I haven’t had the chance to read Monday’s oral argument transcript in Free Enterprise Fund v. Public Company Accounting Oversight Board, so I don’t have much new to say about the case. Fortunately, there are lots of other legal bloggers and academics who are more focused on the case, and they’ve been writing quite a bit. The Conglomerate features a post by Bob Thompson and two by Donna Nagy (one, two). Rick Pildes has a pair on Balkinization (one, two), and Hans Bader posts on OpenMarket. There are still more links at Professor Bainbridge and Point of Law.
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December 10, 2009, 11:33 amHans says:
Bob Thompson describes a Justice’s well-founded “skepticism” of the “argument of [Solicitor General] Kagan and [PCAOB lawyer] Lamken that the SEC had comprehensive control over the PCAOB.”
Such skepticism would be well-placed, as law professor Donna Nagy notes in a forthcoming law journal article.
At a recent panel discussion at American Enterprise Institute, former SEC Commissioner Paul Atkins called into question how much control the SEC really has over the PCAOB, noting the SEC’s difficulties during his tenure (2002-2008) in reining in the PCAOB. (The speech is available at this link, which breaks up video of the panel discussion by speaker, with Atkins as the fifth speaker.)
Atkins discussed how the PCAOB enforces what are, in every practical sense, rules, without SEC approval (on subjects such as stock options); how PCAOB officials resisted entreaties from the SEC (over things like producing a business plan; and the limits on the SEC’s ability to oversee PCAOB spending (the PCAOB finances itself through a tax, the accounting-support fee, levied not on the accounting firms it regulates, but on America’s public companies).
SEC Commissioner Atkins previously noted the PCAOB’s unapproved staff-driven rules on subjects such as “options grants” in prior speeches, such as one available on the SEC’s web site (which also recounted the PCAOB’s chairman’s belief that the PCAOB and SEC were like “cousins,” rather than having a subordinate, “parent-child” relationship with the SEC. That’s at odds with the claims of the Government’s attorneys at oral argument in Free Enterprise Fund v. PCAOB, where they depicted the PCAOB as being closely controlled by the SEC.
December 10, 2009, 11:42 amHans says:
The Government’s case in Free Enterprise Fund v. PCAOB rests on the premise that the SEC Commissioners as a group head the SEC — not the SEC’s Chairman, who is just a figurehead — and that the SEC Commissioners collectively are the “Head” of a “Department” who can thus pick members of the PCAOB. (The Constitution’s Appointments Clause requires that even lesser federal officers much less powerful than PCAOB members be picked by (1) the President, (2) heads of departments, or (3) courts of law, not other officials, much less groups of officials like SEC Commissioners).
But the SEC’s Chairman is its head, in charge of appointing and removing SEC staff, and managing the SEC’s operations. As former SEC Commissioner Paul Atkins noted recently at an AEI panel discussion, while the SEC Commissioners have to be consulted about the most important SEC staff appointments, “in reality, he [the Chairman] can still appoint who he wants.”
(The speech is available in video on the web at this link (he is the fifth of the speakers listed if you click on “Play Full Video”; if you click on that, it brings up an “Index” of listed speakers: you can hear Atkins’s remarks by clicking on the link for Paul Atkins (“(00:51:40) Paul Atkins”)
Ironically, the DC Circuit, which rejected an appointments-clause challenge in a 2-to-1 ruling on the grounds that the SEC was collectively headed by all of its commissioners, not its chairman, contradictorily claimed that the SEC’s chairman “dominates” commission policymaking (a contradictory claim that undergirded its claim that the President indirectly has constitutionally sufficient control over the PCAOB members through his ability to designate which member of the SEC is its chairman to defeat a separation-of-powers challenge). This reasoning was blatantly inconsistent and illogical, as the Wall Street Journal has noted.
If the SEC’s chairman really does “dominate” the SEC, then surely he is its head. In any event, the Founding Fathers, like James Wilson, loathed the idea of letting groups, rather than individual department heads, pick federal officials, and put the Appointments Clause in the Constitution precisely to require that appointments be made by individuals, not groups, to avoid log-rolling, delay, inefficiency, and cronyism in appointments.
In any event, as Atkins has noted, the President can’t control the SEC’s chairman or commissioners, much less the PCAOB, so it makes little sense for the Government to claim in its Supreme Court brief that the President has “fully effective control” over the PCAOB through his indirect influence over the SEC’s chairman.
