The DC Circuit consists of 13 judges, three of whom are women.  The plaintiffs in this case, however, have trouble recognizing this.  At oral argument, there was a small repartee over the improper use of the male pronoun by plaintiff. 

With that in mind, we were a bit surprised to see the motion for reconsideration written without regard to gender neutrality.  This was particularly (but not always) true with respect to references to the president.  Thus, according to the brief:

• Here, the President has been "completely stripped" of his removal power.  Brief, at 4.
• the President has no power to direct the SEC to exercise its discretion to remove a Board member, any more than he could direct the SEC to follow his wishes . . . Brief, at 5. 
• The President's ability to "appoint" does not confer influence over how independent agencies exercise their discretionary power . . . because it is not coupled with the power to remove for failure to follow his policy wishes.  Brief, at 6 n. 3 
• Congress specifically denied the President this power by stripping the Chairman of his heretofore exclusive power to appoint and remove subordinates . . .    Brief, at 6 n. 3 
• "Equally important, even if the President could totally control the SEC through his indirect influence, that still would not enable him to exert any policy influence over Board members who were executing the law in a way he viewed as destructive . . . Brief, at p. 7
• Even assuming arguendo that enhanced SEC control over the board could somehow ameliorate stripping the President of his Article II power, Brief, at 10
• and the President is powerless to switch that power to an agency over which he exercises sufficient control.
• An executive official is an inferior officer only if his work is . . . Brief, at 12.
• Where, as here, an officer cannot be removed for purising policies at odds with the agency's desired policies, then he is not subject to . . . 

• First, the SEC is permitted to remove a PCAOB member only if it finds, after a hearing on the record, that the member willfully violated the Act or Board rules, willfully abused his or her authority, or unreasonably failed to enforce compliance with the Act

The challenge to the constitutionality of the PCAOB lives on.  Plaintiffs lost at the trial level and lost at the court of appeals.  Before taking a stab at cert, they have filed a petition for rehearing and rehearing en banc.  The missive is mostly a rehash of the issues already litigated and resolved, with special prominence given to the only judge so far to agree with their arguments (Judge Kavanaugh).  

The critical issue is the double layer of removal restrictions.  Members of the PCAOB are appointed by the SEC and can only be removed by the SEC for cause.  It is this attenuated influence that is at the heart of the constitutional challenge. Plaintiffs pose the proper question.  They argue that "the President has been 'completely stripped' of his removal power."  Thus, the president can only remove rogue board members by somehow forcing the SEC to do it.  

For the plaintiffs to win, the en banc court will have to accept that the double layer of restrictions is per se unconstitutional, irrespective of the duties assigned to the PCAOB.  After all, Morrison, the key case in this area, defined the test as whether the restriction on removal interfered with the president's ability to carry out his or her constitutionally assigned duties.  Overseeing accounting firms is not a very big or important part of the president's duties.  

The petition is filed on the DU Corporate Governance web site.

The most significant constitutional question in the case concerns the double layer of removal restrictions. As the DC Circuit described:   "[T]he President is two levels of for-cause removal away from Board members, a previously unheard-of restriction on and attenuation of the President's authority over executive officers."   There isn't much law in this area and for now the most applicable precedent is Morrison v. Olson, 487 U.S. 654 (1988).  Morrison involved the constitutionality of independent counsel.  Counsel was appointed by a panel of judges and could only be removed for cause by the attorney general.  

The Supreme Court upheld the removal restriction emphasizing that the independent counsel was a position with limited jurisdiction (the panel of judges assigned the relevant matter for investigation) and limited duration (it went away once the investigation was completed).  Although these were the factors emphasized by the Court, it wasn't really about limited jurisdiction or tenure.  It was about whether the task performed by independent counsel somehow involved a critical executive  function.  As the Supreme Court concluded:  "we simply do not see how the President's need to control the exercise of that discretion [the discretion exercised by the independent counsel] is so central to the function of the Executive Branch . . . "  In other words, restrictions on removal of employees in the executive branch are permissible if they are imposed on personnel who are not that important to the function of the presidency.

That accurately describes the PCAOB.  Even though the jurisdiction is arguably broader and the tenure longer (at least more definite), the task of regulating independent auditors isn't central to the function of the president. 

But even if the office can be subject to removal restrictions, that does not mean any restrictions will pass constitutional muster.  If for example Congress were to provide that removal could only occur with the advise and consent of the Senate, this would be unconstitutional, even if it applied to non-central personnel.  In Morrison, the Supreme Court concluded that Congress could limit removal of non-central personnel to good cause where the cause was exercised by the Attorney General.  Presumably, had Congress instead prohibited removal by the president (or anyone appointed by the president), this would have been unconstitutional.  The president must have at least some residual right to police the actions of the members of his or her branch, particularly where they engage in misconduct.

The issue in the PCAOB case, therefore, is whether the double removal restriction was so severe as to deprive the president of any ability to supervise employees in his/her own branch.  One could imagine, for example, that a quadruple removal restriction (four layers of for cause removal restrictions) would make the president's authority to remove so attenuated as to deny it completely.  That was the question in this case:  Whether the president's ability to remove was so attenuated, it effectively did not exist.  Moreover, the analysis might change somewhat depending upon the importance of the non-central official at issue.

