Oral argument was held in FEF v. PCAOB, a case challenging the constitutionality of the PCAOB. The case has often been discussed as if it involved a frontal challenge to all of SOX. Thus, the Wall Street Journal Law Blog asked: "Whither Sarbanes-Oxley? Come June, will the law exist in its current form or will it have to be dismantled or reconstituted, the result of a hostile Supreme Court ruling?"
The approach is little more than hyperbole. Whatever happens in the case, SOX, particularly Section 404 and the heightened governance requirements, will remain unaltered. At most, Congress will have to merge the PCAOB into the Securities and Exchange Commission, something that all of the parties concede is constitutional.
A critical issue in the case turns on the constitutionality of the limits on the president's right to remove members of the PCAOB board. The president has no direct removal authority. Only the Securities and Exchange Commission can remove them and only for cause. At the same time, Commissioners on the SEC can only be removed by the president for cause. (Although as we have noted, and Justice Breyer pointed out at oral argument, there is no explicit provision that limits the president's ability to remove SEC commissioners only for cause). The president does have plenary authority to designate the chairman.
The Government took the position that the PCAOB was subject to plenary control by the SEC. It was, therefore, functionally no different than a branch of the Commission. The Commission had the right to review all rules, penalties in enforcement proceedings, and even subpoenas. As such, the PCAOB was no more independent from the president than the SEC itself. As Solicitor General Kagan noted:
- Mr. Chief Justice, removal is just a tool. Removal is not the ultimate constitutional question. The ultimate constitutional question is the level of presidential control, and the presidential control here is exactly the same with respect to the board's activities as it is with respect to the SEC staff's activities.
The only real exception to the plenary control argument was the right to begin an investigation. As this exchange between Justice Breyer and counsel for Plaintiff noted:
- JUSTICE BREYER: But I've got one thing on my list. I'm looking to what they control, can't control, the commission. And so far I've written that in your view the commission can investigate people without subpoenas and the commission can do nothing about it, okay? That's one.
- MR. CARVIN: Yes.
- JUSTICE BREYER: Now, what's two?
- MR. CARVIN: Well, I think that that is the main point.
For the Supreme Court to strike down the PCAOB, a majority of the Court will have to find that this degree of discretion violates the Constitution. They will have to find that the imposition of something described in oral argument as a "cost of doing business" results in a violation of the Constitution.
The transcript, briefs, and other primary materials can be found at the DU Corporate Governance web site.