Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board
Issues
Whether the Sarbanes-Oxley Act violates the Constitution’s separation of powers doctrine by stripping the President of authority to select or remove members of the Public Company Accounting Oversight Board (“Board”), and whether the Board members are properly categorized as “inferior officers”, the Securities and Exchange Commission (“SEC”) is properly categorized as a “Department”, and the five commissioners are properly the “Head” of the SEC, so as to be consistent with the Constitution’s Appointments Clause.
In 2002, Congress passed the Sarbanes-Oxley Act in reaction to the perceived failures of the self-regulatory system for accounting procedures that led to the infamous Enron and WorldCom scandals. The Act established the Public Company Accounting Oversight Board to supervise the audit of public companies. Although the Board is under the authority of the Securities and Exchange Commission, its members are not subject to direct removal or appointment by the President and it retains the power to set and raise its own budget. In this case, the Supreme Court will determine whether the Act’s establishment of the Board is an unconstitutional violation of separation of power principles and whether the Board’s structure violates the Appointments Clause. Petitioners argue that the Act violates separation of powers by diminishing the President’s ability to control or supervise Board members. Respondents argue that the Act does not violate separation of powers because Congress can grant exclusive appointment and removal authority to the Heads of Departments. Petitioners additionally argue that the Board’s structure violates the Appointment Clause because Board members are Principal Officers and, even if they were to be construed as Inferior Officers, their appointment is still unconstitutional, because the SEC is not a “Department” and its Commissioners are not the SEC’s “Head,” as required by the Clause. In response, Respondents argue that Board members are inferior officers because they are controlled directly by the SEC, and that the SEC is in fact a “Department” over which the President can exercise broad control and the Commission is its “Head” because it exercises the SEC’s collective powers. The case will ultimately determine the permissibility of the scheme currently in place that regulates US financial markets.
Questions as Framed for the Court by the Parties
1. Whether the Sarbanes-Oxley Act of 2002 violates the Constitution's separation of powers by vesting members of the Public Company Accounting Oversight Board ("PCAOB") with far-reaching executive power while completely stripping the President of all authority to appoint or remove those members or otherwise supervise or control their exercise of that power, or whether, as the court of appeals held, the Act is constitutional because Congress can restrict the President's removal authority in any way it "deems best for the public interest."
2. Whether the court of appeals erred in holding that, under the Appointments Clause, PCAOB members are "inferior officers" directed and supervised by the Securities and Exchange Commission ("SEC"), where the SEC lacks any authority to supervise those members personally, to remove the members for any policy-related reason or to influence the members' key investigative functions, merely because the SEC may review some of the members' work product.
3. If PCAOB members are inferior officers, whether the Act's provision for their appointment by the SEC violates the Appointments Clause either because the SEC is not a "Department" under Freytag v. Commissioner, 501 U.S. 868 (1991), or because the five commissioners, acting collectively, are not the "Head" of the SEC.
The notorious financial accounting scandals involving Enron and Worldcom demonstrated the inadequacies of the self-regulatory reporting requirements governing many public companies. See Free Enterprise Fund v.
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Additional Resources
• Wex: Law about Securities
• Wex: Law about Separation of Powers
• Securities Prof Blog, Law Professor Blogs Network: Securities