In this case, though, the answer is no.  The SEC has extensive supervisory authority over the PCAOB.  The authority constrains the actions of the PCAOB, limiting its discretion.  This oversight is a form of presidential supervision since the commissioners on the SEC are appointed by the president.  Moreover, if real misconduct occurred and the SEC did nothing, the president likely could remove SEC commissioners (for cause) and appoint those who would take the necessary steps against the PCAOB.  Its a blunt authority to say the least.  The president won't be likely to remove members of the Commisson for failing to act against the PCAOB except in the most extreme circumstances.  But that's the point.  In the most extreme circumstances, the president could intervene.  Short of that, the structure requires that auditing standards  be kept above the political fray.

We are discussing the constitutionality of the PCAOB, a matter recently (if not temporarily) resolved by the DC Circuit.  I have been teaching administrative law this semester and recently discussed this case as well as the relevant Supreme Court cases with students.  These posts are a result of thoughts coming from class discussion. We will have two of them on this subject today.

The DC Circuit held that the PCAOB, as a matter of administrative structure, was constitutional.  There were a plethora of issues but the main one was the double layer of for cause removal restrictions.  Congress set up the PCAOB so that the members were appointed by the Securities and Exchange Commission, not the President.  Moreover, members of the board could only be removed for cause by the Commission.  More specifically, the Commission had the right to remove board members for failing to enforce their own rules.

The PCAOB is something like a self regulatory organization, an approach to regulation that has long been present in the securities markets, with the stock exchanges an example.  But the model has problems, in particular the problem of enforcement.  Self regulators have an incentive to go light on their own.  This is not a new problem.  The legislative history to the Exchange Act is replete with discussions of this problem in connection with the NYSE.  Indeed, in adopting the Act, Congress refused to allow the NYSE to regulate the periodic reporting process because of the problem of enforcement and instead gave the authority to the SEC.  Recall that in 1934, Section 13(a) only applied to exchange traded companies.

Because the SEC appoints the members of the PCAOB, rather than the president, this effectively limits the authority of the president over the regulation of auditors.  While this might not sound like any great loss, one could imagine what auditing standards would look like if the system became imbued with excessive political interference (imagine what would have happened with the dispute over the standards for conforming with the attestation requirements of SOX Section 404(b) had the process been more political). 

At the same time, by only allowing the Commission to remove board members for cause, Congress unquestionably was trying to create a regulatory body that was to some degree independent of the regulators.  In other words, Congress didn't want auditor standards set by the president but also didn't want auditor standards set by the SEC.  Instead, Congress wanted an organization that was largely free of bureaucratic impediments and closer to industry.  At the same time, however, the right of the Commission to remove board members for non-enforcement of the rules of the PCAOB meant that the PCAOB couldn't get too close to industry.  It is an interesing experiment in government.  The approach, as the litigation illustrates, raises a number of constitutional questions.

With that in mind, we will do a second post today on the constitutionality issue.

We offer a final note.

There is no doubt at this Blog that the litigation has not yet ended. We fully expect the plaintiffs to file a petition for ceriorari and see if they can attract the attention of the high court. Certainly, the dissent has written one of those opinions designed to attract the attention of those on the Supreme Court most concerned with limits on executive authority. But having said that, we'll be surprised if Justice Scalia is able to convince three others (cert requires four justices to assent) to join him. Why?

First, Judge Kavanaugh is caught in a conundrum. On the one hand, he wants to make the case one of critical importance, a direct threat to the Republic. On the other hand, he knows that he must delicately walk around the independent agency issue. He cannot issue a decision that provides ammunition to those wanting the challenge the constitutionality of independent agencies. That ship has sailed and there is no going back. Consequently, he starts by opining on the importance of the decision but ends with an explanation of the unimportance of the decision. He points out that the decision does not impact the independent agencies and, in fact, only impact the PCAOB. He's not quite right on that, as we have noted, but it sure reduces the power of any argument that the case, if left standing, will disrupt our system of government.

Second, although wanting to defend executive authority, the Supreme Court won't have the executive on its side. It has been the DOJ that has vigorously defended the constitutionality of the PCAOB. Judge Kavanaugh was clearly troubled by this. First, he tries to minimize the government's involvement.

• the Department of Justice representing the United States as intervenor has defended the constitutionality of this statute. To be sure, the defense has been rather tentative; at oral argument, the superb counsel from DOJ refused to say that the structure of the PCAOB would be permissible in any analogous situation, strongly implying that the Executive Branch’s position is a ticket good for this train and this day only. In any event, the Executive Branch has defended the statute as consistent with Article II. This is reason for respectful consideration.

The written transcript suggests a vigorous defense of the Act by the attorney for the DOJ, Mark Stern. 

Judge Kavanaugh then tries to make the case that the DOJ really didn't really believe its own position, that it was a matter of political expediency.

• History tells us that Executive Branch prerogatives have, in some instances, taken a backseat to the President’s other more immediate policy, legislative, or political priorities. The United States as intervenor has argued that the PCAOB is better from a Presidential control perspective than the private self-regulatory accounting organizations that previously existed to regulate the accounting industry. This is an odd argument as a matter of constitutional law. The fact that the President would have less control over a private organization than over an Executive Branch entity is both obvious and irrelevant. It certainly does not excuse compliance with Article II’s principles regarding Presidential appointment and removal of executive officers.

In the end, he is left with the only real response. He disagrees with the DOJ and, as a result, doesn't intend to follow the reasoning.    But added to this is the notion that it falls on Judge Kavanaugh to defend the Constitution, at least where the President won't. 

