June 28, 2010
Today, the United States Supreme Court issued its opinion in Free Enterprise Fund v. Public Company Accounting Oversight Board, No. 08-861. The Public Company Accounting Oversight Board ("Board") was created by the Sarbanes-Oxley Act of 2002 to regulate accounting firms that conduct audits of public companies. The five members of the Board are appointed by the Securities and Exchange Commission ("SEC"), and are removable by the SEC only "for good cause shown" and "in accordance with" certain procedures. This "dual for-cause" removal regime–wherein a Board member is only removable for good cause shown by the SEC, whose Commissioners the President may not remove at-will–was described by the Court as "novel" and "highly unusual."
The Board’s structure was challenged by the petitioners as violating the Constitution’s separation of powers principle and the Appointments Clause. Reversing in part the opinion of the United States Court of Appeals for the District of Columbia Circuit, the Court held in an opinion authored by Chief Justice Roberts that the restrictions on removal of Board members violated the separation of powers principle and were therefore unconstitutional. Justice Breyer, joined by Justices Stevens, Ginsburg, and Sotomayor, dissented.
Although the Court previously has recognized limited restrictions on the President’s removal authority, the Court held that the "dual for-cause" removal regime applicable to the Board contradicts Article II of the Constitution’s vesting of executive power in the President. Because the President does not directly oversee the Board, and he cannot attribute the Board’s failings to those who he can directly oversee, the Court found that the "result is a Board that is not accountable to the President, and a President who is not responsible for the Board." The Court explained that "this case presents an even more serious threat to executive control than an ‘ordinary’ dual for-cause standard" because "Congress enacted an unusually high standard that must be met before Board members may be removed." The Court further found that the SEC’s supervisory authority over the Board’s functions did not remedy the constitutional defect as "[b]road power over Board functions is not equivalent to the power to remove Board members."
The Court found, however, that the unconstitutional tenure provisions are severable from the remainder of the Sarbanes-Oxley Act, thus limiting the effect of its holding on the Board’s functionality. The Act, with the exception of the tenure provision, remains fully operative as a matter of law. As a result, the Board continues to function, but its members are now subject to at-will removal by the SEC. The Court found that the Board’s structure–as modified by the removal of the tenure provision–is consistent with the Appointments Clause. The Court remanded the case for further proceedings consistent with its opinion, recognizing that the petitioners are "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."
Although this comparatively narrow holding may raise other issues, such as whether the Board’s prior actions are constitutionally valid and whether the Board will now be subject to federal budgetary control, it permits the Board to continue to function without further action by Congress or the SEC.
Board and SEC Responses
Both the Board and the SEC issued statements today emphasizing their view that Court’s decision will have a minimal impact.
The Board stated that "[a]ll other aspects of the SEC’s oversight, the structure of the PCAOB and its programs are otherwise unaffected by the Court’s decision" and that "all PCAOB programs will continue to operate as usual." See http://pcaobus.org/News/Releases/Pages/06282010_SupremeCourtDecision.aspx.
The SEC also issued a statement, including comments from Chairman Mary L. Schapiro that she is "pleased that the Court has determined that the Board’s operations may continue and the Sarbanes-Oxley Act, with the Board’s tenure restrictions excised, remains fully in effect." See http://www.sec.gov/news/press/2010/2010-111.htm. The SEC further stated that "[t]he opinion does not call into question any action taken by the PCAOB since its inception." This issue was not specifically addressed by the Court’s opinion.
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. To learn more about the firm’s Securities Regulation and Corporate Governance Practice, please contact the Gibson Dunn attorney with whom you work, or any of the following:
John F. Olson (202-955-8522, [email protected])
Douglas R. Cox (202-887-3531, [email protected])
Brian J. Lane (202-887-3646, [email protected])
Ronald O. Mueller (202-955-8671, [email protected])
Lewis H. Ferguson (202-955-8249, [email protected])
Amy L. Goodman (202-955-8653, [email protected])
Michael J. Scanlon (202-887-3668, [email protected])
Joseph P. Busch III (949-451-3898, [email protected])
James J. Moloney (949-451-4343, [email protected])
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