Tuesday, September 05, 2006
SEC Files Brief on PCAOB Constitutionality
I've blogged previously about the Free Enterprise Fund's challenge to the constitutionality of the Public Company Accounting Oversight Board here.
Last week, the SEC joined with the U.S. Department of Justice when it filed a brief opposing the FEF's motion for summary judgment. The SEC's brief is available here. The central issue in the case is what type of appointees are the members of the PCAOB? Are they "Principal" officers who must be appointed by the President, or are they "Inferior" officers and, if so, is appointment by the SEC the same thing as appointment by the "Heads of Departments" under the Appointments Clause of the U.S. Constitution?
These arguments presuppose that the PCAOB is part of the government for purposes of application of the Appointments Clause. Sarbanes-Oxley provided, though, that the "Board shall not be an agency or establishment of the United States Government." 15 U.S.C. 7211(b). The SEC argues that this issue need not be decided by the U.S. District Court for the District of Columbia because "whether or not it is [a government agency], the PCAOB is constitutional. . . ."
The SEC summarizes its response in the following ways:
1. "The term 'inferior officer' connotes a relationship with some higher ranking officer or officers below the President." The fact that the SEC exercises a "pervasive" oversight role with respect to the PCAOB makes the members inferior officers. The SEC noted that it has similar oversight authority with respect to self-regulatory agencies (e.g., the NASD and stock exchanges) that engage in rulemaking, but are subject to oversight by the SEC.
2. According to the SEC, the FEF's argument that the PCAOB "by its nature, impermissably derogates Executive Branch authority" also lacks merit. The SEC notes that nothing in the Constitution requires that the President be able to remove inferior officers directly and that the contitutional standards do not prevent a requirement that inferior officers be removed only for good cause.
3. Finally, the FEF argued that the non-delegation doctrine prevented Congress from giving authority to the PCAOB. The SEC notes that so long as an "intelligible principle" is provided in conferring discretionary authority, the delegation is permissable and that many similar grants of authority have been upheld over the years.
There's no question but that the PCAOB has a substantial amount of power, but so do the NYSE and NASD. The SEC still has the right to approve the PCAOB's actions in much the same way that the SEC does for the stock exchanges and the NASD. Rules passed by the PCAOB and disciplinary actions appealed from the PCAOB to the SEC are not effective until the SEC has sanctioned them. The same is true of actions by the stock exchanges and the NASD.