court issued its opinion in Free Enterprise Fund v. Public Company Accounting Oversight Board case. This case had been widely followed because the petitioners challenged the constitutionality of the Sarbanes-Oxley Act and of the Public Company Accounting Oversight Board (PCAOB).


The petitioners prevailed before the Supreme Court, and a majority of the Court held that restrictions on the removal of PCAOB board members were unconstitutional, but the Court declined to hold either that the Sarbanes Oxley Act itself or the PCAOB are unconstitutional. The net effect is that Sarbanes-Oxley remains fully operational, other than the provisions governing the removal of PCAOB members.



This case arises out of a dispute involving a small Nevada accounting firm, Beckstead and Watts. In September 2005, the PCAOB disclosed that it was investigating the firm and that it had found "deficiencies" eight of sixteen of the firm’s audits. In response, the firm sued the PCAOB and the federal government, seeking an order blocking the PCAOB from taking any further action. The firm was joined in the action by the Free Enterprise Fund, which according to its website, is a nonprofit advocacy group "dedicated to fighting the so-called Sarbanes-Oxley law."


The plaintiffs contended that in creating the PCAOB in the Sarbanes Oxley Act, Congress set up a private corporation that exercised governmental authority. The plaintiffs argued that this arrangement and in particular SOX’s statutory provision for the SEC’s appointment of the PCAOB’s five members, and more particularly specifying that the members can only be removed by the Commission for just cause, contravened the separation of powers in the U.S. Constitution by conferring wide-ranging executive power on Board members without subjecting them to Presidential control.


In a March 21, 2007 decision, Judge James Robertson of the District Court for the District of Columbia rejected the plaintiffs’ arguments, and on August 22, 2008, the D.C. Circuit Court affirmed the lower court’s dismissal. The Circuit Court later denied an en banc review, and the plaintiffs filed a petition for a writ of certiorari to the Supreme Court, which the Court granted.


An excellent summary of the background regarding the case and the parties’ arguments can be found on the SCOTUSWiki site, here. My prior post about the case can be found here.


The Supreme Court’s Opinion

In a 5-4 majority opinion written by Chief Justice John Roberts, the Court focused on the Sarbanes Oxley’s Act’s provisions for the removal of the PCAOB members. The removal provision provides that members can only be removed by the SEC Commissioners for good cause shown and then only pursuant to rigorous procedural requirements. The Court said the arrangement "not only protects Board members from removal except for good cause, but withdraws from the President any decision on whether that good cause exists."


The result of what the Court described as "a second level of tenure protection," in the form of the procedural requirements, is that the Commission "cannot remove a Board member at will" and the President therefore "cannot hold the Commission fully accountable." This arrangement, the majority found, is "contrary to Article II’s vesting of the executive power in the President." The majority opinion added:


By granting the Board executive power without the Executive’s oversight, this Act subverts the President’s ability to ensure that the laws are faithfully executed – as well as the public’s ability to pass judgment on his efforts. The Act’s restrictions are incompatible with the Constitution’s separation of powers.


However, having found a provision of Sarbanes Oxley Act to be unconstitutional, the majority drew back from finding either the entire Act or the PCAOB itself to be unconstitutional. The Court found that the "unconstitutional tenure provisions are severable from the remainder of the statute" and that even if board removal provisions violate the Constitution, the "existence of the Board does not." The Act itself "remains fully operative as a law with these tenure restrictions excised," since the "remaining provisions are "not incapable of functioning independently."


The majority opinion reversed the Court of Appeals opinion in part and remanded the case for further proceedings.


A dissenting opinion written by Justice Breyer asserted that the removal provisions violated no separation of power principles and contended that the majority’s ruling "threatens to disrupt severely the fair and efficient administration of the laws" because it is inconsistent with the structure of many administrative agencies.



Though the majority found a portion of the Sarbanes Oxley Act to be unconstitutional, its holding was about as limited and as nondisruptive (at least as to the continued operation of the Act) as might be hoped for, given the finding of constitutionality. Certainly the finding that Act remains otherwise fully operational fell well short of the plaintiffs’ objective so trying to have the entire Act set aside.


Indeed the relief provided seems like pretty weak beer. The majority said only that "petitioners are not entitled to broad injunctive relief against the Board’s continued operations. But they are entitled to declaratory relief sufficient to ensure that the reporting requirements and auditing standards to which they are subject will be enforced only by a constitutional agency accountable to the Executive."


The Court’s refusal to declare the entire Act unconstitutional, despite finding one part to be unconstitutional, might have surprised and disappointed some advocates and Court watchers, who, as discussed here, had contended that the absence from the Act of a "savings clause" preserving the rest of the statute if one part was disallowed, should have required the entire Act to be found improper. The Court clearly strained to avoid this result, relying on prudential and precedential principles to steer clear of a disruptive result that arguably might otherwise have been required by absence of a statutory savings clause.


As the Conglomerate blog commented, the majority opinion "illustrated how to hold an agency to be unconstitutional without really doing anything important at all." quotes one commentator as saying that the decision against the PCAOB "was about as gentle a finding as you could expect." The Volokh Conspiracy blog said "The Court drew a line in the sand to safeguard executive power and ensure greater accountability, but did so without picking much of a fight."


The net effect of the Court’s holding is that the SEC now may remove the PCAOB board members at will, rather than having to go through the removal procedures that had been defined in the Sarbanes Oxley Act. The SEC issued a statement after the opinion was published in which the SEC said that "the Act ‘remains fully operative as a law’ with the for-cause restrictions excised, leaving the members of the PCAOB subject to removal by the Commission without restriction. The opinion does not call into question any action taken by the PCAOB since its inception." 


Professor Stephen Bainbridge has an interesting commentary on his eponymous blog (here) commenting that he is "unpersuaded" by the majority opinion, agreeing with the dissent that there is nothing about the effective result of the Court’s ruling that actually validates the President’s actual right or authority to oversee the PCAOB.


In a nice piece of ironic timing, the Court released its opinion in the case on the first day of the Senate Judiciary Committee confirmation hearings for Supreme Court nominee Elena Kagan. The Court’s ruling represents a defeat for Kagan, who as Solicitor General had argued the case for the government. (A transcript of the oral argument in the case can be found here.)