Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, December 6, 2009

Nagy on Free Enterprise Fund v. PCAOB

Is the PCAOB a 'Heavily Controlled Component' of the SEC?: An Essential Question in the Constitutional Controversy, by Donna M. Nagy, Indiana University School of Law-Bloomington, was recently posted on SSRN.  Here is the abstract:

The U.S. Supreme Court will soon be hearing oral arguments in Free Enterprise Fund v. Public Company Accounting Oversight Board, described by D.C. Circuit Judge Brett Kavanaugh as “the most important separation-of-powers case regarding the President’s appointment and removal powers to reach the courts in the last 20 years.” Established by Congress as the cornerstone of the Sarbanes-Oxley Act of 2002, the PCAOB was structured as a strong, independent board in the private sector, to oversee the conduct of auditors of public companies.

This Article challenges the D.C. Circuit’s depiction of the PCAOB as “a heavily controlled component” of the SEC, and argues that this flawed premise was essential to the court’s 2-1 decision upholding the PCAOB’s constitutionality. With a focus on statutory analysis and legislative history, the Article seeks to show that Congress designed the PCAOB to operate with substantive independence from the SEC. It then argues that PCAOB members acting with significant discretion and autonomy outside the SEC’s control are “principal officers” who, pursuant to the Appointments Clause, must be appointed by the President with the advice and consent of the Senate. And as “principal officers” performing significant executive functions, PCAOB members must be removable for cause by the President.

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