December 10, 2009, 12:12 pmHans says:
Everyone agrees that if PCAOB members are “principal officers,” then they need to be picked by the President and confirmed by the Senate, under the Constitution’s Appointments Clause, which requires that principal officers be picked by the President (and that even “inferior” officers subject to close supervision by a Presidential appointee be picked either by the President; the head of a department; or a court).
PCAOB members are indeed principal officers, both because of their extremely important policymaking rule, and because of their substantial autonomy (such as their prosecutorial and investigative independence, and extraordinary protection against removal by the SEC for anything except willful misconduct).
No one doubts the importance of their function. Just one set of PCAOB rules (its internal controls rules) costs the economy $35 billion a year, according to the American Electronics Association. A Brookings-AEI study by a University of Rochester researcher estimates the cost of Sarbanes-Oxley, in large part attributable to PCAOB rules, at $1.4 trillion over the long haul. By contrast, defenders of the PCAOB attr attribute to it and the Sarbanes-Oxley Act an almost mystical ability to restore confidence to capital markets in the aftermath of the Enron and Worldcom scandals (never mind that the Act has been a full employment law for big accounting firms, enriching the very big accounting firms that have failed to detect major accounting scandals, and never mind that the Act’s enormous cost has largely driven IPOs overseas to places like London, drying up equity-based financing for small businesses that otherwise could have gone public, and thus preventing new job creation).
Senator Gramm, who voted to create the PCAOB, said it would have “massive power, unchecked power by design.” The General Accounting Office, which described the chaotic results of the collective appointment process for PCAOB members (which led to the resignation of the PCAOB’s first chairman after his role in an accounting scandal surfaced), noted that the PCAOB is an “independent board with sweeping powers and authority.”
The PCAOB is certainly far more powerful than many officials that the Supreme Court has characterized as being “principal officers” in past rulings, like Consuls. (Ambassadors and Consuls have to be picked by the President and confirmed by the Senate. Who is more powerful, a PCAOB member, or the Ambassador to Malta? Moreover, Ambassadors and Consuls are subject to supervision by the Secretary of State and sub-cabinet officials, yet they are still deemed principal officers. PCAOB fines are subject to review after the fact, but then, so, too are federal district judges’ rulings, but that does not change the fact that federal district judges are “principal officers,” as Justice Souter noted in the Edmond case).
But even if PCAOB members were mere “inferior” officers, as the Government claims, their manner of appointment would still violate the Constitution’s Appointments Clause, as a I noted in my comment above at 12:12 pm, since inferior officers should have been picked by the Head of a Department, not SEC Commissioners as a group.
December 10, 2009, 12:38 pmHans says:
Above, I cited speeches by Paul Atkins, SEC Commissioner from 2002-2008, to rebut claims made by the Government about the SEC and PCAOB, in order to defend the unprecedented appointment process for members of the Public Company Accounting Oversight Board (and the unusual restrictions on removal of its members), such as the text of a speech by Atkins on an SEC web site, and video of a speech available on the AEI web site. Courts sometimes similarly cite web site content in their decisions. See Nebraska v. EPA, 331 F.3d 995, 998 n.3 (D.C. Cir. 2003) (taking judicial notice of statements on web site); Parents Involved in Community Schools v. Seattle School District No. 1, 551 U.S. 701, 780 n. 30 (2006) (Thomas, J., concurring) (quoting from web site); id. at 730, n.14 (plurality) (citing news articles about website’s earlier content).
December 10, 2009, 1:04 pmHans says:
If the PCAOB’s appointment process is upheld, all sorts of politically unpopular decisions indirectly mandated by future 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 is 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).
PCAOB-like appointment mechanisms are tailor-made to avoid accountability and hide culpability for bad legislation.
The President and Congress can use them to 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 10, 2009, 1:10 pmDilan Esper says:
Here’s the Dilan Esper principle of separation of powers cases, gleaned from cases such as Northern Pipeline, Morrison v. Olson, INS v. Chadha, Mistretta v. US, and others:
If imposing a separation of powers restriction will not seriously obstruct the federal government from doing what it wants to do, the Court will impose one.
If imposing a separation of powers restriction will seriously restrict federal power, the Court will not do it.
You can predict the result of PCAOB accordingly.
December 10, 2009, 1:38 pmHans says:
The Public Company Accounting Oversight Board (PCAOB) is nominally private, but even the Government has belatedly admitted that it is part of the Government for purposes of the Constitution and constitutional provisions like the Appointments Clause, which the PCAOB clearly violates, as I have noted above.
