Posts Tagged ‘securities and exchange commission’

High Court to Consider Separation of Powers in Upcoming PCAOB Case

December 4, 2009

(This entry originally appeared on the blog of the American Constitution Society.)

Roughly since the second Reagan administration, separation of powers sophisticates (SOPS) have been held in thrall – whether in joy or dread – by the theory of “the unitary presidency.” Its central claim is that the president is constitutionally entitled to direct personally the exercise of any and all discretionary authority that Congress vests in any officer of the executive branch. Say the Center for Disease Control is told to write a pamphlet about AIDS. The president gets to edit it. NASA scientists are supposed to write a report on climate change. The president gets to tell them if global warming is good science. Maybe the Park Service has been given the discretion to limit certain activities in national parks either through the imposition of user fees or the promulgation of regulatory restrictions. The president gets to pick. And so on. Any and all discretionary decision making in the executive branch would be hypothetically subject to presidential control, even in areas of government activity for which Article II gives the president no inherent authority.

A number of fellow academics for whom I have great personal affection and intellectual respect assert (a) that they are constitutional originalists and (b) that unitary executive theory represents the proper reading of the Constitution. As I wrote in Madison’s Nightmare: How Executive Power Threatens American Democracy (University of Chicago 2009), I don’t think these positions can be squared. Eighteenth century ideas of executive power simply did not include centralized policy control over all of public administration.

The idea of the unitary presidency is a very tough one, however, to test in court. One would have to imagine a case in which a party with standing was injured by an administrative action that the relevant officer avowedly undertook for the sole reason that the President ordered her to do so, but which, she confesses, she otherwise would not have pursued. Hard to see that happening. So, we SOPS are left to read other tea leaves, and the tea leaves we read most assiduously appear in Supreme Court opinions on appointments and removals. That is because the Court’s conclusions on the president’s appointment and removal powers would seem to have some logical connection to its inferences about the president’s supervisory powers, as well.

This is the main reason that even those of us who devote little if any time to thinking about securities regulation care about Fair Enterprise Fund v. Public Company Accounting Oversight Board, 537 F.3d 667 (D.C. Cir. 2008), cert. granted, 77 U.S.L.W. 3625 (U.S. May 18, 2009) (No. 08-861), in which the high court will hear oral argument on December 7. This case involves the constitutionality of the Public Company Accounting Oversight Board (PCAOB), which was created by the Sarbanes-Oxley Act to oversee the activities of public company auditors.

It is an odd institutional creature – a nonprofit private corporation that has been given enforcement, adjudication, and rulemaking powers. The members of the PCAOB are appointed by the Securities and Exchange Commission – presumably because Congress found them to be “inferior officers” and thus subject to appointment, at Congress’s discretion, by the “heads of departments” – and are not directly removable by the president. This is clearly not the unitary executive at work.

Over a scathing dissent by Judge Brett Kavanaugh, the D.C. Circuit upheld the PCAOB on the grounds that (a) PCAOB members are sufficiently subordinate to the SEC to count as “inferior,” and (b) both the appointments provisions and limited removability under Sarbanes-Oxley are constitutional under Morrison v. Olson. These holdings plainly invite a reconsideration of Morrison, which is the Supreme Court opinion most discomfiting to champions of the unitary executive. Morrison upheld Congress’s decision to create an officer called “independent counsel,” who would be appointed by the judiciary – permissible only for “inferior” officers – and subject to removal only for good cause and only by the attorney general. Following a sort of multi-factor balancing test, the Supreme Court concluded that independent counsels count as “inferior” for constitutional purposes, and that their limited removability did not deprive the president of his capacity to discharge his Article II functions. It is the removal point in Morrison that most gives presidential unitarians heartburn. Were the Supreme Court now to insist that all officers of the United States must be removable at will by the president, that might well signal the president’s entitlement also to command their exercise of discretionary authority. (I say “might well” because the points are analytically distinct. A president entitled to fire officers at will might still be legally required to allow them to exercise their discretion as vested and then fire them post hoc.)

As it happens, however, of the seven Justices in the Morrison v. Olson majority, only one – Justice Stevens – remains on the Court. Justice Scalia has since been joined on the Court by Chief Justice Roberts and Justices Thomas and Alito, all of whom, whether as jurists or as government lawyers, have been notably staunch advocates of the “unitary executive.” The apparent “swing vote,” as is often the case, belongs to Justice Kennedy, who recused himself in Morrison and who, in other contexts, has sometimes seemed sympathetic to categorical claims of inherent executive power. There is thus some real doubt as to the enduring vitality of the Morrison analysis.

Because five Justices may, of course, decide anything, it is technically true that a majority in the PCAOB case would have the option of using the case either to limit Morrison to its facts or overrule Morrison’s approach to the removal issue. The latter especially might seem to bolster unitary executive theorists and would raise doctrinal doubts – at least at the “tea leaf” level – about the constitutionality of independent agencies. Or, the Court might decide the case modestly, leaving Morrison’s broad separation of powers implications untouched. (I assume that the Court did not grant certiorari in the case simply to affirm the D.C. Circuit.)

A modest opinion would likely turn on the “inferior officer” issue. That is, it would be enough to invalidate the PCAOB’s mode of appointment to find its members are “principal,” not “inferior” officers, and can thus be appointed only by the president and with the Senate’s advice and consent. Whether PCAOB members count as inferior officers is, however, not necessarily an easy question. Although they receive substantial SEC supervision and appear to lack significant final, unreviewable policymaking authority, the PCAOB has important investigative and prosecutorial powers that involve genuine discretion.

