The Public Company Accounting Oversight Board, and the Sarbanes Oxley Act under which it was created, withstood a constitutional challenge in a case which may be remembered more for its separation of powers analysis than the specific holding. Free Enterprise Fund v. PCAOB, No. 08-861 (June 28, 2010). The plaintiff petitioners claimed that the Act contravened separation of powers principles, as well as the presidential appointment power. The district court granted summary judgment in favor of the Board. The circuit court affirmed. The Supreme Court, in an opinion written by Chief Justice Roberts, reversed in part striking down a portion of the Act and remanded for further proceedings. Despite striking down part of the statute, the PCAOB remains intact.

The PCAOB was created to provide tighter regulation of the accounting profession in the wake of a series of corporate scandals. Its five members are appointed by the SEC. A member can only be terminated if the Commission finds, after notice and a hearing, that the member willfully violated a provision of the Act, abused the authority of a member or without justification failed to enforce compliance with the Act or its rules. The board has broad authority over the accounting profession.

The focus of Chief Justice Roberts’ opinion is a separation of powers analysis. The Constitution divided the powers of the federal government into three defined categories, the Legislative, Executive and Judicial, the opinion notes. Article II vests the executive Power in the President who has the obligation to “take Care that the Laws be faithfully executed.” Under long standing decisions of the Court, the President has been understood to have the authority under the Constitution to hold executive officers accountable who are retained to assist. In those decisions, the Court held that it was appropriate when creating independent agencies run by principal officers to provide that the President cannot remove those officers except for good cause shown.
The question in this case however differs from those considered in the Court’s precedents. Here, the issue is whether “the President [may] be restricted in his ability to remove a principle officer, who is in turn restricted in his ability to remove an inferior officer . . .” Slip Op. at 2. This occurs in this case because the SEC Commissioners can only be removed by the President for cause. The Board members in turn may only be removed for cause. The difference in the statutory scheme here which causes the constitutional infirmity, Chief Justice Roberts wrote, is the fact that it “withdraws from the President any decision on whether that good cause exists . . .” because of the double layer of for cause decisions. Id. at 14. Without the ability to oversee the Board, the President is no longer the judge of its conduct.

The Constitution envisions that the people will govern through their elected representatives. The President is accountable to the people. Diffusing the power of the President means that control may slip from the Executive and thus from the people. Indeed, the scheme here undercuts the authority of the President and is a blueprint for the extensive expansion of legislative power. This is contrary to Article II, the Court concluded.

The constitutional difficulty can be solved however by severing the provisions which create the infirmity. This will leave the Board removable at will by the Commission. Thus revised, the SEC is fully responsible for the actions of the Board. The Commission in turn is responsible to the President.

Justice Breyer, in a dissent joined by Justices Stevens and Sotomayor, took a different approach to the question of Presidential power in the context of the separation of powers principles. The issue in this case arises at the intersection of two general constitutional principles. One is the broad power of Congress to enact statutes “necessary and proper” in the exercise of its specifically enumerated authority. The other is the separation of powers in Articles I, II and III and the directive of Article II that the President take care that the laws are faithfully executed. This limits the power of Congress to structure the federal government.

Since the Constitution is silent on the power and authority of the President to remove officials from office, it is clear that Congress may sometimes limit that authority, Justice Breyer noted. Here, the justification for insulating the technical expertise of the board from fear of losing their jobs due to political influence is particularly strong. Where, as here, the structure is unlikely to restrict presidential power and furthers a legitimate institutional need, the Court’s precedent strongly support its constitutionality. In contrast, the rule adopted by the majority will apply to numerous inferior officers unless limited to the Board. This will, in fact, undermine the authority of the President.

In the end, what is perhaps most notable about Free Enterprise is the differing views of the authority of the President. The majority opinion by the Chief Justice seeks to preserve executive power with a President accountable to the people, precluding a dilution by Congress which might diffuse the government. The dissent however, views the provisions of the Act which were struck down as serving a valid purpose consistent with the congressional goals for creating the Board and as having has little impact on the authority of the President. In this regard, the majority’s effort to create a simple bright line test is misguided and may undermine Presidential power, according to the dissent.