The Vanderbilt Law Review has now posted a second round of comments in its En Banc Roundtable on Free Enterprise Fund v. Public Company Accounting Oversight Board. The contributors are Peter Strauss, 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.
Hans says:
Government lawyers seeking the defend the PCAOB’s peculiar appointment mechanism (the PCAOB is an independent agency whose members are picked by the members of another independent agency, the SEC, and not by the SEC’s chairman, much less the President) have argued that PCAOB members are just “inferior officers” who needn’t be picked by the President, based on the SEC’s supposedly broad control over the PCAOB.
Law professor Donna Nagy rejects that argument in a forthcoming law journal article.
At a December 3 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. (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)).
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.
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 the December 3 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 and cronyism in appointments.
Moreover, as Atkins has noted, the President doesn’t have much control over 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.
Everyone agrees that if PCAOB members are “principal officers,” rather than inferior officers as the Government claims, 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 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 rules adopted under Sarbanes-Oxley have gravely harmed capital markets, largely driving 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.” It certainly has more power than many “principal” officers, like consuls or the ambassador to Malta.
December 16, 2009, 11:15 amHans says:
Lawyers seeking the defend the PCAOB’s peculiar appointment process (the PCAOB is an independent agency whose members are picked by the members of another independent agency, the SEC, and not by the SEC’s chairman, much less the President) have argued that PCAOB members are just “inferior officers” who needn’t be picked by the President, based on the SEC’s supposedly broad control over the PCAOB.
Law professor Donna Nagy rejects that argument in a forthcoming law journal article.
At a December 3 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. (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)).
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.
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 the December 3 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 and cronyism in appointments.
Moreover, as Atkins has noted, the President doesn’t have much control over 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.
Everyone agrees that if PCAOB members are “principal officers,” rather than inferior officers as the Government claims, 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 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 rules adopted under Sarbanes-Oxley have harmed capital markets, largely driving 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.” It certainly has more power than many “principal” officers, like consuls or the ambassador to Malta.
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December 16, 2009, 1:42 pmHans says:
The PCAOB is nominally private, but even its lawyers have 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 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. See 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 by the government and picked by government officials. 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, since they are not picked by the Head of a Department, as inferior officers can be as an alternative to presidential appointment, but rather by the SEC Commissioners collectively, as opposed to the SEC’s chairman). 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 16, 2009, 2:29 pmHans says:
It’s ironic that the PCAOB contains the word “accountability” in its title, because its appointment process is tailor-made for politicians to use to avoid accountability for unpopular decisions and policies that don’t work out as well as promised or predicted to the public.
If the PCAOB’s appointment process is upheld, all sorts of politically unpopular decisions indirectly mandated by hypothetical future federal laws — like, say, unexpectedly draconian rationing of medical care — could be fobbed off on newly-created, politically unaccountable boards not directly picked by the President or confirmed by the Senate, even if such politicians were indirectly responsible for such decisions by passing the very law that required them. (By contrast, if the PCAOB’s appointment process is struck down, that would not endanger any other existing 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 legislation, even while shifting all the blame for any negative aspects (whether or not they are foreseeable results of the legislation), to “independent” boards that will be in charge of the dirty work.
They can more readily shift blame to such “independent” boards, whom they do not appoint, than to traditional independent agencies, whose members are picked by the President, and confirmed by the Senate.
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. Neither of them did anything about those burdensome and costly rules, though.
If the PCAOB’s rules misapplied the intent of Sarbanes-Oxley (which to some extent I think they 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.
It was no doubt easier for politicians to appease constituents by lamenting the cost of the PCAOB’s rules, even while doing nothing about those costs or rules, knowing that they could not be blamed for picking any of the PCAOB members (the way Bush was blamed for picking Chris Cox as SEC chairman, especially after the Madoff scandal — never mind that it was Cox’s Clinton-appointed predecessor, Arthur Levitt, who looked to Madoff for advice and put him on an advisory panel, giving him the SEC’s imprimatur).
December 16, 2009, 6:38 pmHans Bader says:
Oops. I should have said “oversight,” not “accountability” in the first reference in the preceding comment. The lack of direct presidential and congressional oversight (such as vetting of appointments) over the agency begets a lack of accountability (as does the lack of individual responsibility for oversight over the agency), and plausible deniability that reinforces a lack of accountability.
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March 31, 2010, 4:15 pm