The Consequences of FEF v. PCAOB

After the adoption of Sarbanes Oxley, which created the PCAOB, a rigorous constitutional challenge to the PCAOB emerged. 

The main line of attack was the novel structure of the governance of the body.  Members to the PCAOB were appointed by the SEC for a term of five years and could only be removed by the SEC for cause.  Because SEC commissioners could also only be removed for cause (a limitation on removal that is not in the statute but is conventional wisdom), the structure provided a significant barrier to influence by the President in the appointment and removal of members of the PCAOB. 

On that basis, the "for cause" restriction on removal was struck down.  PCAOB members became at will appointees who could be removed by the Commission at any time with or without cause.  The Supreme Court decision and assorted filings/briefs can be found at the DU Corporate Governance web site.  As such, the independence of the body was reduced and the control by the Commission (particularly the Office of the Chief Accountant) was significantly enhanced. 

From an administrative perspective, the decision was a poor one.  It restricted an approach to government regulation that sought to increase private sector sensitivities while both avoiding capture by the industry subject to regulation and minimizing the direct role of the bureaucracy.  The PCAOB was structured as a non-profit that was not subject to many of the bureaucratic restrictions on activities (including limits on compensation).  This allowed the body to have a closer connection to the private sector.  At the same time, however, the governance structure was not controlled by industry (minimizing the risk of capture) but by the SEC.  By limiting removal to cause (with cause defined in part as the failure to enforce its own rules), however, the PCAOB also retained independence from the SEC and could therefore avoid some of the problems associated with government bureaucracies. 

The Supreme Court's decision to strike down the limitation on removal of PCAOB members changed all of that.  The efforts by Congress to thread the gap between the Scylla of industry capture and the Charybdis of excessive bureaucratic oversight was disrupted.  While the PCAOB remains in place, Congress is less likely to use this model of governance in other circumstances.  With SEC control enhanced, there is little reason (other than funding) to not simply include this type of oversight directly in the relevant regulatory body, eliminating all pretenses of private sector influence.

All of this brings us to a more recent consequence of the decision.  It turns out that in our federal system of government, there are other instances of the persons subject to a double "for cause" removal limitation.  This is apparently the case with respect to the appointment of administrative law judges.  According to a recent law suit, ALJs at the SEC can only be removed "for cause."  The law suit, therefore, challenges the constitutionality of these decision makers.  For the time being, we offer no views on the case except to say that but for the Supreme Court's decision with respect to the PCAOB, this suit would likely not have been brought.    

J Robert Brown Jr.