Supreme Court Will Decide Constitutionality of PCAOB
The U.S. Supreme Court has agreed to hear an audit
firm's challenge to the constitutionality of the PCAOB. The audit firm asked the
Supreme Court to declare the PCAOB unconstitutional because the Sarbanes-Oxley
Act provisions creating the Board violate the separation of powers and
Appointments Clause by stripping the President of all powers to appoint or
remove Board members. In its petition, the firm said that the Board is a
congressional attempt to create a "Fifth Branch" of the federal
government over which the President has less control than over "Fourth
Branch" agencies like the SEC, which currently reflect the outermost
constitutional limits of congressional restrictions on the executive (Free
Enterprise Fund v. PCAOB, Doc. No. 08-861).
The case will be briefed over the summer and argued in
the fall when the Court convenes for the 2009-2010 term. A split federal appeals
court panel upheld a district court ruling which decided that the PCAOB is
constitutional and rejected claims that SEC rather than presidential selection
of Board members violates the Constitution. The panel concluded that Board
members are inferior officers of the U.S. within the meaning of the Appointments
Clause and are properly appointed by the SEC. The fact that the Sarbanes-Oxley
Act limited the SEC's authority by providing that Board members can only be
removed for cause did not elevate Board members to the status of principal
officers of the U.S. worthy of presidential appointment. Despite the
"for-cause" removal, the panel said that the Act gave the SEC
comprehensive and pervasive control over the PCAOB, including the approval of
the Board's budget.
The U.S. Court of Appeals for the D.C. Circuit, by a
five to four vote, denied full or en banc review of the split panel decision.
The full circuit court denied the rehearing en banc in a one page order, with no
written opinions. Judge Kavanaugh, who dissented in the panel opinion, would
have granted review. He was joined by Circuit Judges Ginsburg and Griffith, and
Chief Judge Sentelle. Voting to deny full court review were Judges Brown and
Rogers, who were the majority on the panel decision, and Judges Henderson, Tatel
and Garland.
The SEC has consistently and vigorously defended the
PCAOB against the constitutional attack on the appointment process of Board
members and the manner in which the Board conducts its operations. In a joint
brief in the district court with the Justice Department, the SEC contended that
the method detailed in the Sarbanes-Oxley Act for appointing Board members
satisfies the Appointments Clause. In addition, the brief said that the
pervasive authority of the SEC to supervise and control the PCAOB's activities
refutes the depiction of the Board as a rogue agency running unchecked over the
separation of powers. The Commission said that the Board's performance of
diverse functions pursuant to a variety of intelligible principles defeats the
argument that the Sarbanes-Oxley Act unconstitutionally delegated legislative
power to the Board.
The main government argument before the Court is that
the audit firm failed to exhaust its administrative remedies before the SEC, so
the federal district court lacked jurisdiction to entertain the claim that the
creation of the Board was unconstitutional. Congress modeled the Board on the
self-regulatory organizations, and the same judicial review procedures for the
SROs are applicable to the Board. Because the district court lacked
jurisdiction, the Supreme Court could not reach the merits of the questions
presented in the petition, according to the brief, even if review of those
questions was otherwise warranted.
The audit firm told the Supreme Court that it would
not invent a fictional controversy with the SEC solely to create a vehicle to
challenge the Board's constitutionality. In its reply brief to the government,
the audit firm said that no case has ever hinted that a standard provision for
appellate review of agency rulemaking is the exclusive vehicle for challenging
the agency's, much less another agency's, constitutionality, thus displacing a
federal district court proceeding for injunctive relief. The firm urged the
Supreme Court not to allow the Board to convert the most important separation of
powers case in the last 20 years into a narrow dispute.
The audit firm described as disingenuous the
government's suggestion that it should have challenged a Board sanction because
the Board's investigation of the firm did not result in sanctions. Even more
disingenuous, in the firm's view, is the assertion that it could have brought
the challenge by seeking SEC review of the Board's inspection report or by
petitioning the SEC to modify or revoke the Board's authority, because appellate
courts have no jurisdiction over SEC inspection report rulings or refusals to
initiate rulemaking.
The firm argued that the SEC's views on the
constitutional issues before the Court are not entitled to deference. The
Commission lacks institutional competence and authority to opine on the
separation of powers or invalidate the Board, according to the firm. The firm
also noted that the Commission, in the lower courts and before this Court, has
provided in the briefs that it joined, its construction of the Act, just as it
would have done in a statutory review case.