PCAOB’s Dual Insulation From
President’s Authority Violates Constitutional Separation of Powers
The U.S. Supreme Court has held that the PCAOB’s double layer of
insulation from presidential removal of its members is an
unconstitutional violation of the Separation of Powers doctrine.
Board members are appointed by the SEC, which the Court said is
constitutional, but their two separate layers of for-cause tenure
protection restrict the President in his ability to remove a
principal officer, who is in turn restricted in his ability to
remove an inferior officer, even though that inferior officer
determines the policy and enforces the laws of the U.S. Congress
cannot deprive the President of adequate control over a Board that
is the regulator of first resort and the primary law enforcement
authority for a vital financial sector of the economy. The Court
also ruled that the Board’s unconstitutional tenure provisions are
severable from the remainder of the Sarbanes-Oxley Act ( Free
Enterprise Fund v. PCAOB, Doc. No 08-861, June 28, 2010).
The Court concluded that the removal restrictions are invalid,
which leaves the Board removable by the SEC at will and separates
the President from Board members by only a single level of good
cause tenure. The Commission is then fully responsible for the
Board’s actions, which are no less subject than the Commission’s own
functions to Presidential oversight. The Court said that the
Sarbanes-Oxley Act remains fully operative with these tenure
restrictions excised.
Since the Board members were validly appointed by the full
Commission, the Court refused to broadly enjoin the Board’s
continued operations. The audit firm challenging the Board’s
constitutionality was entitled to declaratory relief sufficient to
ensure that the reporting requirements and auditing standards to
which they are subject will be enforced only by a constitutional
agency accountable to the Executive.
The central issue in the case is that the PCAOB’s second layer of
tenure protection matters when the President finds it necessary to
have a subordinate officer removed, and a statute prevents him from
doing so. The Court ruled that the Board members’ multilevel
protection from removal is contrary to Article II’s vesting of the
executive power in the President. The President cannot “take care
that the laws be faithfully executed” if he cannot oversee the
faithfulness of the officers who execute them, reasoned the Court.
Regarding the PCAOB, the President cannot remove a Board member
who enjoys more than one level of good cause protection, even if the
President determines that the officer is neglecting his or her
duties or discharging them improperly. That judgment is instead
committed to SEC commissioners who may or may not agree with the
President’s determination, and whom the President cannot remove
simply because they disagree with him. In the Court’s view, this
situation contravenes the President’s constitutional obligation to
ensure the faithful execution of the laws.
While the Court has allowed limited restrictions on the
President’s removal power, the Court could not allow two levels of
protected tenure to separate the President from an officer
exercising executive power. The Sarbanes-Oxley Act not only protects
Board members from removal except for good cause, but withdraws from
the President any decision on whether that good cause exists. That
decision is vested instead in other tenured officers, the SEC
commissioners, none of whom is subject to the President’s direct
control. The result is a Board that is not accountable to the
President and a President who is not responsible for the Board.
The added layer of tenure protection makes a difference, the
Court said, because without it, the SEC could remove a Board member
at any time, and therefore would be fully responsible for what the
Board does. The President could then hold the Commission to account
for its supervision of the Board to the same extent that he may hold
the Commission to account for everything else it does. The
commissioners are not responsible for the Board’s actions. They are
only responsible for their own determination of whether the Act’s
rigorous good cause standard is met. Even if the President disagrees
with their determination, he is powerless to intervene unless that
determination is so unreasonable as to constitute inefficiency,
neglect of duty or malfeasance in office.
In the Court’s view, this novel structure does not merely add to
the Board’s independence, but transforms it. Neither the President,
nor anyone directly responsible to him, nor even an officer whose
conduct he may review only for good cause, has full control over the
Board. The President is stripped of the power and the ability to
execute the laws because his ability to hold his subordinates
accountable for their conduct is impaired.
The Board’s second layer of tenure protection compromises the
President’s ability to remove a Board member the Commission wants to
retain. Without a second layer of protection, the SEC has no excuse
for retaining an officer who is not faithfully executing the law.
With the second layer in place, the Commission can shield its
decision from Presidential review by finding that good cause is
absent, a finding that, given the SEC’s own protected tenure, the
President cannot easily overturn. No one has explained to the Court
why the Board’s task, unlike so many others, requires more than one
layer of insulation from the President, according to the opinion.
The current PCAOB-SEC arrangement is contrary to 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 is not the one who decides whether Board members
are abusing their offices or neglecting their duties. He can neither
ensure that the laws are faithfully executed nor be held responsible
for a Board member’s breach of faith. This violates the basic
principle that the President cannot delegate ultimate responsibility
or the active obligation to supervise that goes with it, because
Article II makes a single President responsible for the actions of
the Executive Branch.
Without a clear and effective chain of command, the Court said
the public cannot determine on whom the blame or the punishment of a
pernicious measure ought really to fall. By granting the Board
executive power without the Executive’s oversight, the
Sarbanes-Oxley Act subverts the President’s ability to ensure that
the laws are faithfully executed and the public’s ability to pass
judgment on his efforts. The Court ruled that the Act’s restrictions
are incompatible with the Constitution’s separation of powers.