Hans Bader has a summary write-up of the PCAOB case that will be heard next week. The insights of former SEC Commissioner Paul Atkins are especially interesting.
Hans Bader has a summary write-up of the PCAOB case that will be heard next week. The insights of former SEC Commissioner Paul Atkins are especially interesting.
James Darby says:
The PCAOB case involves not just an Appointments Clause violation — as Bader argues — but also a separation-of-powers problem because of the fact that the members of the PCAOB agency can’t be removed except for willful, job-related misconduct related to how they enforce Sarbanes-Oxley, and then only by the SEC Commissioners as a whole. (Even Congress can impeach federal officials for non-job-related misconduct, and state legislatures impeach judges for things far less serious, and less job-related, than the SEC has to show to remove PCAOB members — yet no one claims that legislatures supervise the judicial branch of government, the way the Justice Department claims the President supervises the PCAOB, even though he can’t appoint or remove PCAOB members).
The PCAOB does violate the Appointments Clause, although not necessarily for the reasons Bader claims.
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 try to 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 SEC Commissioner Paul Atkins suggests that such a claim is just factually wrong and grossly understates the SEC Chairman’s leading role at the SEC and his dominant position.
Moreover, that argument, if accepted, would create separation of powers problems of its own, 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.
December 5, 2009, 2:58 pmCommenter says:
Basically, SEC Commissioner Atkins has demolished two foundational premises of the respondents’ case in the pending Supreme Court case of Free Enterprise Fund v. Public Company Accounting Oversight Board (PCAOB), which will be argued on Monday:
(1) the claim that PCAOB members are not “principal” officers who need to be picked by the President and confirmed by the Senate (they are currently picked by the 5 SEC Commissioners); and
(2) the claim that the SEC is headed not by its Chairman (whom the D.C. Circuit said “dominates” commission policymaking) but by the SEC Commissioners as a collective.
The audio of Atkins available on the web site of the American Enterprise Institute ought to be treated as admissible and considered by the Court. See Nebraska v. EPA, 331 F.3d 995, 998 n.3 (D.C. Cir. 2003) (taking judicial notice of statements on web site).
December 5, 2009, 3:13 pmgeokstr says:
Anybody know where the AICPA and various state CPA societies stand on this? Sarbanes-Oxley has been affectionately referred to as the Accountants Full Employment Act since it was passed.
December 5, 2009, 4:18 pmSam Bokanofwitz says:
Deregulation? Ha ha ha ha ha. Hans Bader and the AEI are nuts!
December 5, 2009, 9:45 pmrpt says:
Well at least we don’t have Hans himself posting the same canned press release on three different threads. The epitome of lameness.
December 6, 2009, 12:12 amCommenter says:
It illustrates that the Public Company Accounting Oversight Board (PCAOB) violates the Constitution.
Paul Atkins’ point about the very limited ability of the SEC to oversee the PCAOB is supported by a forthcoming law review article in the Pittsburgh Law Review by Professor Donna Nagy, the leading scholar on the PCAOB’s constitutional status.
Nagy explains why the Constitution is violated by the PCAOB’s current appointment process, and why arguments for the PCAOB fail. PCAOB members, she notes, are powerful “principal officers” who should have been picked by the President — not by the SEC (much less its commissioners as a group).
As Newswise notes,
“Nagy’s most recent scholarship on the PCAOB will be published in a forthcoming symposium issue of the Pittsburgh Law Review. The article, “Is the PCAOB a ‘Heavily Controlled Component’ of the SEC?: An Essential Question in the Constitutional Controversy,” challenges the D.C. Circuit’s depiction of the PCAOB as “a heavily controlled component” of the SEC and argues that this flawed premise was essential to the court’s 2-1 decision upholding the PCAOB’s constitutionality. With a focus on statutory analysis and legislative history, the article seeks to show that Congress designed the PCAOB to operate with substantive independence from the SEC. It then argues that PCAOB members acting with significant discretion and autonomy outside the SEC’s control are “principal officers” who, pursuant to the Appointments Clause, must be appointed by the president with the advice and consent of the Senate. And as “principal officers” performing significant executive functions, PCAOB members must be removable for cause by the president.”
Nagy is the leading scholar in this area of the law, having written the seminal article about the PCAOB, back in 2005, in the Notre Dame Law Review. See Donna M. Nagy, “Playing Peekaboo With Constitutional Law: The PCAOB and Its Public/Private Status,” 80 NOTRE DAME LAW REV. 975-1071 (2005), Reprinted in 38 SECURITIES LAW REV. 424 (2006) (ed., Donald C. Langevoort).
December 6, 2009, 1:58 pmrpt says:
Commenter=Hans Bader.
December 6, 2009, 11:54 pmEasterner says:
I’ve heard that SEC Commissioner Atkins will have a commentary on the Wall Street Journal’s web site soon with further insights.
December 7, 2009, 10:37 am