• But as the Supreme Court has stated when this situation has arisen before, the Judiciary cannot defer to the Executive Branch in justiciable cases affecting individual rights simply because the Executive Branch does not assert its Article II prerogatives. The primary reason, as the Court has explained time after time, is that the separation of powers protects not simply the office and the officeholders, but also individual rights. The point was captured well by Justice Blackmun in his opinion for the Court in Freytag: “In reaching this conclusion, we note that we are not persuaded by the Commissioner’s request that this Court defer to the Executive Branch’s decision that there has been no legislative encroachment on Presidential prerogatives . . . . The structural principles embodied in the Appointments Clause do not speak only, or even primarily, of Executive prerogatives simply because they are located in Article II. . . . The structural interests protected by the Appointments Clause are not those of any one branch of Government but of the entire Republic.” So too here.

The Justice Department is not always right but in this case, a potentially delicate issue dealing with separation of powers, the Supreme Court will get no help from the supposedly aggrieved branch of government.

Finally, even if the Supreme Court wanted to examine whether a somewhat more severe restriction on the president's removal authority was constitutional, this is not the right case, at least for those wanting to strengthen executive authority.  The case, after all, involves the regulation of independent auditors.  In other words, unless the Court was willing to issue a per se rule that these types of restrictions were always unconstitutional (like the way it struck down legislative veto in Chadha), this case simply doesn't intersect in any meaningful way with the president's constitutionally assigned duties.  

We have a limited track record in predicting decisions by the Supreme Court but so far are one for one, having anticiapted the outcome in Stoneridge.  We will therefore offer a prediction in this matter.  A petition for certiorari will be filed and it will be denied.

 We are discussing the decision, issued today, by the DC Circuit, upholding the constitutionality of the PCAOB.  It was a 2-1 decision. 

The dissent goes out of its way to minimize the impact of its reasoning.  Striking down the PCAOB (primarily because of the limitations on the president's removal authority) would, according to the dissent, have little effect and be easily corrected.  

• Third , to reiterate, the PCAOB is uniquely structured, and a judicial holding invalidating it would be uniquely limited to the PCAOB. And Congress could easily fix the constitutional flaws by, for example, making PCAOB members subject to Presidential appointment with the advice and consent of the Senate and therefore removable by the President. Cf. Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289, 122 Stat. 2654 (2008) (creating new “independent” federal regulator of Fannie Mae and Freddie Mac appointed by President with advice and consent of Senate and removable for cause by President). Alternatively, Congress could fix the problem by making the PCAOB a truly subordinate part of the SEC – for example, by giving the SEC express authority to direct and supervise all Board actions and to fire Board members at will. In such a structure, the Board would not differ from any other inferior officers in the SEC. In the meantime, in my judgment, the Board’s structure violates the Constitution of the United States. 

The opinion (and the supporting documents) are here. 

The critical issue, as we noted on this Blog, was the right of Congress to restrict the president's removal authority. The commissioners of the PCAOB were only subject to removal by the SEC for cause. The SEC, in turn, is an independent agency. Thus, removal by the president was subject to two layers of limitations. Unlike appointments, the Constitution is silent on removal. As a result, removal is addressed through application of separation of powers doctrine, an amorphous area to say the least. With respect to removal limitations, the Supreme Court is relatively clear that Congress can impose limitations on removal where it gets to participate in the removal decision. Thus, requiring advise and consent of the Senate before an executive branch employee can be removed is unconstitutional.

Second, assuming Congress stays out of it, limitations on removal are permissible if they do not prevent the president from performing his or her "constitutionally assigned duties." Morrison, 487 U.S. at 696. This is a highly underdeveloped area. But in Morrison, the Supreme Court essentially reaffirmed the holding in Humprhey's Executor. That was the case that upheld the restrictions imposed by Congress on the president's abilty to remove commissioners from the Federal Trade Commission. Congress allowed the president to remove them only "for cause." In other words, the Supreme Court held that Congress could limit removal authority by the president for officials that have wide ranging authority without it interfering with the president's "constitutionally assigned duties." Given this blessing of Humphrey's Executor, it is hard to make an argument that limitations on removal of commissioners of the PCAOB somehow interfere with the president's constitutionally assigned duties.

Nonetheless, the double layer of removal restrictions presents at least a unique set of circumstances. The majority addressed the issue in succinct fashion:

• The Fund does not assert that Congress or the judiciary have directly encroached on the Executive Branch’s appointment, removal, or decision making authority by aggrandizing their own powers. Instead, the Fund’s separation of powers challenge is premised on the contention that the Act constitutes an excessive attenuation of Presidential control over the Board. The crux of the Fund’s challenge – that the double for-cause limitation on removal makes it impossible for the President to perform his duties – is a question of first impression as neither the Supreme Court nor this court has considered a situation where a restriction on removal passes through two levels of control. But the Fund’s categorical, bright-line approach conflicts with the Supreme Court’s case specific reasoning in Morrison, which emphasized that there are “several means of supervising or controlling [Presidential] powers,” 487 U.S. at 696. The removal power thus does not operate in a vacuum; rather it is one of several criteria relevant to assessing limits on the President’s ability to exercise Executive power.

