Oral Arguments in Free Enterprise Fund

The Supreme Court heard oral arguments Monday in Free Enterprise Fund v. PCAOB, the case the testing the constitutionality of the Public Company Accounting Oversight Board, a regulatory board created by the Sarbanes Oxley Act within the Securities and Exchange Commission.  The central question in the case is whether the PCAOB violates separation of powers and the Appointments Clause--whether its members are subject to sufficient presidential control, and, in any event, whether they were properly appointed as principal or inferior officers.  I posted on the case here, and interviewed amici here and here.

Congress created the PCAOB as an independent agency within the already independent SEC in order to promote the regulatory goals of the SOX.  As part of this independence, PCAOB members enjoy "for cause" removal by the SEC; SEC members, in turn, enjoy "for cause" removal by the president.  (As it turns out, the statutory basis for the SEC's for cause removal is uncertain, at best.  But no party disputed it in the case.)  But at the same time Congress also subjected the PCAOB to extraordinary SEC control, principally by allowing the SEC to write rules that direct virtual every aspect of the PCAOB's investigations and other regulatory activities. 

The petitioners (challenging the PCAOB) argued that the PCAOB's "double for cause" removal provides insulation against presidential control--a violation of separation of powers.  (Nobody used the phrase "unitary executive" at oral argument, but the petitioners' arguments were directed at protecting and promoting a strong unitary theory of executive power.)  They also argued that the appointment process for PCAOB members violated the Appointments Clause.  Both arguments turn on the control exercised by   (first) the president and (second) the SEC over the PCAOB.  And in measuring control, the petitioners have privileged the President's removal authority among the various considerations that one might use to measure control.  (The petitioners de-emphasized removal authority at oral argument, especially in comparison to the attention it got in their brief.)

The government argued that the President has constitutionally sufficient control over the SEC (based, in part, on the Court's approval of independent agencies 70 years ago in Humphrey's Executor), and that the SEC has comprehensive control over the PCAOB.  The net result: The President has constitutionally sufficient control over the PCAOB.  In contrast to the petitioners, the government argued that removal authority is merely one of many considerations in determining control.  When we look at the entire relationship, it's clear that the SEC exercises complete control over the PCAOB.

A good part of the arguments, then, dealt with the precise nature of the SEC's control over the PCAOB--and what form it came in.  In addition to removal authority, justices probed about everything from subpoena authority to PCAOB member salaries.  And at least two--Chief Justice Roberts and Justice Scalia--suggested that the SEC's power to change PCAOB rules--a kind of "veto" power, but not an affirmative supervisory power--is not a sufficient control.

Chief Justice Roberts and Justice Scalia pressed the control question the hardest.  Chief Justice Roberts at one point seemed to endorse the petitioners' theory of "double for cause" removal, calling it "'for cause' squared," while still navigating bedrock cases that uphold independent institutions:

General Kagan: Justice Scalia, that's Humphrey's Executor.  Humphrey's Executor does indeed say that the President can't order the SEC commissioners in the same way that he might be able to --

Chief Justice Roberts:  Yes, yes.

General Kagan:  But that's a 70-year old precedent.

Chief Justice Roberts:  Right.  That's Humphrey's Executor.  But you have to add to Humphrey's Executor Perkins and Morrison.  Humphrey's Executorsays you can limit the President's removal power.  That doesn't get you down to the [PCAOB].  You have to also say the principal officers, there can be limited on their removal authority of [PCAOB] members. . . .

So you need to rely on Morrison to make the limitations on what the SEC can do with respect to the [PCAOB] constitutional. . . .

And you need to rely on Humphrey's Executor to make the limitations on what the President can tell the SEC constitutional. . . .

So you have got "for cause" squared, and that's -- that's a significant limitation that Humphrey's Executor didn't recognize and Morrison didn't recognize.

Justice Scalia was not so reserved.  He would have taken on Humphrey's Executordirectly and thus undercut the basis for an independent SEC, an independent PCAOB, and, apparently, independence within the executive branch itself.

On the other side, Justice Breyer emphasized the extraordinary control that the SEC exercises over the PCAOB, and Justice Sotomayor wondered how independent agencies like the SEC could operate without the kind of appointment and supervisory power it exercises over the PCAOB.  (Justice Sotomayor cut to the point early in petitioners' argument:  "What is the difference between what you are talking about and an employer who says, look, I can't stick my nose in every bit of business that goes on in my office because that's impossible; otherwise I would be doing all the work and I just humanly can't.  I'm delegating to you the responsibility to do X, Y, and Z according to these rules of conduct.")

Finally, Justice Stevens and Justice Ginsburg reached for ways to sever any offending portions of the SOX and save the core of the PCAOB.  Counsel for the petitioner would have none of it.  Even if PCAOB members were inferior officers, subject to unrestricted power of removal, and appointed solely by the SEC head (and not by the commissioners), the PCAOB would still be unconstitutional, he argued--again, because of the lack of control.

In the end, it's not clear that this case can support the petitioners' necessarily conjectural and sweeping arguments.  The problem is that the petitioners failed to appeal the offensive PCAOB standards, regulations, and pending investigations to the SEC, the proper administrative channel, and thus failed to exhaust administrative remedies.  And as a result, they also failed to test the SEC's ability to control the PCAOB by changing its standards and rules.  The petitioners' arguments about the relationship between the SEC and the PCAOB are thus largely conjectural.  As fodder for their aggressive facial challenge, they are also necessarily sweeping.

This seems a flimsy way to bring a facial challenge to the Roberts Court.  But only one Justice asked about these issues: Justice Ginsburg book-ended the arguments with questions about the petitioners' lack of harm and failure to exhaust administrative remedies.  She summarized:

We don't know -- we don't know what's fictional and what is not here, because you came in, and you don't have a particular case. . . .

You have another instance where Congress set up a scheme, and without having a particular case of an individual who has been hurt, you come in and say: We might sometime be hurt by this, so we want the whole thing knocked down in the absence of any concrete case.

Judging by the active questions on the substance, though, this Court seems unlikely to dispose of the case on petitioners' lack of standing.

SDS