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Chief Justice John Roberts has often been depicted as an advocate of narrow rulings and a judicial philosophy of minimalism. In his opinion for the Court in Free Enterprise Fund v. Public Company Accounting Oversight Board, he took this philosophy to an extreme, refusing to invalidate much of the Sarbanes-Oxley Act despite the fact that its central provisions violated the Constitution’s separation of powers. Enacted in 2002, Sarbanes-Oxley has cost the economy $1.4 trillion, making it the biggest expansion of regulation of business since the New Deal. The Supreme Court’s decision to leave the law largely intact despite its constitutional infirmities is one more illustration that it does not have a pro-business tilt. Indeed, the Court in recent years has generally been more hostile to business than the lower federal courts.
In the Free Enterprise Fund case, the Supreme Court essentially ruled that Congress cannot create an independent agency overseen by another independent agency—but it can create a new subordinate agency whose members are subject to removal at will by an existing independent agency. The Court’s ruling will promote accountability by strengthening the government’s ability to fire hundreds if not thousands of high-ranking bureaucrats and lawyers. But it may also open the door to messy appointment processes at independent agencies.
The Court struck down tenure protections for leaders of an agency created by Sarbanes-Oxley, the Public Company Accounting Oversight Board. The law prohibited removal without cause of members of the PCAOB—colloquially pronounced ‘‘peek-a-boo’’—which regulates the auditing of public companies.Under the statute, any decision to remove PCAOB members had to be made not by the president, but by another independent agency whose members can also only be removed for cause, the Securities and Exchange Commission. Thus, two layers of removal restrictions insulated the PCAOB from any accountability to the president. The Court held that such dual for-cause limitations on removal of government officials violate the Constitution’s separation of powers, which vests executive power in the president.
The Court refused to strike down the Sarbanes-Oxley Act as a whole, however, instead merely severing the unconstitutional removal limitations. It did so even though Sarbanes-Oxley lacks a severability clause and the removal provisions were central to it.
The Court then rejected a challenge to the PCAOB under the Constitution’s Appointments Clause, which requires that the president, and no one else, pick the principal federal officers (with Senate approval), while permitting ‘‘Heads of Departments’’ to pick socalled inferior officers, who are supervised and directed by principal officers. PCAOB members are picked not by the president, but by the SEC commissioners as a group. By striking down the restrictions on removing PCAOB members, and thus making them subject to termination at will by the SEC, the Court was able to render PCAOB members inferior officers who could be validly picked by someone other than the president under the Appointments Clause. In effect, it used one constitutional violation to cure another, and limit the reach of its decision as narrowly as possible.
Even after the Court’s decision, the PCAOB members, whose pay exceeds the president’s, retain considerable power. The PCAOB has the power to write regulations controlling the auditing of all public companies, which the SEC is supposed to approve as long as they are consistent with Sarbanes-Oxley or the public interest. The PCAOB has the power to inspect, investigate, and punish accounting firms and accountants for violating its regulations, professional standards, or federal laws. It can fine an accountant up to $100,000 or an accounting firm up to $2 million for a single, inadvertent violation of its rules, although the SEC has plenary power to review and reverse such sanctions. And the PCAOB finances itself with a tax, the accounting support fee, which it levies on all public companies in the United States (although the SEC must first approve its budget). The PCAOB is, in effect, ‘‘an enforcement body that is at once lawmaker, tax collector, inspector, sheriff, prosecutor, judge and jury.’’