Among issues Sotomayor will address, if confirmed, along with the other Supreme Court justices: last week, the U.S. Supreme Court agreed to hear an appeal relating to a challenge to the Constitutionality of the Sarbanes-Oxley Act, specifically whether the appointment of PCAOB board members by the SEC commissioners (as opposed to by the President) violates the Appointment Clause of the Constitution. According to this one-page Supreme Court document confirming the court’s decision to ‘grant certiorari’ or take on the case, the questions presented are:
- Whether the Sarbanes-Oxley Act of 2002 violates the Constitution's separation of powers by vesting members of the Public Company Accounting Oversight Board ("PCAOB") with far-reaching executive power while completely stripping the President of all authority to appoint or remove those members or otherwise supervise or control their exercise of that power, or whether, as the court of appeals held, the Act is constitutional because Congress can restrict the President's removal authority in any way it "deems best for the public interest."
- Whether the court of appeals erred in holding that, under the Appointments Clause, PCAOB members are "inferior officers" directed and supervised by the Securities and Exchange Commission ("SEC"), where the SEC lacks any authority to supervise those members personally, to remove the members for any policy related reason or to influence the members' key investigative functions, merely because the SEC may review some of the members' work product.
- If PCAOB members are inferior officers, whether the Act's provision for their appointment by the SEC violates the Appointments Clause either because the SEC is not a "Department" under Freytag v. Commissioner, 501 U.S. 868 (1991), or because the five commissioners, acting collectively, are not the "Head" of the SEC.
Broc Romanek noted in The CorporateCounsel.net Blog (under subhead: It Ain’t Over Til It’s Over: SCOTUS to Review Constitutionality of SOX): “Last August, the US Court of Appeals for the DC Circuit - voting 2-1 - concluded that the SEC’s “comprehensive” oversight of the PCAOB satisfied the appointments clause. Then in November, the full DC Circuit voted 5-4 not to reconsider the ruling.” Bruce Carton noted in his Securities Docket Blog, in a post entitled U.S. Supreme Court Grants Cert. in Case Challenging Constitutionality of PCAOB, that: "The Court will hear arguments during its 2009-10 term, which starts in October." In related news, see the WSJ OpEd dated May 13, The PCAOB: An Obstacle to President Obama's Success, by Kenneth Starr and Viet Dinh, who are among the lead lawyers for the plaintiffs, audit firm Beckstead & Watts, and the Free Enterprise Fund.
FCPA Investigations Increase
Meanwhile, Dionne Searcey of the Wall Street Journal reports today on developments relating to a precursor to Sarbanes-Oxley: The Foreign Corrupt Practices Act or FCPA. In her article, U.S. Cracks Down on Corporate Bribes, Searcey explains that FCPA, which became law in 1977 as a response to corporate bribery scandals at home and abroad, has seen an uptick in related investigations, rising from 100 last year, to 120 this year. She notes: "The effort began in the wake of a series of business scandals earlier this decade, including the collapse of Enron, that stirred up a new corporate-reform movement... After the passage of the 2002 Sarbanes-Oxley Act, which is intended to hold executives more accountable for their companies' actions, the Justice Department dusted off the FCPA law as part of the overall crackdown on corporate shenanigans."
In 1979, then-SEC Chairman Harold Williams outlined the accounting and internal control provisions of FCPA, as implemented though Section 13 (b) of the Securities Exchange Act, in this speech: “[to] make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer [and to] devise and maintain a system of internal controls sufficient to provide reasonable assurances [that specified objectives are met.].”
Williams noted that the SEC was proposing a management report on internal control, adding: “In fashioning this proposal, our objective was to meld the management report concept recommended by the Cohen Commission, the Financial Executives Institute [now called Financial Executives International], and other elements of business leadership with the national policy congress adopted in the accounting provisions of the [FCPA].”
However, the proposal from Williams’ day, and another proposal a decade later, were ultimately not issued as final rules, in part over concerns about lack of a materiality threshhold, and concerns about language surrounding documenting compliance with the law. Banks were ultimately required to provide a management report under FDICIA enacted in 1991. Separately, in a private sector initiative, companies were provided guidance on internal control, including a sample management report on internal control, by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), published in 1992 as COSO’s Internal Control-Integrated Framework. Ultimately, the requirement for all public companies to provide a management report on internal control, and an auditor’s report on internal control, came in the form of Sarbanes-Oxley Sections 404a and 404b, respectively. The SEC and PCAOB rulemaking under Sarbanes-Oxley recognizes the COSO internal control framework as a suitable, generally accepted framework for purposes of the internal control attestation. COSO continues to publish guidance and research studies, visit http://www.coso.org/ for more information.
Returning full circle to the topic earlier in this post, some have posited that if one section of the Sarbanes-Oxley Act is found unconstitutional, that could open a can of worms for other provisions in the act or the act as a whole. See,e.g. Is SOX Unconstitutional Dec. 2006 by Kevin LaCroix in the D&O Diary, in which he says of the Free Enterprise Fund v. PCAOB case: “Although the case focuses on only a narrow part of the [Sarbanes-Oxley] Act, it has the potential to bring down the entire statute.” I don’t know if the Supreme Court permits bloggers in the courtroom (nor do I know if cameras or cell phones are permitted); if so, I’m sure we’ll see some interesting live blogging (or tweeting) from the proceedings.
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