Supreme Court rules Sarbanes-Oxley oversight board unconstitutional
Supreme Court rules Sarbanes-Oxley oversight board unconstitutional
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[JURIST] The US Supreme Court [official website; JURIST news archive] on Monday ruled [opinion, PDF] 5-4 in Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board [Cornell LII backgrounder; JURIST report] that the Sarbanes-Oxley Act of 2002 [text] violates constitutional separation of powers by affording members of the Public Company Accounting Oversight Board (PCAOB) [board website] executive power while removing any presidential authority to control the exercise of such power. The US Court of Appeals for the District of Columbia Circuit held [opinion, PDF; JURIST report] that the act is constitutional because Congress is able to restrict the president’s removal power in any way it “deems best for the public interest” and because the constitutional authority to appoint implies the authority to limit, restrict and regulate the removal of such appointments. The Supreme Court reversed the circuit court’s ruling, holding that the PCAOB was too attenuated from presidential authority because the act created a multilevel tenure provision that protects board members from removal except for good cause. Additionally, board members could be removed only by the Securities and Exchange Commission (SEC) [official website] rather than by the president directly, withdrawing from the chief executive any decision on whether that good cause exists. Chief Justice John Roberts, writing the opinion of the court, held that because the SEC cannot remove a board member at will, the president cannot hold the commission fully accountable for the board’s conduct. The president is limited to reviewing the commissioner’s good-cause determination for removal and is powerless to intervene on that determination unless it is so unreasonable as to constitute “inefficiency, neglect of duty, or malfeasance” in office. Roberts noted the effects of expanding legislative power in this area:

This arrangement contradicts Article II’s vesting of the executive power in the President. Without the ability to oversee the Board, or to attribute the Board’s failings to those whom he can oversee, the President is no longer the judge of the Board’s conduct. He can neither ensure that the laws are faithfully executed, nor be held responsible for a Board member’s breach of faith. If this dispersion of responsibility were allowed to stand, Congress could multiply it further by adding still more layers of good-cause tenure. Such diffusion of power carries with it a diffusion of accountability; without a clear and effective chain of command, the public cannot determine where the blame for a pernicious measure should fall. The Act’s restrictions are therefore incompatible with the Constitution’s separation of powers.

Roberts went on to say that the unconstitutional removal provision was severable from the rest of the Sarbanes-Oxley Act, holding that the statute remains fully operative as a law with the good-cause restrictions excised, leaving the members of the PCAOB subject to removal by the commission without restriction. Justice Stephen Breyer, joined by Justices John Paul Stevens, Ruth Bader Ginsburg and Sonia Sotomayor, dissented, listing several other federal agencies and boards whose appointees are similarly insulated from presidential control. Breyer concluded that the act did not “significantly interfere” with the president’s executive power and that the majority’s opinion “threatens to disrupt severely the fair and efficient administration of the laws.”

The Sarbanes-Oxley Act was passed in 2002 to reform business practices and prevent corporate fraud by overseeing the accounting industry and punishing corrupt auditors. In 2006, the Free Enterprise Fund, a non-profit public interest organization promoting economic growth, lower taxes and limited government, and a Nevada accounting firm, Beckstead and Watts, LLP [corporate website], challenged [JURIST report] certain portions of the legislation, alleging that it violated separation of powers doctrine because it did not give the president sufficient control over the agency. Consistent with the overall purpose of Sarbanes-Oxley, the PCAOB was created in response to the collapse of Enron and the other corporate fraud scandals [JURIST news archives] that made headlines in 2002. The five-member PCAOB is appointed and overseen by the SEC.