 The two main challenges were to the appointment of PCAOB members and the limits on their removal. In the former case, it was the SEC that appointed the members, not the President. Resolution of this issue came down to whether the limitation on presidential appointment violated the Appointments Clause. That in turn came down to whether members of the PCAOB were Principal (as opposed to inferior) officers. Resolution of that issue largely depended upon the issue of supervision. See Edmond v. United States, 520 U.S. 651, 662 (1997)("Generally speaking, the term 'inferior officer' connotes a relationship with some higher ranking officer or officers bleow the President: Whether one is an 'inferior' officer depends upon whether he has a superior.").

The PCAOB is subject to extensive supervision by the SEC, with all rules and sanctions subject to review by the agency. As such, the PCAOB was subject to the oversight of a superior. Plaintiff argued that there were places where the PCAOB could intitiate actions without supversion. Thus, for example, the PCAOB could intitiate an investigation without SEC approval although any sanctions ultimately were subject to SEC oversight. The majority rejected the argument.

• Consequently, the Board’s work is necessarily “directed and supervised at some level” by the Commission. Notably for purposes of this facial challenge, the Act subjects Board members to greater supervision than the Coast Guard judges in Edmond, whom the Supreme Court held were inferior officers even though supervision of the judges was fractured between two different bodies, id. at 664, and their decisions were not subject to de novo review, id. at 665. Contrary to the Fund’s suggestion, the fact that the Board is charged with exercising extensive authority on behalf of the United States does not mean that Board members must be appointed by the President, for principal as well as inferior officers, by definition, “‘exercis[e] significant authority pursuant to the laws of the United States.” Instead, what is key under the Edmond analysis is the fact that Board members “have no power to render a final decision on behalf of the United States unless permitted to do so by other Executive officers.” The Act vests a broad range of duties in the Board, 15 U.S.C. § 7211(c), but its exercise of those duties is subject to check by the Commission at every significant step.

The main argument, however, that took up most of the space in the majority and dissenting opinion, came back to one issue: The restriction on the president's ability to remove commissioners of the PCAOB. (It is the Commission that has this authority and may only remove for cause). Thus, the dissent essentially conflated appointments and removal authority. Limits on removal meant unconstitutional appointment. The majority rightfully noted the central weaknesses in the argument:

• The Supreme Court has expressly permitted legislatively imposed limitations on executive officers’ removal authority: We have no doubt that when congress, by law, vests the appointment of inferior officers in the heads of departments, it may limit and restrict the power of removal as it deems best for the public interest. The constitutional authority in congress to thus vest the appointment implies authority to limit, restrict, and regulate the removal by such laws as congress may enact in relation to the officers so appointed. The head of a department has no constitutional prerogative of appointment to offices independently of the legislation of congress, and by such legislation he must be governed, not only in making appointments, but in all that is incident thereto.

The critical issue was removal (as even the discussion of the appointments issue illustrates). We will discuss that issue next.

The opinion (and the supporting documents) are here.

The DC Circuit has ruled.  By a 2-1 decision, the PCAOB is constitutional, upholding the one provision of Sarbanes Oxley that has been challenged.  The opinion (and the supporting documents) are here.  The decision was a gender split, the  two women on the panel (Rogers & Brown) upholding the PCAOB's constitutionality, Kavanaugh, the one male, dissenting.  We will provide some commentary as we digest the 92 page opinion.

The DC Circuit has been sitting on the PCAOB case since last April (oral argument was on April 15).   It's our understanding that the court tries to issue opinions for the prior term by August 1.  Obviously, that deadline hasn't been met.  We also understand that the court usually issues opinions on Tuesdays and Fridays at 11:00 am.  To the extent that the opinion comes out this month, we are looking at August 15, 19, 22, 26 or 29. 

It is potentially a complicated case which might explain the delay.  The more likely explanation is a divided panel. 

FEF v. PCAOB is a case that tests a new model of self regulation.  To the extent that the DC Circuit strikes down the model, the Plaintiffs may well find the consequences not to their liking. 

When the suit was filed, there was no doubt hope that a decision finding the PCAOB unconstitutional would have spelled the demise in the organization. With a Republican Congress overseen by a Republican president, and the Enron scandal having receded into the past, there was little stomach for additional regulation.  A legislative fix for the PCAOB, therefore, was highly problematic.  A victor, in short, meant deregulation.    

But times have changed.  There is now a Democratic Congress and, increasingly likely, there will be a Democratic president after the 2008 elections.  They will be the ones who determine whether and how to fix the PCAOB should the DC Circuit agree with Plaintiffs. 

And fix it they will.  The era of deregulation has come to an end.  See Obama, McCain Likely to Step Up Government Role in U.S. Economy.  Accounting firms require some kind of regulatory oversight. 

So what is the most likely fix?  Not a traditional self regulatory organization, with the governance structure determined by the members.  Possibly accounting oversight could become a task of the SEC.  Counsel for Plaintiffs noted at oral argument that Congress could have avoided any constitutional challenges by transforming the PCAOB into a "traditional independent regulatory agency." 

That is the most likely answer.  The members of the board could be made subject to presidential appointment and removal only for cause.  The President would have little actual control over the activities of the agency but it would pass constitutional muster. 

Would the change in status make a difference?  Board salaries would certainly be lower, potentially impairing the quality of those appointed.  An independent agency would likely be less responsive to the private sector and would have the attendant problems associated with a traditional bureaucracy.  There would be no one to act as a check on the activities.  Would an independent agency have succumbed to the pressure from the SEC and revisited its interpretation of Section 404(b) under SOX? 