In its 8-to-1 Lebron decision in 1995, the Supreme Court held that Amtrak is part of the government, for constitutional purposes, even though Congress expressly declared Amtrak to be private in its enabling statute, since it was organized by Congress and appointed by federal officials. Lebron v. National Railroad Passenger Corporation, 513 U.S. 374, 399 (1995) (“a corporation is an agency of the government for purposes of the constitutional obligations of the government . . . when the State has specifically created that corporation for the furtherance of governmental objectives and . . . controls the operation of the corporation through its appointees”).
The PCAOB is even more obviously governmental than Amtrak, since it was not only created by a federal law (Sarbanes-Oxley), and appointed by federal officials (SEC Commissioners as a group), but wields great law enforcement powers (such as the ability to prosecute and impose sanctions of up to $2 million for even unintentional, inadvertent violations of its rules), and even levies a tax on public companies to pay for its salaries and expenses (the accounting-support fee). And violations of its rules can be made the basis for criminal prosecutions (rules with enormous economic significance — the American Electronics Association estimated a cost of $35 billion a year, citing the PCAOB’s internal-controls rules).
Similarly, it is clear that PCAOB members are officers of the United States for purposes of the Appointments Clause, given their law enforcement powers (the ability to impose fines of up to $2 million for even inadvertent violations of PCAOB rules), their statutorily-prescribed job responsibilities, fixed tenures (they can only be removed for willful misconduct, and then only by the SEC Commissioners as a group), and enormous pay (The Supreme Court has said that “emoluments” are relevant to officer status).
As law professors Viet Dinh and Kenneth Starr noted in the Wall Street Journal,
“All five members of the PCAOB make more than President Obama himself. In 2008, PCAOB Chairman Mark Olson took home $654,406 in 2008 and the four other members received $531,995. The U.S. President, by contrast, makes $400,000 a year. The PCAOB salaries also exceed the cap of $500,000 set by the Obama administration for chief executives of banks taking federal bailout dollars.”
The government has suggested that the President has “fully effective control” over the PCAOB. (See pg. 46 of its brief). But he cannot remove its members for any reason, and even the SEC Commissioners can only remove PCAOB members for willful misconduct, not the broad array of reasons generally encompassed under the notion of “good cause.”
The Congress has far more power over the PCAOB than the President does, since it can abolish the PCAOB, and since it can (I assume) impeach PCAOB members, like other executive branch officials and judges, for misconduct. But would anyone insist with a straight face that the Congress has control over the President because it can impeach him? Or that Congress has control over the judicial branch merely because it can remove them for certain misconduct (i.e., failure to exhibit “good behavior,” since judges constitutionally hold office “during good behavior”).
The PCAOB’s defenders liken it to SROs like the New York Stock Exchange (NYSE). But the NYSE had a venerable private history stretching back 200 years, completely unlike the PCAOB, which was created and picked by the government. For this and many other reasons, treating the PCAOB as a state actor thus does not in any sense make SROs state actors or endanger their functioning.
The comparison to SROs is apt in only one sense: in illustrating the considerable autonomy of the PCAOB. SRO’s enjoy considerable autonomy from the SEC, and the SEC does not run SROs, despite its review powers over them, and no one would say that the President has “fully effective control” over the SROs. Similarly, the SEC does not run the PCAOB, despite its review powers over the PCAOB, either — a reality which refutes the Government’s argument that PCAOB members are inferior officers who do not need to be picked by the President (an argument that, even if true, would not make the PCAOB constitutional, as I noted in my comment at 12:12). So if the PCAOB was indeed modeled on SROs in this respect, as the Government has claimed, then that is fatal, not a reason for upholding its appointment mechanism.
December 10, 2009, 3:03 pmRPT says:
Hans-Mania
December 10, 2009, 3:14 pmDilan Esper says:
Hans:
As someone who knows a bit about Lebron (it was coming up through the courts while I was in law school and I correctly predicted the result in my student note), let me just say that the test for whether an agency is “part of the government” for purposes of the First Amendment state action requirement is quite a bit different than whether any and if so which members of the agency are subject to the Appointments Clause.
I should also add that to me, this is a “who really cares?” issue, unless the agenda is to try and cripple independent agencies of the government, in which case it is extremely pernicious and I will agree with the Supreme Court’s ultimate decision to reject the Appointments Clause challenge. The Appointments Clause isn’t very important to begin with, but what is important is that Humphrey’s Executor remains in full force and maximum effect, and Congress retains its powers to create an administrative state.
