Free Enterprise Fund v. PCAOB: Muddling the Law While Making New Law

June 28, 2010
Guest Post

By Alan B. Morrison, Lerner Family Associate Dean for Public Interest & Public Service, George Washington University Law School
The Supreme Court's 5-4 decision today invalidating a portion of the statute creating the Public Company Accounting Oversight Board (PCAOB) extends the implied power of the President to remove officers of the United States, but does so in a back-handed manner and introduces confusion into whether thousands of persons who work for the federal government are entitled to the statutory protections against removal that are currently contained in multiple provisions of the United States Code.

Unfortunately, the statutory structure and relation of the Board to the Securities & Exchange Commission really matter, so here they go. After the various accounting and other securities fraud scandals that surfaced in the early 2000s, Congress passed Sarbanes-Oxley, one portion of which created the Board to regulate the accounting profession as applied to the securities field, modeling its structure on the bodies that regulate the stock exchanges, except that it made the Board a governmental entity, exercising government power. All five members of the Board are appointed by the Commission for terms of years (staggered) and are removable only for cause and only by the Commission, not the President. The majority opinion, written by Chief Justice Roberts, asserted that the Commission members are also removable only for cause, but as Justice Breyer pointed out in his 37 page dissent (plus 36 pages of statutory tables) the Commission's statute does not include any for cause language, unlike most of the comparable agencies, although it has always been assumed that the Commissioners can only be removed for cause.

As befitting an agency that regulates a profession, the Board has the right to approve applications of accountants to practice before the Commission, issue rules, conduct investigations, and bring administrative enforcement proceedings to sanction accountants that violate its rules or those of the Commission. It is also undisputed that all Board rules must be approved by the Commission, and all of its administrative decisions are reviewable by the Commission, which has the power to reverse them, as well as to increase or decrease the Board's level of sanctions.

The case was filed by the non-profit Free Enterprise Fund and by an accounting firm that is a member of the Fund and that was once investigated by the Board (but was not sanctioned) and is still subject to regulation by it. According to the majority opinion, their main claim was that the Board was illegally constituted because its officers are not lawfully appointed under the Appointments Clause in Article II, Section 2, clause 2. The plaintiffs alleged that, because of the Board's extensive powers and the lack of meaningful supervision by the Commission or anyone else, the members of the Board are all principal officers who must be appointed by the President with the advice and consent of the Senate, which they clearly were not. Their alternative argument is that, if the Board is composed of inferior officers, who may be appointed by Department heads, the Commission is not a Department under that Clause and that the Commission as a whole cannot be a Department "head" - only the Chair can be. One piece of good news for those seeking some separation of powers clarity from this decision is that the majority specifically rejected the alternative arguments, with the apparent agreement of the dissent, holding that a body such as the Commission can be a Department and that the Commission as a whole can be the "head" of it under the Appointments Clause.

Instead of starting with the issue of principal vs inferior officer, the Chief Justice assumed that the Board's members were properly appointed as inferior officers, but then took up the issue that caused Circuit Judge Kavanaugh to dissent: the absence of any direct role for the President in their removal, and the fact that even the Commission could only remove them for cause. Without going into the history of removal litigation in the High Court, even the majority conceded that there was no case that presented this two-level for cause situation, but it nonetheless took it on. It did so on the theory that it was protecting the powers of the President, even though the Solicitor General, who works for the President, filed a brief supporting the structure of the Board as a permissible judgment of Congress as to its need for independence. This was not an automatic position for the SG since in many other separation of powers cases under the Appointments Clause, that office has asked the Court to strike down many that infringed on the powers of the President to appoint or remove officers, in such cases as Myers, Humphrey's Executor, Buckley, Bowsher & Morrison. One would think that if the President didn't think he needed any help from the Court, it might have been a little reluctant to jump in, but that was not the case.

Although there is a not a word in the Constitution about removal of officers, the Court has previously found implicit in the President's ability to assure that the laws are faithfully executed a constitutional necessity that he have some power over the retention of officers of the United States, and it applied that principle to the Board. No one challenged the (assumed) limits on removal of the Commissioners, but instead the Court concluded that the second level limits on the power of the Commission to remove Board members infringed on the President's power to assure that the Commission and/or the Board did their jobs properly. Having decided that the limitation on the Commission's removal power was unconstitutional, the Court then concluded that the Board could be composed of inferior officers, rather than principal officers, because of its ruling in this case that the Commission could fire them at will, even if it did not have the power to oversee their daily operations, as the dissent believed the Commission had under the statute, making the removal issue irrelevant.