Commenters predicting that the PCAOB case will provide the occasion to limit Morrison sometimes point to the case of Edmond v. United States, 520 U.S. 651 (1997), in which the Court unanimously (through an opinion by Justice Scalia) overturned the appointment by the Secretary of Transportation of civilian members of the Coast Guard Court of Criminal Appeals. The opinion noted, however, that the civilian members were not “inferior” under at least two of the Morrison v. Olson criteria: they are not limited in “tenure” to a single defined task and they are not limited in “jurisdiction” to focusing on a single individual or set of defendants. The Scalia opinion pointedly went on, however, to state that “‘inferior officers’ are officers whose work is directed and supervised at some level by others who were appointed by presidential nomination with the advice and consent of the Senate.” The obvious suggestion was that this test, not the Morrison balancing of factors was the better test. Advocates of “unitary executive” theory may be hoping that the PCAOB case at least reads Edmond as overturning Morrison’s approach to inferiority. (It would seem an odd move since Edmond acknowledges that its result is consistent with Morrison.)

Of course, even if Morrison’s approach to inferiority were overturned, the holding would leave independent agencies intact. The commissioners and board members who head our key independent agencies are appointed by the president with Senate advice and consent, so there is no appointments issue raised. Congress, however, whenever it wanted to divest the president of appointments power, would have to render the officer whose duties are at stake substantially subordinate to an officer whom the president does appoint. That would put an end to any prospect of resurrecting the precise model of special prosecution enacted after Watergate – but perhaps Judges Laurence Walsh and Kenneth Starr already accomplished that.

Obscure Cases and Important Principles: Free Enterprise Fund v. PCAOB

October 27, 2009

I am currently participating in on online debate under the auspices of the Federalist Society regarding a case hardly anyone has heard of that is now before the U.S. Supreme Court. The case is called Free Enterprise Fund v. Public Company Accounting Oversight Board (PCAOB). It poses the question whether Congress acted permissibly in structuring the PCAOB. Its members are (a) appointed by the Securities and Exchange Commission, not by the President, and (b) removable only by the Securities and Exchange Commission – not by the President – and only for good cause. The Federalist Society has asked its debaters to discuss whether these appointment and removal provisions are unconstitutional.

As my colleague Hal Bruff writes in a forthcoming essay, this is the kind of case only separation of powers cognoscenti typically follow, even though it has the potential – albeit, just slight potential – to revolutionize our separation of powers law. That is because, if the Court overturns the removal provisions, it may well cast into doubt the great many statutes that create administrative agencies throughout the federal government, such as the Federal Trade Commission and the Federal Communications Commission. It could instead vindicate so-called Unitary Executive Theory, which I try to refute in Madison’s Nightmare.

I have reprinted below my opening entry in the debate. Anyone intrigued can follow the unfolding conversation here. The other invited participants are Martin Flaherty, Andrew G. McBride, Gillian E. Metzger, Donna M. Nagy, Tuan Samahon, Christian G. Vergonis, and Christian J. Ward. * * *

Appointments: There’s no real doubt that members of the PCAOB are “officers of the United States.” That is, they have duties regarding the implementation of public law that go beyond the tasks Congress could assign to one of its own committees. Hence, its members must be appointed pursuant to the Appointments Clause. And, under the Appointments Clause, they must be appointed by the President with the advice and consent of the Senate, unless they are “inferior officers,” in which case they may be appointed by the president alone, by the head of a department, or by a court of law.

This is the PCAOB’s greatest vulnerability. The members of the PCAOB may well not be “inferior” in the constitutional sense. Although members are removable for good cause by the SEC, their jurisdiction is far more wide-ranging than that of the independent counsel upheld in Morrison v. Olson. The Court could leave Morrison and its antecedents intact, and enjoin the enforcement operations of the PCAOB on noninferiority grounds.

This is doctrinally the most modest way to overturn the PCAOB, and I predict this will be the result, with hardly any greater implications for separation of powers law. If PCAOB members are deemed “inferior,” then I do not see any other vulnerability on the appointments side. As the Court observed in Morrison, Congress’s discretion in choosing among the designated modes of appointing inferior officers is not limited by the text. There would not be anything constitutionally anomalous in giving the SEC power to appoint people with expertise in corporate accounting.

Removal: The more controversial question involves the limitation on direct removals by the President. It is not controversial under Morrison v. Olson. Morrison said that limitations on presidential removal powers are permissible unless they interfere with the President’s capacity to discharge his constitutionally assigned functions. The President, of course, is constitutionally obligated to take care that the laws be faithfully executed. If a PCAOB member is derelict in this regard, the President must be able to instigate that member’s discharge. Under Sarbanes-Oxley, he cannot do so directly – which was also true in Morrison v. Olson – but the failure of the SEC to correct any such dereliction would presumably be good cause for the dismissal of any recalcitrant SEC Commissioner. Under Morrison, this holds up.

The rub, of course, is that there may well be five members of the Court who would now like to overrule Morrison – Roberts, Alito, Scalia, and Thomas, almost certainly, and quite possibly, Kennedy, who recused himself in Morrison. Reaching out to limit or reverse Morrison, however, would be a conspicuous piece of judicial immodesty, especially since the PCAOB can be invalidated on the less controversial ground of noninferiority. I thus predict the Court will not attack Morrison – but this may be wishful thinking on my part because (a) I agree with Morrison and (b) modesty on the Roberts Court is, at best, an occasional virtue.


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