December 10, 2009, 3:58 pmHans says:
The Appointments Clause helps promote good government, and the effective and responsive functioning of government agencies. Perhaps that is why “both liberal and conservative justices” (including Justices Souter and Blackmun) have taken “Appointments Clause violations very seriously.”
Justice Blackmun, speaking for the Supreme Court, rejected the idea that “the Appointments Clause isn’t very important,” in his 1991 Freytag decision. In it, he cited historian Gordon Wood, who wrote that the uncontrolled “power of appointment to offices” was considered by the American revolutionary generation to be “the most insidious and powerful weapon of eighteenth-century despotism.” Thus, the Appointments “Clause reflects our Framers conclusion that widely distributed appointment power subverts democratic government.”
Appointments Clause violations can seriously harm agency functioning and accountability. As the GAO noted in a December 2002 report, the PCAOB’s collective appointment process created a mess when it was used to select the first PCAOB members, leading to the resignation of the first PCAOB chair after his role in an accounting scandal became known.
(The PCAOB members are picked by the SEC Commissioners collectively, not the SEC’s Chairman, even though the SEC’s Chairman picks the SEC’s own important staff. The SEC’s Chairman, not the other SEC Commissioners, is the SEC’s head. Under the Appointments Clause, only the Head of a Department can pick federal officers).
As the GAO report showed, the cumbersome process of group selection by SEC Commissioners delayed appointments, diminished individual accountability, and led to inadequate vetting of PCAOB members.
As two law professors noted, “The PCAOB’s lack of an accountable structure has likely contributed to what members of both parties see as its policy failures. It did not foresee the disclosure issues for firms reporting subprime securities.”
Invalidating the PCAOB’s strange appointment process, which is unique for independent agencies, would not strip Congress of its powers to create an administrative state, or in any way overrule Humphrey’s Executor. As both Judge Kavanagh and Professor Adler have noted, this case is not remotely like Humphrey’s Executor; it is “Humphrey’s Executor Squared.”
Instead, it would enhance the accountability and transparency of the administrative state by preventing Congress from deviating from the traditional, longstanding model of independent agencies to create new, extraordinarily unaccountable agencies of the sort described in my earlier comments.
The PCAOB would violate the settled understanding of the Appointments Clause of the Constitution even if it were true that the PCAOB is closely controlled by the SEC (which it is not) and that its members are inferior officers.
Moreover, PCAOB members are in fact 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 has “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. They cannot be removed except for willful misconduct, and then only by the SEC Commissioners as a group (and they are paid much better than the President or the SEC Commissioners). It does not seem like much to ask that PCAOB members — like other independent agencies — be nominated by the President and vetted by the Senate prior to assuming office.
A ruling that the PCAOB members are principal officers would simply require the PCAOB members to be picked the way other independent agencies already are (and the way that many lesser officials already are picked, like ambassadors, consuls, and a host of subcabinet officials).
SEC oversight of some PCAOB functions doesn’t change this. As Justice Souter observed in Edmond, the fact that an official’s decisions are subject to after-the-fact review doesn’t make the official an inferior officer; after all, federal trial judges’ decisions are subject to review, but they are still principal officers who have to be picked by the President and confirmed by the Senate. And as SEC Commissioner Atkins and law professor Donna Nagy have noted, the PCAOB is simply not subject to close SEC control (the way the SEC’s own staff are).
December 10, 2009, 4:52 pmDilan Esper says:
Hans:
It isn’t important because as long as Congress can find some workaround, the government can still pursue the same substantive goals.
If the courts prohibit the workarounds, however, and actually seek to constrain federal power, then it is very important, because of the necessity of the modern administrative state.
As long as this is not an attempt to restore the “lost Constitution”, I don’t really care about it, and I suspect the Supreme Court might go along with it. Any whiff of seriously constraining independent agencies, however, and it needs to be snuffed out.
December 10, 2009, 5:11 pmRichard Samp says:
Dilan:
The case is not about “constraining federal power,” it is about constraining congressional power. When Congress purports to make a body like the PCAOB “independent,” what it is really doing is making the body independent of the President but more beholden to Congress. The PCAOB can operate largely independently of the President, but it cannot afford to piss off its congressional overseers who must approve its budget on an annual basis. I prefer to have Executive Branch officials under the control of the President rather than some congressional appropriations subcommittee.
December 10, 2009, 5:30 pmDilan Esper says:
The case is not about “constraining federal power,” it is about constraining congressional power. When Congress purports to make a body like the PCAOB “independent,” what it is really doing is making the body independent of the President but more beholden to Congress.