If the DC Circuit agrees with plaintiffs in this case (and it should not), the case may well take the place of Business Roundable v. SEC as the most notable Phyrric victory in the realm of securities regulation.  Mostly, though, it will severely damage efforts to link the regulation of securities activities to the private sector.   

We have posted on the DU Corporate Governance web site most if not all of the important documents on the case, including the assorted amicus filed in the appellate case.

An interesting little aside concerns the independence of the SEC.  Through out the case, it has been assumed that the President may only remove commissioners for cause.  But is this true?

The Commission was created in the Securities Exchange Act of 1934, replacing the Federal Trade Commission as the oversight body for the securities markets. The Exchange Act provides each Commissioner with a term of years but does not explicitly limit the President's authority to remove to cause.  The sin qua non of an independent agency is congressional restrictions on the President's right to remove those at the head.  Section 4 of the Exchange Act provides:

• (a) Establishment; members; term of office. There is hereby established a Securities and Exchange Commission (hereinafter referred to as the "Commission") to be composed of five commissioners to be appointed by the President by and with the advice and consent of the Senate. Not more than three of such commissioners shall be members of the same political party, and in making appointments members of different political parties shall be appointed alternately as nearly as may be practicable. No commissioner shall engage in any other business, vocation, or employment than that of serving as commissioner, nor shall any commissioner participate, directly or indirectly, in any stock-market operations or transactions of a character subject to regulation by the Commission pursuant to this title. Each commissioner shall hold office for a term of five years and until his successor is appointed and has qualified, except that he shall not so continue to serve beyond the expiration of the next session of Congress subsequent to the expiration of said fixed term of office, and except (1) any commissioner appointed to fill a vacancy occurring prior to the expiration of the term for which his predecessor was appointed shall be appointed for the remainder of such term, and (2) the terms of office of the commissioners first taking office after the enactment of this title [enacted June 6, 1934] shall expire as designated by the President at the time of nomination, one at the end of one year, one at the end of two years, one at the end of three years, one at the end of four years, and one at the end of five years, after the date of the enactment of this title [enacted June 6, 1934].

The provision also originally provided that the commissioners "shall receive a salary of $10,000 a year."  See Conference Report, HR 1838, 73rd Cong., 2d Sess., at 5 (May 31, 1934). 

While the provision provides for a term of years, it is silent with respect to the ability of the President to remove a commissioner for cause.  This could mean that the President has no authority to remove a commissioner of the SEC.  To the extent true, there would be an argument that the removal authority (or lack thereof) is unconstitutional.  The case for an executive branch employee not subject to any ability to be removed (even for cause) would have a greater risk of interfering with the President's ability to carry out his or her executive duties and be unconstitutional.  If that were the case, commissioners of the SEC would be subject to removal at will and the SEC would not be an independent agency. 

The conventional wisdom is that commissioners of the SEC can only be removed for cause.  The legislative history says nothing about this but it does make a number of references to the need for an independent securities commission.  The reference, however, probably means independence from the Federal Trade Commission, the agency originally assigned the task of overseeing the securities laws in the Securities Act of 1933.  It came up in the discussion about whether enforcement of the securities laws should be in the FTC or in a separate, indepenendent agency.  So the language does not provide authority for the proposition that commissioners of the SEC can only be removed for cause. 

The omission of any "for cause" provision is particularly noticeable since the enabling act for the FTC, the alternative body considered for supervision of the securities laws, did explicitly restrict the President's ability to remove commissioners for cause.  See 15 USCS § 41 ("Any commissioner may be removed by the President for inefficiency, neglect of duty, or malfeasance in office.").  On the other hand, Congress the same year created the Federal Communications Commission and likewise did not include a "for cause" removal limitation.  See 47 USCS § 154. 

A few cases have paid lip service to the SEC's independent status and acknowledged that the President has the authority to remove for cause but without much analysis.  See SEC v. Blinder, Robinson & Co., 855 F.2d 677, 681 (10th Cir. 1988) ("The Act does not expressly give to the President the power to remove a commissioner. However, for the purposes of this case, we accept appellants' assertions in their brief, that it is commonly understood that the President may remove a commissioner only for "inefficiency, neglect of duty or malfeasance in office.").  See also MFS Sec. Corp. v. SEC, 380 F.3d 611, 619 (2d Cir. 2004) ("And although the Chairman of the Commission is the most powerful of the five Commissioners owing to his or her additional executive powers within the agency, the power to remove Commissioners belongs to the President, and even that is 'commonly understood' to be limited to removal for 'inefficiency, neglect of duty or malfeasance in office.'").

The DC Circuit in FEF v. PCAOB can take for granted the independent status of the SEC.  Certainly that is the common wisdom.  The statutory basis, however, is surprisingly weak. 

Similarly, a number of amicus briefs were filed on behalf of the Plaintiffs, including the Mountain States Legal Foundation, a relatively short brief dealing with the Appointments Clause issue. 

More entertaining was the one filed by the Washington Legal Foundation which described itself as a center devoting "substantial resources to litigating constiutional and statutory cases over the last 30 years in support of the free enterprise system and in opposition to unlawful and excssive government regulation of business."  Whatever the general views of the Foundation, it was clear from the brief that rabid opposition to SOX was one of them. 

