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Separation of Powers

The Roberts’s Court other foray into the intersection of administrative law and securities law—PCAOB—has almost nothing to do with the securities laws. Neither the majority nor the dissent grapples with the decision’s implications for the regulation of accounting.

PCAOB nominally involves the Sarbanes-Oxley Act, but it is mainly a constitutional separation of powers case. At issue was the provision of that law making PCAOB board members removable only by the SEC, and then only “for good cause shown.”[1] This provision was challenged as violating the separation of powers because it deprived the president of meaningful oversight regarding officers exercising executive authority. The chief justice, for the majority, wrote a lengthy opinion surveying the Court’s prior decisions involving “for cause” restrictions, which were upheld by the New Deal Court in Humphrey’s Executor[2] The tenor of his discussion of those prior precedents is at best grudging, but he eventually concludes that some restrictions on the president’s removal authority are permissible. The double “for cause” removal provision at issue in PCAOB, however, was too much.[3] In a similarly lengthy opinion, Justice Breyer, joined by Justices Stevens, Ginsburg, and Sotomayor, concluded that the majority was “wrong—very wrong.”[4]

For the average securities lawyer, the only thing of interest in the opinions is that the Court found that the unconstitutional “for cause” provision was severable from the remainder of the Sarbanes-Oxley Act.[5] The question of severability was the only topic that created any drama; the Court’s holding meant that the decision was largely a nonevent for the practice of securities law because the Sarbanes-Oxley Act was left generally intact. Whether the members of the PCAOB are removable or not is not likely to make much of a difference for the day-to-day practice of accounting regulation.

For the scholar of securities law, the opinion is notable both for what it includes and what it omits. The notable inclusion is the Court’s assumption that the members of the SEC are removable only for cause, despite the lack of a textual basis for that conclusion.[6] As Justice Breyer points out in his dissent, the majority stretches to create a constitutional question by reading a “for cause” provision for the removal of SEC commissioners into the Exchange Act.[7] If the Court had instead read the Exchange Act to allow for at will removal of SEC commissioners by the president, the novel constitutional question of double “for cause” removal could have been avoided.[4] Why did the Court depart from its usual practice of construing statutes to avoid constitutional questions? If one reads the majority’s opinion, the most reasonable conclusion to draw from its arguments is that restrictions on the president’s power to remove the SEC commissioners violate the separation of powers. The holding, however, targets the new kid in town, the PCAOB. The SEC’s status in the pantheon of regulatory agencies is apparently so secure that it is unthinkable for the Court to question its independence, notwithstanding the absence of a “for cause” provision in the text of the Exchange Act.

The notable omission from the opinion is any discussion of Congress’s goals in insulating the members of the PCAOB from removal. The omission is telling. Congress was not concerned about presidential interference with the board’s operations; the real threat was from Congress itself. Politics abhors a vacuum of governmental authority. By insulating the SEC from the president’s removal authority, Congress made the SEC not independent, but rather, dependent on Congress.[9] That dependence allowed Congress to strong arm the SEC on the question of auditor independence.[10] When Arthur Andersen collapsed in the wake of the Enron scandal, the accounting firm’s substantial revenue stream from consulting for Enron was diagnosed as the principal cause. Faced with a flurry of embarrassing headlines, Congress quickly got religion on the question of auditor independence. That newfound fervor found its expression in the independence conferred on the PCAOB, which was insulated both from the president and Congress in the hope that it would protect accounting regulation from political interference.

None of this history is covered in the Court’s opinion, which blinks reality by asserting “that one branch’s handicap is another’s strength"[11] This point applies to the “for cause” removal requirement for the SEC, but has much less force when applied to the PCAOB. Moreover, the dissent fails to challenge the majority on its skewed understanding of the balance of power between Congress and the president. This omission by both sides of any discussion of the rationale for the PCAOB’s independence might be taken as further evidence of the gap between the Court’s securities jurisprudence and the political economy of securities regulation. In fairness to the Court, however, it is difficult to sound judicial while discussing interest-group pressures on Congress and their influence on accounting policy. Do the justices really want to introduce the question of campaign contributions into separation of powers jurisprudence? That said, the Court’s decision restores some of the influence that Congress previously held over the accounting profession. Any benefit to presidential oversight from the Court’s striking down the PCAOB’s “for cause” provision seems de minimis by comparison.

  • [1] 15 U.S.C. § 7211(e)(6). A second issue was raised in the case regarding the appointment ofthe PCAOB members by the SEC, but the Court rejected the argument summarily. See PCAOB, 130S. Ct. at 3162.
  • [2] Humphrey’s Executor v. United States, 295 U.S. 602 (1935).
  • [3] PCAOB, 130 S. Ct. at 3164 (“While we have sustained in certain cases limits on the President’sremoval power, the Act before us imposes a new type of restriction-two levels of protection fromremoval for those who nonetheless exercise significant executive power. Congress cannot limit thePresident’s authority in this way.”).
  • [4] Id. at 3184 (Breyer, J., dissenting).
  • [5] Id. at 3161-62.
  • [6] Id. at 3148-49 (“The parties agree that the Commissioners cannot themselves be removed bythe President except under the Humphrey's Executor standard of 'inefficiency, neglect of duty, or malfeasance in office,’ 295 U.S., at 620 (internal quotation marks omitted); see Brief for Petitioners 31;Brief for United States 43; Brief for Respondent Public Company Accounting Oversight Board 31(hereinafter PCAOB Brief); Tr. of Oral Arg. 47, and we decide the case with that understanding.”).
  • [7] PCAOB, 130 S. Ct. at 3182-83 (Breyer, J., dissenting).
  • [8] Id. at 3184 (Breyer, J., dissenting).
  • [9] I delve into this point in The SEC at 70: Time for Retirement?, 80 Notre Dame L. Rev. 1073(2005).
  • [10] Interview with Arthur Levitt, Frontline (March 12, 2002), transcript available at (last accessed June26, 2013).
  • [11] PCAOB, 130 S. Ct. at 3156.
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