That’s a feature, not a bug. The point is that we need a quasi-independent administrative state, the precedents permit one, and as long as we are simply trimming around the edges, that’s fine. But if the point of this is to seriously inhibit the ability of Congress to make agencies less accountable to the President (i.e., to provide some political insulation), then it becomes a problem.
What specifically happens to the PCAOB isn’t all that important. Ensuring this isn’t a stalking horse to introduce unitary excecutive theories that make it more difficult for Congress to achieve its regulatory objectives WOULD be important.
And my more descriptive point is, the more this case looks like the latter scenario, the greater the likelihood the Supreme Court refuses to go there.
December 10, 2009, 5:46 pmHans says:
Rich, Congress doesn’t approve the PCAOB’s budget. The SEC does. And the PCAOB in turn funds itself through a tax on America’s public companies, the accounting support fee. (You are certainly right that the PCAOB is more easily influenced by Congress than by the President, since Congress can abolish the PCAOB or take away its responsibilities or privileges, while the President can’t; and the President can’t remove PCAOB members, although Congress might be able to in extreme cases, via impeachment).
In practice, the PCAOB writes its own budget. While the PCAOB’s budget is theoretically subject to SEC review, in practice, the SEC lacks the tools needed to effectively oversee PCAOB spending, as former SEC Commissioner Paul Atkins has noted.
The SEC has every incentive to approve a generous budget for the PCAOB, since SEC duties are said to overlap with the PCAOB’s, the SEC’s own budget is limited by Congressional appropriation (unlike the PCAOB’s), and a more generous PCAOB budget may indirectly benefit the SEC.
In an ideal world, the PCAOB would be more accountable to the President — and also, in certain respects, the Congress. Its members should have been picked by the President and vetted by the Senate (since important government officials are supposed to be appointed by the President with the consent of the Senate). And the Congress should review its budget — since legislative control over appropriations has been described by Senator Byrd (D-W.Va.) and others as the “tap-root of Anglo-American liberty,” and since appropriations bills are constitutionally supposed to originate in the House.
December 10, 2009, 5:48 pmHans says:
Oops. I meant “revenue” bills, not “appropriations bills,” in my comment above, since the Constitution requires that bills to raise revenue originate in the House (legislative precedent has appropriations bills generally originate there, but the Origination Clause speaks to revenue bills, e.g., tax bills, not appropriations bills).
In theory, bills to raise revenues are constitutionally supposed to originate in the House under the Origination Clause.
In reality, the courts refuse to enforce that constitutional requirement, which, unlike the Appointments Clause at issue in the PCAOB case, seems to be a virtual dead letter.
In one case, the Senate apparently took a tax-cut bill passed by the House, struck out everything but the title, and substituted a tax increase which then passed the House. The courts refused to intervene, divesting the Origination Clause of all real meaning. See Wardell v. U.S., 757 F.2d 203 (8th Cir. 1985).
In practice, the House, Senate, and the President all play a role in the budget process (the President beginning the process with a budget request to Congress).
The PCAOB’s extraordinary budget autonomy (it finances itself through a tax called the accounting support fee) leaves it less accountable to checks and balances than traditional independent agencies, which rely on the budget process and appropriations bills for funding. (The accounting-support fee is levied not on the regulated industry (accounting firms), the way fees are typically levied by independent agencies, nor is it imposed in the form of a user-fee (the way many agency exactions are, putting them beyond the reach of the Origination Clause), but rather is levied like a tax, on America’s public companies).
While the PCAOB’s budget is theoretically subject to SEC oversight, as a I noted above, in practice, the SEC has every incentive to approve a luxurious budget for the PCAOB (and is said to have inadequate tools to weed out unnecessary spending).
December 10, 2009, 6:52 pmThe Volokh Conspiracy » Blog Archive » PCAOB Blogging « Blogging says:
[...] Originally posted here: The Volokh Conspiracy » Blog Archive » PCAOB Blogging [...]
December 13, 2009, 10:47 amThe Volokh Conspiracy » Blog Archive » En Banc Roundtable on Free Enterprise Fund v. PCAOB — Round 2 says:
[...] Richard Pildes, Stephen Calabresi and Christopher Yoo, Harold Bruff, and Gary Lawson. Here’s a roundup of post-argument commentary. More VC posts on this case can be found here. Categories: [...]
December 16, 2009, 9:09 am