The brief largely provided a historical review of presidential opposition to limits on removal authority.  It was, therefore, part discourse on history and part polemic.  In the Summary of the Argument, the WLF had this to say about SOX:

• Indeed, the short history of Sarbanes-Oxley demonstrates that it deserves the same fate as the Tenure in Office Act and the Ethics in Government Act.  Sarbanes-Oxley has had a harmful effect on our businesses and economy.  Sarbanes-Oxley's requirements have raised substantially the costs of obtaining accounting and auditing services.  And small business have been forced to bear a disproportionate share of this burden.  Simply put, the practical effect of Sarbanes-Oxley has been to harm public companies, small businesses, and shareholders. 

Towards the end of the brief, the Foundation discusses the "harmful effects of Sarbanes-Oxley" and notes that the PCAOB, "unchecked by political will, has run amok among the accounting industry and our nation's public companies." 

As for the historical analysis, the brief was selective in the content discussed.  For example, after discussing developments in 1789, quoting Madison and noting some statements by Jackson, the brief moves on to Grover Cleveland, who took office in 1885.  Omitted was the only thing of consequence ever accomplished by Cleveland's predecessor, Chester Arthur (who never held elected office until becoming Vice President, gaining the top office only upon the assassination of James Garfield).  Arthur was in office when Congress adopted the Civil Service Reform Act of 1883.  The Law sought to protect government workers from political pressure and, incidentally, restricted the President's right to remove some members of the executive branch.  As is often the case with Chester Arthur, he is forgotten in the discussion.   

McKinley, Wilson, Coolidge (the brief skipping FDR with our only four term president apparently having no views on the matter), Truman (the brief skipping Eisenhower, Kennedy and Johnson), Nixon (the brief skipping Ford, Carter, Eisenhower and George Bush Sr), Clinton and finally, George W. Bush (who "strongly asserted his removal authority during the creation of the Department of Homeland Security.").   The brief did not reconcile the positions attributed to George Bush with the fact that the Justice Department had filed a brief on behalf of the PCAOB.  The analysis ended by claiming that "from 1789 to the present, the Executive Branch has vigorously and consistently protected its removal authority from congressional intrusions thereon." 

That the Foundation does not like SOX is clear.  That many presidents have resisted efforts to restrict their right to remove executive branch employees is beyond dispute.  The value of these points in determining the outcome of these issues?  Priceless.    

Two amicus briefs were filed in support of the positions taken by the Justice Department and the PCAOB.  One was from the Council on Institutional Investors, the other from seven former chairmen of the Securities and Exchange Commission.  Unanimity by the Chairmen is not always easy to come by as the split in the Stoneridge case illustrated. In that case, assorted chairmen were on both sides of the case (go here and here).  In this one, though, unanimity reigned. 

An amicus brief may not always have content particularly different from the merit briefs.  These two do.  The CII brief examined the history of self regulation and the history of the regulation of the accounting industry.  The brief emphasizes what is the big picture issue in this case:  Can there be a system of self regulation where oversight is independent of the industry subject to regulation.  As the brief noted:  "In contrast to the self-regulation system it replaces, many features of the PCAOB ensure the needed independence from regulated industry."  The brief likewise takes issues with the arguments that SOX has been entirely harmful to American business, particularly noting the improvement in investor confidence that resulted in a recovery of stock prices in the aftermath of Enron and Worldcom. 

The brief of the SEC chairmen (Cook, Hills, Williams, Ruder, Levitt, Pitt and Donaldson) likewise defended the constitutionality of the PCAOB.  So did the current chairman, by the way, since the SEC staff was listed as "of counsel" on the brief filed by the Justice Department.  As the brief noted:

• The SEC oversees numerous entities in this complex system, including self-regulatory organizations (SROs) . . .  This unique and integrated regualtory system, working as a whole and updated by Congress over the years, has successfully ensured worldwide investor confidence in the integrity of the U.S. markets. 

Directly to the point, the brief likewise notes that with the authority to create indpendent agencies, Congress has the authority to create "subunits such as the PCAOB within these agencies, staffed by inferior officers, who are appointed by, and function under the control and oversight of, the SEC itself."

We have posted on the DU Corporate Governance web site most if not all of the important documents on the case, including the assorted amici filed in the appellate case.

In classroom discussions and in written assignments from students, professors often seek to impose a gender neutral approach to the discussion.  Not all CEOs are male (although most of course are), nor are all judges.  There may be an element of political correctness to the approach but it likewise recognizes that students, as lawyers, will confront plenty of judges and clients who are women and they had better start thinking in gender neutral terms, otherwise they risk causing offense. 

So we noted with interest the colloquy that took place before the DC Circuit in FEF v. PCAOB.  A panel consisting of three judges, Brett Kavanaugh, Judith Rogers, and Janice Rogers Brown, heard the case.  The following colloquy occurred between a judge on the panel and Michael Carvin, counsel for the appellants.  

• MR. CARVIN:  So when we get a new President next year who has decided he wants to change the way things are done, he is going to be absolutely powerless to do it, because he's going to be sitting there with a corporation whose terms haven't expired and who he cannot redirect in any way, even if he thinks we are damaging the economy. And the --
• THE COURT: Of whatever sex.
• MR. CARVIN: Excuse me?
• THE COURT: Of whatever sex.
• MR. CARVIN: Of whatever sex.
• THE COURT: He or she.
• MR. CARVIN: And/or race, that's entirely true.
• THE COURT: All right.

