The default mechanism for picking federal officers (federal employees with significant authority) is to have the president pick them, with approval from the Senate. The alternative way, if the officers are mere “inferior” officers, is to have the head of a “Department” pick them.

The PCAOB members aren’t picked either way. They’re not picked by the head of a cabinet department, or even by the SEC’s head — its chairman, who selects important SEC officials with the consent of the SEC commissioners — but by the SEC commissioners acting collectively.

One could argue that in practice — unlike the procedures mandated by a 1950 law (the reorganization act) — the SEC commissioners as a whole run the SEC, not its chairman, making them the “head” of a department (assuming the SEC qualifies as a “department” the way a cabinet department does).

But that argument, if accepted, would create separation of powers problems, since the DC Circuit ruling rejecting a separation of powers challenge did so because it said that the SEC’s chairman “dominates” SEC policymaking, meaning that the President’s oversight role under separation of powers was not defeated, because he can pick and remove the SEC Chairman without cause, even though he can’t remove SEC Commissioners from the Commission without cause — giving him indirect oversight of the PCAOB though his control over the Chairman, whom the DC Circuit said was the dominant SEC official.

As the Wall Street Journal noted, the appeals court ruling upholding the PCAOB was inconsistent and logically “at odds with itself”:

WALL STREET JOURNAL

REVIEW & OUTLOOK

MAY 20, 2009

Sarbox and the Constitution

Supreme Court scrutiny for a harmful law.

Here’s a pleasant surprise: The Supreme Court agreed yesterday to hear arguments in a case challenging the constitutionality of the Sarbanes-Oxley Act of 2002. This could get interesting.

Specifically, the lawsuit brought by free-market think tanks challenges the Public Company Accounting Oversight Board (PCAOB), which was created by Sarbox to police the auditing of public companies. The Appointments Clause of the U.S. Constitution requires that “officers of the United States” be appointed by the President or by the head of a department. Yet under Sarbox, the SEC Commissioners as a group pick PCAOB members. The President can neither appoint nor remove the officials, an arrangement that may violate the separation of powers.

The D.C. Circuit Court of Appeals voted to uphold the PCAOB provision last year in a 2-to-1 ruling at odds with itself. To reject the Appointments Clause challenge, the court held that the SEC Commissioners, rather than the Chairman alone, serve as the collective “head” of the agency and can therefore pick PCAOB members without violating the Constitution. But to reject the separation of powers challenge, the same ruling suggests that the SEC Chairman is in fact the head of the agency. The court reasoned that since the SEC Chairman, unlike the Commissioners, serves at the pleasure of the President, the PCAOB is indirectly accountable to the White House and thus is constitutional. Got that? Some Supreme Court clarity would be welcome.

Sarbanes-Oxley is one of those Congressional classics, passed amid the post-Enron panic, that has done much harm at great cost. Its biggest beneficiaries have been the same accounting firms the law sought to punish and which have nonetheless been able to charge far more money for their services. The law also did nothing to detect problems with the ratings and valuation of subprime mortgaged-back securities. We can only hope the High Court sends Congress back to the drawing board.