This morning the Supreme Court heard oral argument in Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board, an important separation of powers case. I went to the argument, and from what I saw — or rather, what I heard, as I was in the overflow seating in the Lawyer’s Lounge — the day did not go well for the challengers to the constitutionality of the Public Company Accounting Oversight Board. The Justices seemed to think the Board didn’t have many powers and was pretty closely controlled by the SEC, addressing the constitutional objections. I don’t teach or write in this area, so maybe I was missing something obvious, but my read was that the Court would readily conclude the Board is constitutional.
UPDATE: The transcript is here.
Commenter says:
Former SEC Commissioner Paul Atkins, and law professor Donna Nagy, have contested the claim that the PCAOB is pretty closely controlled by the SEC.
Here’s a commentary linking to Nagy’s and Atkins’s rebuttals to this argument made by the PCAOB.
In the comment thread to a prior post about the Free Enterprise Fund v. PCAOB case, it was asserted that Atkins will also have a column in the Wall Street Journal’s online edition soon, making the case that the SEC does not closely control the PCAOB.
December 7, 2009, 2:26 pmOrin Kerr says:
Commenter,
By coincidence, that link is to a story by regular VC commenter Hans bader, who had that same story linked to recently in a main post by Jonathan Adler.
December 7, 2009, 2:44 pmSoronel Haetir says:
I have a hard time believing Commenter is Hans Bader, HB tends to post lengthy misives.
December 7, 2009, 3:17 pmDilan Esper says:
I am not surprised that things did not go well for the challengers of the constitutionality of the board. It’s not that separation of powers cases can’t be won– they can be– or that the argument being made here isn’t valid, but rather that, similar to Professor Kerr’s views on the incorporation debate in the Second Amendment case, I don’t think that the Court is likely to want to breathe a lot of life into doctrines that could potentially be used to challenge large swaths of the administrative state. These battles were waged long ago and, for better or worse, they were resolved.
December 7, 2009, 5:59 pmMe says:
Former SEC Commissioner Paul Atkins’ recent remarks seem to contradict the claims made at oral argument by the Solicitor General about the SEC’s Chairman not being its “head” (as is required for the SEC Commissioners collectively to pick PCAOB members) and the PCAOB lawyer’s claim that the SEC really oversees the PCAOB’s budget.
A ruling on such grounds would invalidate the PCAOB’s appointment process, without undermining the administrative state or independent agencies in general.
December 7, 2009, 6:30 pmDilan Esper says:
A ruling on such grounds would invalidate the PCAOB’s appointment process, without undermining the administrative state or independent agencies in general.
One of the things one learns from practicing law a lot is that there’s a difference between theoretical grounds for distinguishing future cases and any sort of reasonable expectation that the cases will actually be distinguished. Certainly the Supreme Court is aware of this, and it factors into whether they are willing to approve doctrinal expansions.
December 7, 2009, 6:44 pmGlen says:
I didn’t read anything in the transcript that pointed one way or the other.
Several of the Justices seemed quite confused about exactly how “independent agencies” are supposed to work. And others were openly skeptical of the Government’s (along with the PACOB’s) contention that the SEC has “plenary” or “pervasive” authority over the PACOB. Even Justice Ginsburg — who appeared most unwilling to upset Congress’s intent in establishing the Board — nonetheless struggled to fix the statute, suggesting the SEC should have at-will authority over PCOAB board members. While her re-write of the statue would have alleviated the separation of powers issue, it still left a problem with the Appointments Clause.
Everyone (except petitioner’s counsel) also seemed pretty obtuse about how real-world accounting and audit works.
December 7, 2009, 8:49 pmEli Rabett says:
Given that FASB has been around forever, how is the PCAOB different structurally?
December 7, 2009, 11:54 pmGregory says:
Eli, from a practitioner’s perspective, the PCAOB makes “binding” FASB stuff that has been around forever, and in some cases has given it fancier names. But practitioners still use most of the old terminology and treat it the same.
December 7, 2009, 11:57 pmJohn Berlau says:
Going through the transcript, there are major instances that illustrate the scope of the PCAOB’s power and shatter the contention that the PCAOB is “pretty closely controlled” by the SEC.
One example of the PCAOB’s vast powers was inadvertantly revealed by Solicitor General Elena Kagan In its arguments, the PCAOB made much of the fact that it has to go to the SEC to get a subpoena for public company documents. But this is mostly because, as Kagan put it, “the board does not regulate the public companies themselves, the board only regulates the accounting firms.”
And as for those firms, Kagan made it clear that the PCAOB has considerable statutory power to compel documents from them without going to the SEC. In an exchange with Chief Justice John Roberts (on pages 38 and 39 of the transcript), Kagan states: “The accounting firms do, as a condition of their registration, have to present any documents that the — the — the board wants. And so the accounting companies have a real reason to comply with the board’s requests.”
Roberts answers back, “So there are in fact collateral consequences that take place without any involvement by the SEC?” Stammering in her response, Kagan says, “Well, I — I — I think again the SEC could change any of the rules that govern inspections, any of the rules that govern investigations.” (I am quoting directly from the transcript and did not add anything myself for any additional dramatic effect. The “I — I — I” is exactly the way it was transcribed)
And the SEC really couldn’t change these rules governing the PCAOB’s power to compel documents from public firms, since it is written into the Sarbanes-Oxley statute.
December 8, 2009, 8:09 amJohn Elwood says:
One thing that made me wonder about whether the Court would “readily” uphold the law was that both Justices Stevens and Ginsburg asked Carvin during rebuttal whether what remained would be constitutional if the Court struck down and severed the two layers of for-cause removal. That suggested to me that they thought that was how the conservatives might be going.