This colloquy today would be accurate since Hillary Clinton has conceded.  But at the time of the oral argument, she was very much a candidate. 

Gender neutrality in the classroom.  Gender neutrality in the courtroom.  Its a good idea. 

We have posted on the DU Corporate Governance web site most if not all of the important documents on the case, including the assorted amicus filed in the appellate case.

Oral argument at the DC Circuit was spirited, with published reports suggesting that the most pointed questions came from Judge Kavanaugh.  The judges did not seem particularly concerned with the Appointments Clause issue, particularly the status of the SEC as a department.  Much of the discussion focused on removal, with one judge describing the arrangement as "an independent agency within an independent agency." 

Thus, the main concern seemed to be with what one judge on the panel called "two levels of for cause removal away from the president."

• THE COURT: Right. Right. And the distinction is, and again, the distinction is, this is two levels of for cause removal away from the president. Humphrey's Executor, which was commonly thought to be the outer limit of encroachment on Presidential authority was one level of for cause removal away. Never before has there been an officer that is two  levels of for cause removal away.

The panel relentlessly asked for examples of any other "two level for cause removal" provision.  Counsel for the Defendants in particular had trouble coming up with examples.

• THE COURT: Let me ask you this. Your brief says there is nothing novel about this. Are you aware of any inferior officers in independent agencies who are subject to for cause removal?
• MR. LAMKEN: Any inferior officer who happens to be civil service protected would be subject to removal.
• THE COURT: Officer. Officer.
• MR. LAMKEN: Yes. Meyer makes clear that Congress can make inferior officers subject to --
• THE COURT: I asked for examples.
• MR. LAMKEN: I don't have any examples for you.
• THE COURT: I don't think there are any.
• MR. LAMKEN: I don't know whether there are or not.
• THE COURT: I don't think there have been any.

As we have noted in a prior post, there are examples.  With respect to the Board of Governors of the Postal System, the Board is an independent body.  See 39 USCS § 202(a)(creating an 11 person board with members only subject to removal "for cause").  The Board's enabling statute gives it the authority to appoint an Inspector General who can only be removed by the Board and only for cause.  See  39 USCS § 202 (3)("The Inspector General may at any time be removed upon the written concurrence of at least 7 Governors, but only for cause.").  It's not a separate agency reporting to the Postal Board but it is example of two levels of "for cause" removal. 

Similarly, there are restrictions on presidential removal authority even more extreme than two levels of "for cause" restrictions.  The Personnel Appeals Board within the GAO is independent, with members appointed by Comptroller General and receiving five year terms.  31 USCS § 751.  Only they can remove themselves.  See 31 USCS § 751(d)("A member may be removed by a majority of the Board (except the member subject to removal) only for inefficiency, neglect of duty, or malfeasance in office.").  In other words, while the President can influence the PCAOB through its authority to remove members of the Commission, neither the President nor the President's appointees have any authority to remove members of the Personnel Appeals Board.

The issue is not the two layers of for cause removal.  As a practical matter, the President's authority to remove an inferior officer appointed by the head of an independent agency is, by definition, highly circumscribed, irrespective of the standard for removal applicable to the head of the independent agency.  Thus, in this case, the court must resolve whether it is constitutional for an independent agency to have the authority to appoint an inferior officer of any kind.  That there is a double layer of "for cause" removal requirements is largely irrelevant.

We have posted on the DU Corporate Governance web site most if not all of the important documents on the case, including the assorted amici filed in the appellate case.

The other argument about the removal authority is that the Commission, which is itself an independent agency, can only remove members of the PCAOB "for cause."  In other words, the President's influence over the PCAOB is even more attenuated.  As one appellate judge characterized it, the PCAOB was an independent agency within an independent agency.

Despite the appellate panel's concern, the issue is a red herring.  First, there is nothing inherently wrong with a double layer of insulation from the executive.  Whether or not subject to for cause removal, anyone appointed by the head of an independent agency is effectively insulated from the President.  Thus, for example, a number of agencies have the authority to hire a Chief Financial Officer.  See See 31 USCS § 901)(a). 

In some instances, the authority to appoint is expressly given to the President.  In other instances, however, the authority rests with the head of the agency.  See 31 USCS § 901(b).  Among the agency heads that have the authority to appoint a CFO?  A number of agencies that are independent.  See, e.g. Commissioner of Social Security, 42 USCS § 902 ("An individual serving in the office of Commissioner may be removed from office only pursuant to a finding by the President of neglect of duty or malfeasance in office."); Nuclear Regulatory Commission, 42 USCS § 5841(e) ("Any member of the Commission may be removed by the President for inefficiency, neglect of duty, or malfeasance in office. No member of the Commission shall engage in any business, vocation, or employment other than that of serving as a member of the Commission."); The National Transportation Safety Board, 49 USCS § 1111 (“The President may remove a member for inefficiency, neglect of duty, or malfeasance in office.”). 

In other words, the President has little or no ability to remove a CFO appointed by the head of an independent agency.  This is true whether or not the head of the agency is limited to removal for cause.  Moreover, in at least one instance, Congress restricted the right of an independent agency to remove to for cause, creating a double layer "for cause" restriction of the type at issue in FEF v. PCAOB.  This is the case with respect to the Board of Governors of the Postal System, an independent body.  See 39 USCS § 202(a)(creating an 11 person board with members only subject to removal "for cause").  It is the Board that is assigned the task of appointing an Inspector General and only the Board can remove the individual and only for cause.  See  39 USCS § 202 (3)("The Inspector General may at any time be removed upon the written concurrence of at least 7 Governors, but only for cause."). 

