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Court Uses Inconsistent Reasoning to Reject Sarbanes-Oxley Challenge

Today, a divided D.C. Circuit Court of Appeals voted 2-to-1 to uphold a provision of the Sarbanes-Oxley Act, over a strong dissent by Judge Kavanaugh, in the case of Free Enterprise Fund v. Public Company Accounting Oversight Board.   But the court's decision rests on reasoning that is disturbingly inconsistent.

This case is a constitutional challenge to the PCAOB, the regulatory board set up by Sarbanes-Oxley, as a violation of the Appointments Clause and separation of powers.  The PCAOB is enormously important: The red tape generated by the board has cost the stock market over $1.4 trillion, and annually imposes compliance costs of over $35 billion, while providing only illusory benefits for investors, and driving businesses overseas.   The PCAOB enjoys "massive power," "unchecked power by design," according to a Senator who voted to create it.  But rather than being picked by the President with Senate approval, the way important government officials are supposed to be, PCAOB members are picked by SEC Commissioners as a group (which led to a disorganized selection process for the first PCAOB members). 

The lawsuit says that violates the Appointments Clause of the Constitution, which requires that government officials be picked by the President or (for minor officials) by the “Head of a Department.”  The lawsuit also argued that the PCAOB members are so unaccountable to the president, who can't remove them (the SEC Commissioners collectively can, but only for "willful" misconduct), that it violates separation of powers.

In order to reject the constitutional challenges, the court's majority had to rely on inconsistent reasoning.  First, it claimed that the SEC's Chairman is NOT the SEC's head, but rather "simply one" of "several commissioners," making the SEC Commissioners collectively the head of the SEC.  See Opinion, at pg. 20 (“The [SEC's] Chairman . . . is simply one Commissioner”); Opinion, pg. 21 (“The commission” is a body “whose ‘Head' consists of the several commissioners”).  Only by doing that could it rule that the SEC Commissioners collectively are the "Head" of a department and thus are permitted by the Appointments Clause to make appointments.    (Never mind that the Chairman has been described by the SEC itself as its "chief executive" and "head").

Then, just a few pages later, it suddenly suggested just the opposite: that the SEC's chairman was, after all, the SEC's head.  Confronted with the argument that the PCAOB is not accountable to the President through his appointees, such as the SEC's chairman (who, unlike other SEC commissioners, serves at the president's pleasure), the court stated that the President does have indirect influence over the PCAOB through the SEC, because the president picks the SEC Chairman, who “dominates commission policymaking.”   See Opinion, Pg. 24.  (It said that “by appointment of the Commission chairman, who serves at the pleasure of the President and often ‘dominate[s] commission policymaking,' the President can influence Commission policy and control who directs ‘the administrative side of commission business, select[s] most staff, set[s] budgetary policy, and as a consequence command[s] staff loyalties.'"  See Opinion, pg. 24).  But if the Chairman so “dominates commission policymaking," that is because he is the SEC's actual “head" (its "top executive," as the SEC concedes), not a mere figurehead. 

Perhaps it is too much to expect courts to always reach the right result.  But is it too much to ask that they at least use consistent reasoning?  Especially in a case like this, which Judge Kavanaugh noted is "the most important separation-of-powers case regarding the President's appointment and removal powers to reach the courts in the last 20 years."