On December 31, 2007, Appellants and Amici filed briefs with the District of Columbia Court of Appeals to revisit a constitutional challenge to the Public Company Accounting Oversight Board (PCAOB). The PCAOB was established by Congress under the Sarbanes-Oxley Act in an effort to rebuild investor confidence post- Enron. This case is an appeal from the district court’s grant of summary judgment rejecting Appellants’ claims that, by stripping the President of all power to appoint, remove or otherwise supervise the members of the PCAOB, the Sarbanes-Oxley Act violates the Constitution’s separation of powers and Appointments Clause.

The appellants, Free Enterprise Fund and Beckstead and Watts, LLC, continue their assault on SOX, describing the PCAOB as “by design, vesting public officials with massive unchecked powers,” the exercise of which is “shielded from all political accountability.” In laymen’s terms, the Free Enterprise Fund believes that SOX, and more specifically the PCAOB, places smaller accounting and securities firms at a disadvantage due to what they allege to be over burdensome fees and due diligence regulations.

While the complaint did not challenge any decisions of the Board or the manner in which the Board has carried out its authority, it contested the board’s constitutional authority to act at all by asserting violations of separation of powers and appointments clause violations principles.

Addressing the separation of powers issue, Appellants argue that the district court conclusively asserted, without elaboration, that the President retained sufficient removal and supervisory authority over PCAOB members because “ SEC Commissioners can be removed for cause . . . and PCAOB members can be removed by the SEC .” Dismissing this notion as “non sequitur,” Appellants insist that this structure completely strips the President’s power to remove Board members when the constitutional test for a removal provision is whether the President “retains sufficient supervisory control.”

Regarding the appointment’s clause issue, Appellants describe the ruling that they lacked standing as “meritless.” While the district court agreed that the SEC commissioners are not the “head of the SEC” for purposes of the Appointments Clause, it nonetheless held that Appellants “lack standing” because the Chairman “has voted for each PCAOB member,” so Appellants’ “injury is not traceable to [the] infirmity” of depriving the Chairman of his constitutional appointment power. But, Appellants argue “injury” is precisely the “infirmity” of being regulated by Board members who have not been appointed in a constitutional manner because they were selected by all of the Commissioners, rather than just the Chairman.

During oral argument on April 15^th, Judge Brett Kavanaugh raised numerous questions about the precedent for an independent body such as the PCAOB operating within or under another, such as the SEC, so that board members are two levels away from executive-branch control.

Michael Carvin, who represents the Appellants, responded by characterizing the PCAOB is “an independent agency outside an independent agency," and warned that if the oversight board is found to be constitutional, it could give rise to other powerful government-like bodies with no check on their power and no accountability to elected officials. Attorneys for the PCAOB rejected that assertion, saying the SEC has "pervasive" mechanisms of control over the accounting-oversight board. He compared the oversight board to industry self-regulatory groups such as the New York Stock Exchange or the Financial Industry Regulatory Authority, albeit with more SEC control.

Another issue that generated interest came from Judge Judith Rogers, who questioned whether the oversight board is free to make final decisions without the approval of the SEC, noting that its rules and budget must be authorized by the SEC. While Appellants acknowledged that point they contend that the board's investigative and enforcement activities are immune from SEC review, and that Congress gave the SEC power only to veto the board's actions, not control it on a day-to-day basis or remove board members at will.

The judges did not raise any questions regarding the less heated issue of ripeness, which suggests the argument may not be a persuasive one for the appellate court. Since the Plaintiff challenging the PCAOB did not appeal first to the SEC, Appellees raised a ripeness defense as grounds for a motion for summary judgment.

The primary materials can be found on the DU law corporate governance site. Posts on the district court case can be found here.