I leave to the majority opinion to defend that ruling and to explain how it sliced and diced the statute to save the Board, but free up the Commission to fire its members at will, despite the clear intent of Congress not to give it that power. I also leave to the dissent to explain why the principal conclusion of the majority is in error. Instead, I want to raise a preliminary question that the majority did not discuss, ask what Congress might do as a second best alternative, and then touch briefly on the some of the concerns expressed by the dissent that relate to how this opinion will affect agencies beyond the Board.

Before getting to the merits, the Court was faced with a claim that the plaintiffs had to exhaust their administrative remedies and could not bring this case in this form. The Court rightly rejected that contention on the ground that at least the accounting firm was objecting to being subjected to a Board that was illegally appointed and thus had no power to do anything. But that argument has much less force when the issue is not the Board's method of appointment, but whether the plaintiffs have standing to protest that the Commission has too little power to remove Board members. It is one thing to conclude that Congress had too much power over the removal of the Comptroller General as he was then known in Bowsher v. Synar, so that members of the public who were subject to his rulings could protest his lack of independence, but here the claim would have to be that the Board had too much independence and that somehow the plaintiffs would inevitably be harmed by that. Given the stringency with which the Chief Justice and others in the majority have been applying the doctrine of standing, it is quite remarkable that they expressed no concern over the right of these plaintiffs to sue on this claim, with no showing whatsoever has to how this limitation adversely affected them. Of course, if the Court had found that the Board's members were principal officers, there would be no standing issue, but having split the baby this way, undoubtedly so that the Board's past and future actions would remain in place, that created a standing issue that the Court chose to ignore.

What might Congress do now to fix up a regime that it clearly did not want? First, it could do nothing on the theory that the Commission will not exercise this newly awarded power except in extreme cases, that there will be none, and that, because if there are problems the Commission would have to fire at least two and probably three members to effect any change, which it will probably never do. Second, it appears from the majority opinion that if either the Commission or the President had the power to fire Board members at will, that would satisfy the majority. Thus, Congress could amend the statute so that power to fire resides with the President, who would probably have too much else to do to worry about besides the Board that supervisors accountants, especially since he would not get to pick their replacements. Third, Congress could give the President the power to appoint the Board (with recommendations from the Commission), but then make the Board subject to removal only for cause, by the President. In this option, the Board might also be relieved of Commission supervision of its decisions, but that might not be necessary. None of these solutions is ideal, and given the fact that Congress has just finished the financial services regulation bill and seems unlikely to want to open up these issues now, leaving well (or bad) enough alone might be the best or at least the most likely course.

The dissent of Justice Breyer has two parts: in the first, he takes issue with the majority by arguing that none of the reasons for any of the Court's prior separation of powers cases striking down federal statutes has any application here and most point in the opposite direction. In doing so, he shows why this decision is wrong, but that does not seem to be his main concern since the statute governing the Board is unique in many ways. The problem, which Breyer explores in the second part of his dissent, is what else is subject to the majority's newly minted Presidential (or actually Commission derived from the President) right, given the great variety of federal agencies and the ways in which their membership is established and controlled. Perhaps it did not occur to him, but he might have taken a page from the Chief Justice's dissent in Caperton in 2009 which listed 40 questions that the opinion of Justice Kennedy in that case left open. I did not count the questions raised by Justice Breyer's dissent, but if they did not reach that number, they came pretty close. Among the most significant is what the majority will say about administrative law judges whom no one can remove without cause and who appear to be at least inferior officers.

For those who are interested in creating hypotheticals for class or a final exam, there are fertile grounds in the dissent's two appendices, the first listing 48 statutes limiting removal of specified officers and the other listing 573 Senior Executive Service officers whose removal might be subject to this ruling. As the dissent remarked, the ruling could be limited to this statute, but it is not easy to see on what principle, or it could be broad and hence potentially quite disruptive - and the majority does not tell us which one it will be. If it is the former, it can be forgotten as just an errant decision, but if it is the latter, the administrative state of the federal government is in for a rocky and uncertain ride.