Supreme Court Decides PCAOB Violates Separation of Powers, But Recommends a Cure

Earlier today, the U.S. Supreme Court issued its opinion in the Free Enterprise Fund et al. v. Public Company Accounting Oversight Board et al. case, which turns on whether the PCAOB, created as part of the Sarbanes-Oxley Act of 2002, violates the U.S. Constitution's appointments clause.

Here are some highlights from the 5-4 ruling today, (Commissioner Breyer dissenting), in which the Supreme Court stated:

Held:

1. The District Court had jurisdiction over these claims......

2. The dual for-cause limitations on the removal of Board members contravene the Constitution’s separation of powers. Pp. 10–27....

.....(d)The Government errs in arguing that, even if some constraints on the removal of inferior executive officers might violate the Constitution, the restrictions here do not. There is no construction of the Commission’s good-cause removal power that is broad enough to avoid invalidation. Nor is the Commission’s broad power over Board functions the equivalent of a power to remove Board members. Altering the Board’s budget or powers is not a meaningful way to controlan inferior officer; the Commission cannot supervise individual Board members if it must destroy the Board in order to fix it. Moreover, the Commission’s power over the Board is hardly plenary, as the Boardmay take significant enforcement actions largely independently ofthe Commission. Enacting new SEC rules through the required no-tice and comment procedures would be a poor means of micro-managing the Board, and without certain findings, the Act forbidsany general rule requiring SEC preapproval of Board actions. Finally, the Sarbanes-Oxley Act is highly unusual in committing sub-stantial executive authority to officers protected by two layers ofgood-cause removal. Pp. 21–27.

3. The unconstitutional tenure provisions are severable from the remainder of the statute.

Because “[t]he unconstitutionality of a partof an Act does not necessarily defeat or affect the validity of its re-maining provisions,” Champlin Refining Co. v. Corporation Comm’n of Okla., 286 U. S. 210, 234, the “normal rule” is “that partial . . . in-validation is the required course,” Brockett v. Spokane Arcades, Inc., 472 U. S. 491, 504. The Board’s existence does not violate the sepa-ration of powers, but the substantive removal restrictions imposed by§§7211(e)(6) and 7217(d)(3) do. Concluding that the removal restric-tions here are invalid leaves the Board removable by the Commissionat will. With the tenure restrictions excised, the Act remains “ ‘fullyoperative as a law,’ ” New York v. United States, 505 U. S. 144, 186, and nothing in the Act’s text or historical context makes it “evident”that Congress would have preferred no Board at all to a Board whosemembers are removable at will, Alaska Airlines, Inc. v. Brock, 480 U. S. 678, 684. The consequence is that the Board may continue to function as before, but its members may be removed at will by the Commission. Pp. 27–29.

4. The Board’s appointment is consistent with the AppointmentsClause. Pp. 29–33.

(a)The Board members are inferior officers whose appointment Congress may permissibly vest in a “Hea[d] of Departmen[t].” Infe-rior officers “are officers whose work is directed and supervised atsome level” by superiors appointed by the President with the Senate’s consent. Edmond v. United States, 520 U. S. 651, 662–663. Because the good-cause restrictions discussed above are unconstitutional andvoid, the Commission possesses the power to remove Board membersat will, in addition to its other oversight authority. Board members are therefore directed and supervised by the Commission. Pp. 29–30.

(b)The Commission is a “Departmen[t]” under the AppointmentsClause. Freytag v. Commissioner, 501 U. S. 868, 887, n. 4, specifi-cally reserved the question whether a “principal agenc[y], such as”the SEC, is a “Departmen[t].” The Court now adopts the reasoning of the concurring Justices in Freytag, who would have concluded that the SEC is such a “Departmen[t]” because it is a freestanding compo-nent of the Executive Branch not subordinate to or contained within any other such component. This reading is consistent with the com-mon, near-contemporary definition of a “department”; with the earlypractice of Congress, see §3, 1 Stat. 234; and with this Court’s cases,which have never invalidated an appointment made by the head ofsuch an establishment. Pp. 30–31.

(c)The several Commissioners, and not the Chairman, are the Commission’s “Hea[d].”

The Commission’s powers are generallyvested in the Commissioners jointly, not the Chairman alone. The Commissioners do not report to the Chairman, who exercises admin-istrative functions subject to the full Commission’s policies. There is no reason why a multimember body may not be the “Hea[d]” of a“Departmen[t]” that it governs. The Appointments Clause necessarily contemplates collective appointments by the “Courts of Law,” Art. II, §2, cl. 2, and each House of Congress appoints its officers col-lectively, see, e.g., Art. I, §2, cl. 5. Practice has also sanctioned the appointment of inferior officers by multimember agencies. Pp. 31–33.
537 F. 3d 667, affirmed in part, reversed in part, and remanded.

Additional Info
A summary of the ruling and addional analysis will be posted later today by our Washington DC office staff on our website, http://www.financialexecutives.org/.

The NYT has posted a brief article: Supreme Court Orders Changes to Sarbanes-Oxley Act (via the Associated Press).

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