Free Enterprise Fund v. PCAOB: Regulation, the Free Market, and the Constitution (The Independence of the SEC)(Part 11)

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.