There are other, similar examples.  While in most cases the heads of the independent agencies are subject to for cause removal by the President, this is far from universal.  Nor are they always subject to removal by someone, as in the case of Morrison, who serves at the complete discretion of the President.  Thus, the Personnel Appeals Board within the GAO is independent, with members appointed by Comptroller General and receiving five year terms.  31 USCS § 751.  Only they can remove themselves.  See 31 USCS § 751(d)("A member may be removed by a majority of the Board (except the member subject to removal) only for inefficiency, neglect of duty, or malfeasance in office.").  In other words, there is no one subject to plenary presidential oversight who has a say in removal.

Similarly, the Legal Services Corporation has a board appointed for a period of years by the President.  The President has no power to remove.  See 42 USCS § 2996c(e) ("A member of the Board may be removed by a vote of seven members for malfeasance in office or for persistent neglect of or inability to discharge duties, or for offenses involving moral turpitude, and for no other cause.").  In other words, it is not uncommon to have situations where the President has little or no authority to remove, whether direct or derivative. 

A finding that the PCAOB restriction is per se invalid would throw these other arrangements into doubt and would be tantamount to the prohibition on the appointment by independent agencies of anyone deemed to be an inferior officer (as opposed to a mere employee). 

Finally, as the PCAOB notes on brief, the President's authority is not "completely stripped" away, only more attenuated. The president in fact retains ultimate authority over the definition of “good cause.”  To the extent members of the PCAOB act in a way that results in grounds for a good cause dismissal (as interpreted by the President), the President can treat the failure by the Commission to remove as itself good cause for removal of the commissioners. The President can fire the commissioner of the SEC until he or she gets the sought after result.  It is a blunt authority but so is any effort by the President to use the power to dismiss to induce personnel changes within an executive branch department.   

The question is not, therefore, whether it is harder for the President to engender the removal of the members of the PCAOB but whether the restriction (however difficult or hard) results in interference with the President's ability to execute the laws.  The answer to this question is clear.  The courts have already upheld in the securities area the use of self regulatory organizations.  These organizations carry out a regulatory function but allow for no presidential control over the persons who head the organization.  With respect to the PCAOB, the President's authority is substantially greater.  Any decision here that the PCAOB arrangement is unconstitutional would have to explain how and why self regulatory organizations are likewise not unconstitutional.  

Plaintiffs’ response? Labeling the assertion a non sequitur, they assert that “[t]he fact that a multi-member agency designed to be independent of the President has some power to remove hardly vests the President with such power, or as a consequence, with any derivative ability to even influence the Board’s execution of the laws.” Appellant Brief, at 17.  The  position does not really speak to a double layer of "for cause" removal restrictions, but instead challenges the right of independent agencies to appoint inferior officers of any kind.  This would apply not only to the members of the PCAOB but to the chief financial officers authorized under Section 901. See 31 USCS § 901(b).  There is no case that has held that independent agencies lack this authority.  More importantly, it is a position disconnected from the required analysis in Morrison.  Morrison does not speak to per se rules but instead requires a functional analysis that examines whether the particular restriction impedes the President's ability to execute the laws. 

We have posted on the DU Corporate Governance web site most if not all of the important documents on the case, including the assorted amicus filed in the case.  

What of the other two issues? There is almost no law interpreting the particular language of a “for cause” restriction. It is possible, therefore, that while some limitations on removal are permissible, there may be some that go too far. A for cause restriction that is excessively narrow means that there is no real right of removal, something that might more readily impair the President's ability to execute the laws, and also might suggest no real supervision for purposes of the Appointments Clause.

Whatever the merit of the case, the facts in this case do not demonstrate an impermissibly broad restriction on removal. Section 107 of SOX allows the Commission to remove a board member who has:

• (A) has willfully violated any provision of this Act, the rules of the Board, or the securities laws;
  (B) has willfully abused the authority of that member; or
  (C) without reasonable justification or excuse, has failed to enforce compliance with any such provision or rule, or any professional standard by any registered public accounting firm or any associated person thereof.

The willful language is unusual.  The more common language is to simply permit removal upon a showing of neglect of duty or malfeasance.  See 15 USCS § 2053(a) (removal of commissioners of Consumer Product Safety Commission may only be "for neglect of duty or malfeasance in office but for no other cause."). 

Nonetheless, the provision applicable to the PCAOB is hardly broader.  First, the failure of members to respond to Commission orders concerning implementation of the law would constitute willful behavior and allow for removal.  Second, in Morrison, the "for cause" provision was in many ways even more restrictive. Except for impeachment and conviction, independent counsel could only be removed for “physical disability, mental incapacity, or any other condition that substantially impairs the performance” of his or her duties. 487 US at 626 n. 23. In other words, “for cause” did not cover anything related to performance or specifically to the duties undertaken. In this case, however, the for cause provision provides far greater latitude to remove a member of the PCAOB.

There is nothing in the particular "for cause" provision that renders it per se unconstitutional.

We have posted on the DU Corporate Governance web site most if not all of the important documents on the case, including the assorted amicus filed in the case.  

The second cluster of legal issues is a bit more complex.  They go not to