December 8, 2009, 9:50 amTuesday Morning Quaterback of Free Enterprise v. PCAOB | Compliance Building says:
[...] Oral Argument in Free Enterprise Fund v. PCAOB by Orin Kerr in The Volokh Conspiracy [...]
December 8, 2009, 10:02 amJon says:
Regardless of the supervisory powers of the SEC, the appointment process for the PCAOB is unconstitutional. If the board members are principal officers of the United States, as Mr. Carvin argues, and Paul Atkins (former SEC commissioner) has said that he believes they are, then clearly the appointment mechanism for the board is in violation of the appointments clause. If they are inferior officers, however, then either the appointment mechanism for appointing inferior officers within the SEC is unconstitutional, or the PCAOB appointment mechanism is unconstitutional. The SEC chairman clearly serves as head of the department (see the GAO’s report on the chairman as the head of the department) for the appointment of all other inferior officers in the SEC. Why then, are the PCAOB members, supposedly appointed by the head of the department according to the government’s lawyers, appointed by the commissioners as a whole? These two appointment methods within the SEC clearly rely on separate definitions of who the head of the SEC is or are (either the chairman or the commissioners collectively) and as such one of those methods has to be unconstitutional. From what I have read of the argument, it seems like at least this point was argued convincingly and without particular opposition from any of the Justices.
December 8, 2009, 11:32 amJohn Berlau says:
On page 10, Justice Anthony Kennedy gets to another issue in which the PCAOB has substantial power to affect those it regulates without SEC control. He asks: “What happens to the information that the board obtains? Can the board go public with that or is it all confidential.”
Yes the PCAOB can and does go public with its findings without ever going to the SEC. Go to this page on its web site for “PCAOB Disciplinary Proceedings.” http://pcaobus.org/Enforcement/Disciplinary_Proceedings/index.aspx
So even though parties can appeal sanctions to the SEC, the PCAOB can still cause great reputational damage to firms before the SEC ever gets to review the case.
December 9, 2009, 12:05 amgary myers says:
In this week of the PCAOB argument, I am wondering whether any of the VC folks or those commenting here, might wish to weigh-in on the maybe lurking separation of powers/appointments clause/Chadha issues in the proposed “Independent Medicare Advisory Board”(sec. 3403 of the Reid bill; pps. 1000-1053). Those issues seem to include: (a) the ability of the yearly Board’s cost-saving provider reimbursement “proposals” to take effect as law (and apparently override present statutory formulas) if not rejected by a fast-tracked Congressional statutory substitute; (b)the imposition of framework legislation on future Congresses for consideration of such substitutes; (c) the impostion of a supermajority requirement(3/5) for the passage of any future resolution abrogating the Board; and (d) the Presidential appointment of “bipartisan” Board members (apparently principal officers) with vetting by the Congressional party leaders but without full Senate approval.
indepp amluose commheir commenters reits VC
December 9, 2009, 10:54 amHans says:
If the PCAOB is upheld, all sorts of politically unpopular decisions indirectly mandated by federal laws — like rationing of medical care — could be fobbed off on politically unaccountable boards not directly picked by the President or confirmed by the Senate, even if they are responsible for such laws in the first place. (By contrast, if it’s struck down, that does not endanger any other independent agency, since the PCAOB is unique among such agencies in its two degrees of separation from the President).
The PCAOB’s appointment mechanism is tailor-made to avoid accountability and hide culpability for bad legislation.
The President and Congress could avoid accountability, by taking credit for the positive aspects of passing national health insurance, even while shifting all the blame for any negative aspects (whether or not they are foreseeable results of the legislation), such as rationing of care to keep federal costs down, to “independent” boards that will be in charge of the dirty work.
Sarbanes-Oxley illustrates this blame-shifting in action. George Bush took credit for signing Sarbanes-Oxley as if it were a good thing, then later claimed it had been misapplied in a way burdensome to the economy (indirectly blaming the PCAOB, which crafted the most costly and economically significant rules under Sarbanes-Oxley). Representative Oxley, co-sponsor of Sarbanes-Oxley, did the same thing, boasting about passing the law, yet later lamenting the extremely burdensome nature of the PCAOB’s rules. If the PCAOB’s rules misapplied the intent of Sarbanes-Oxley (which to some extent I think it did), that illustrates problems with the PCAOB and its rules, and underscores its power and authority. If, by contrast, it faithfully applied Sarbanes-Oxley, then that still illustrates how having an independent agency picked by yet another independent agency can allow politicians to deflect blame for legislation that they were in fact responsible for — defeating ideals of democratic accountability and representative democracy.
December 9, 2009, 11:46 amHans says:
The PCAOB’s strange appointment process would violate the Appointments Clause of the Constitution even if it were true that PCAOB is closely controlled by the SEC (which it is not). (The PCAOB’s collective appointment process created a mess when it was used to select the first PCAOB members. The PCAOB members are picked by the SEC Commissioners collectively, even though the SEC’s Chairman picks the SEC’s own important staff, because the SEC’s chairman, not the other SEC Commissioners, is its head).
Moreover, PCAOB members are principal officers who have to be picked by the President for several reasons, one of which is that they have a broad policy-making role. As the GAO noted, the PCAOB is an “independent board with sweeping powers and authority.” The cost of just one set of PCAOB rules — the PCAOB’s internal controls rules — is estimated to cost $35 billion a year, by the American Electronics Association. The total SOX cost may substantially exceed a trillion dollars.
December 9, 2009, 11:59 am