Supreme Court Oral Argument in PCAOB Case Centers on SEC Control and Presidential Removal Powers

Oral arguments before the Supreme Court in the case deciding the PCAOB’s constitutionality focused on the SEC’s pervasive control over the Board and the President’s control over the SEC. The case, which was brought by an audit firm, is before the Court on a grant of certiorari of a split panel ruling of the D.C. Circuit Court of Appeals that the PCAOB’s creation was constitutional because, under the Appointments Clause of the Constitution, Board members are inferior officers of the U.S. who do not have to be appointed by the President and can be appointed by the SEC, as is currently required by the Sarbanes-Oxley Act. (Free Enterprise Fund and Beckstead & Watts v. PCAOB, Doc. No. 08-861).

The arguments centered on the President’s control over the SEC, the SEC’s control over the Board, and the conclusion that the President has sufficient control over the Board to satisfy the Constitution. Jeffrey Lamken, with MoloLamken LLP, arguing for the Board, went through a litany of powers that the SEC has over the Board that amount to pervasive authority over every aspect of the Board's operations. For example, Board rules and sanctions have no effect except as the SEC allows and can be changed by the SEC at any time. Board inspections and investigations are subject to plenary SEC control. Not only are they conducted under rules that the SEC must approve, he said, but the SEC can threaten or actually rescind the Board's enforcement authority at any time if it thinks that it is appropriate in the public interest. The SEC also controls the Board's budget.

Chief Justice Roberts noted that the Board can act and the SEC can retroactively veto its actions, but the SEC does not propose the actions the Board takes. Its actions can have significant, devastating consequences for a regulated firm. Lamken responded that the SEC has broad authority, in the public interest, to rescind the Board's authority to enforce any devastating action, adding that it is precisely the type of control that powerful executives regularly exercise. If they don't like the way an inferior is doing something, he said, they can take away that authority.

Roberts also questioned Solicitor General Elena Kagan about the “for cause” removal issue. He noted that the President can remove SEC commissioners for cause and the SEC can remove Board members for cause, which Roberts called “for cause squared.” You have to have two violations of the for-cause provision, he observed. When the SEC wants to remove the Board member, it can only do so for cause. If the SEC decides there is not cause, then the President, under the Government’s argument, has to remove the SEC commissioners—all of them—not just the chair, and he can only do that for cause.

Justice Alito said the more layers of “for-cause” removal there is, the less control the President actually has. Solicitor General Kagan replied that it all depends. The Government is not saying that a double “for-cause” provision is always constitutional, just as it is not saying that a single “for-cause” provision is always constitutional. The question is the context in which the “for-cause” provision operates. Where it operates in a context like the relationship between the SEC and the Board, surrounded by a panoply of alternative and equally effective control mechanisms, it simply should not matter that there is another “for-cause” provision. Removal is just a tool, Kagan said. The ultimate constitutional question is the level of presidential control, and the presidential control here is exactly the same with respect to the Board's activities as it is with respect to the SEC staff's activities.

Michael Carvin of Jones Day represented the audit firm. He addressed the Solicitor General's position that because the President can control the SEC, he somehow can control those whom the SEC regulates. The New York Stock Exchange has exactly the same relationship with the SEC as the Board, he noted, and no one would argue that the President has the power to direct and supervise the NYSE.

Roberts asked if the SEC could direct the Board not to demand documents from a particular company. Kagan replied that the SEC has full control over the investigative and inspection function of the Board. The Board's investigations and inspections are all done according to rule, she said, and the SEC can change those rules. The SEC can reach out and abrogate any Board rules, including rules relating to inspections and investigations. The SEC also has the power to promulgate its own rules.

Roberts asked if that kind of SEC power over the Board is consistent with the intent of Congress in establishing the PCAOB. Kagan said the intent of Congress was to place the Board under the extremely close and comprehensive supervision of the SEC. The references to independence that one finds throughout the legislative record are almost all references to independence from the accounting industry, not from the SEC.