Thoughts on Free Enterprise Fund v. PCAOB

In Free Enterprise Fund v. PCAOB, a five-justice majority found a provision of the Sarbanes-Oxley law unconstitutional, yet left the SarbOx regulatory structure largely intact.  With almost surgical precision, the Court erased the limitations on removal of members of the Public Company Accounting Oversight Board (PCAOB), thereby granting petitioners a victory on their constitutional claim without providing them with much (if any) practical relief.  This reinforces the formalist nature of the opinion insofar as the Court’s majority is insisting that Congress not obstruct executive authority but not doing much else to constrain the regulatory apparatus Congress constructed.  The Court drew a line in the sand to safeguard executive power and ensure greater accountability, but did so without picking much of a fight.

To summarize what the Court did: It held that Congress many not insulate a federal officer from executive control through double for-cause removal authority.  So while it is acceptable for Congress to prevent the removal of SEC commissioners except for cause, Congress cannot also require cause for the removal of officers who are only removable by the SEC.  In reaching this conclusion the Court held that the members of the PCAOB are, in fact, officers.  Stripped of the for-cause requirement for removal, PCAOB members are sufficiently controlled by the SEC that they are “inferior” officers, and thus may be appointed by the SEC (and not the President).  Further, the Court held, once thefor-cause limitation on removal is removed, there is no constitutional problem with the PCAOB as constituted nor with the scope of its authority, so it may continue to operate as it has.

I’ve highlighted some interesting, and perhaps important, passages from the Chief Justice’s majority opinion below the fold.  For additional commentary, see John Elwood’s comment below.  Here are additional early thoughts from David Zaring, Larry Ribstein, Megan McArdle, Rick Pildes, and Stephen Bainbridge (here, here, and here).

From the outset of the opinion, the majority focuses on the primary issue of concern — the double for-cause removal limitation.

May the President be restricted in his ability to remove a principal officer, who is in turn restricted in his ability to remove an inferior officer, even though that inferior officer determines the policy and enforces the laws of the United States?

We hold that such multilevel protection from removal is contrary to Article II’s vesting of the executive power in the President. The President cannot “take Care that the Laws be faithfully executed” if he cannot oversee the faithfulness of the officers who execute them. Here the President cannot remove an officer who enjoys more than one level of good-cause protection, even if the President determines that the officer is neglecting his duties or discharging them improperly. That judgment is instead committed to another officer, who may or may not agree with the President’s determination, and whom the President cannot remove simply because that officer disagree with him. This contravenes the President’s “constitutional obligation to ensure the faithful execution of the laws.”

In justifying its holding, the Court stressed the effect a double-for-cause removal provision has on the Board’s accountability.

we have previously upheld limited restrictions on the President’s removal power. In those cases, however, only one level of protected tenure separated the President from an officer exercising executive power. It was the President—or a subordinate he could remove at will—who decided whether the officer’s conduct merited removal under the good-cause standard.The Act before us does something quite different. It not only protects Board members from removal except for good cause, but withdraws from the President any decision on whether that good cause exists. That decision is vested instead in other tenured officers—the Commissioners— none of whom is subject to the President’s direct control.The result is a Board that is not accountable to the President, and a President who is not responsible for the Board.The added layer of tenure protection makes a difference. Without a layer of insulation between the Commission and the Board, the Commission could remove a Board member at any time, and therefore would be fully responsible for what the Board does. The President could then hold the Commission to account for its supervision of the Board, to the same extent that he may hold the Commission to account for everything else it does.

A second level of tenure protection changes the nature of the President’s review. Now the Commission cannot remove a Board member at will. The President therefore cannot hold the Commission fully accountable for the Board’s conduct, to the same extent that he may hold the Commission accountable for everything else that it does. The Commissioners are not responsible for the Board’s actions. They are only responsible for their own determination of whether the Act’s rigorous good-cause standard is met. And even if the President disagrees with their determination, he is powerless to intervene—unless that determination is so unreasonable as to constitute “inefficiency, neglect of duty, or malfeasance in office.”

This novel structure does not merely add to the Board’s independence, but transforms it. Neither the President, nor anyone directly responsible to him, nor even an officer whose conduct he may review only for good cause, has full control over the Board. The President is stripped of the power our precedents have preserved, and his ability to execute the laws—by holding his subordinates accountable for their conduct—is impaired.

Chief Justice Roberts’ opinion for the Court continues in this vein, with some language others have already highlighted as quite-likely-to-be-quoted-in-the-future.

No one doubts Congress’s power to create a vast and varied federal bureaucracy. But where, in all this, is the role for oversight by an elected President? The Constitution requires that a President chosen by the entire Nation oversee the execution of the laws. And the “‘fact that a given law or procedure is efficient, convenient, and useful in facilitating functions of government, standing alone,will not save it if it is contrary to the Constitution,’” for “‘[c]onvenience and efficiency are not the primary objectives—or the hallmarks—of democratic government.’”

One can have a government that functions without being ruled by functionaries, and a government that benefits from expertise without being ruled by experts. Our Constitution was adopted to enable the people to govern themselves, through their elected leaders. The growth of the Executive Branch, which now wields vast power and touches almost every aspect of daily life, heightens the concern that it may slip from the Executive’s control, and thus from that of the people.

The Court also explains that because the ultimate issue is accountability, the executive branch cannot waive the separation of powers concerns, so it is of no import that one or more Administrations supported the limitations on PCAOB removal.

Perhaps an individual President might find advantages in tying his own hands. But the separation of powers does not depend on the views of individual Presidents, . . . nor on whether “the encroached-upon branch approves the encroachment,” . . . . The President can always choose to restrain himself in his dealings with subordinates. He cannot, however, choose to bind his successors by diminishing their powers, nor can he escape responsibility for his choices by pretending that they are not his own.

This passage echoes language from various federalism cases stressing that the judiciary enforces federalism limits on federal power for the benefit of individuals, not the states.  By the same token, separation of powers is about protecting liberty by ensuring accountability, not about protecting one branch or another for its own sake.

The Court further explains that once the offending removal provision is eliminated, there are no constitutional problems with the PCAOB as constituted: “the existence of the Board does not violate the separation of powers, but the substantive removal restrictions imposed by  [SarbOx] do.”

Concluding that the removal restrictions are invalid leaves the Board removable by the Commission at will, and leaves the President separated from Board members by only a single level of good-cause tenure. The Commission is then fully responsible for the Board’s actions, which are no less subject than the Commission’sown functions to Presidential oversight.

The Sarbanes-Oxley Act remains “‘fully operative as a law’” with these tenure restrictions excised.

Further, the Court holds, the removal provisions are severable as there is no evidence that “Congress, faced with the limitations imposed by the Constitution, would have preferred no Board at all to a Board whose members are removable at will.”

In terms of relief, the petitioners got relatively little.  Concluding that the PCAOB’s members were properly appointed by the SEC, the Court found no basis to invalidate anything the PCAOB has done.  Instead, all they get is a determination that the PCAOB is accountable to the SEC because its members are removable at will, and therefore, to some degree, the PCAOB is accountable to the President.

petitioners are not entitled to broad injunctive relief against the Board’s continued operations. But they are entitled to declaratory relief sufficient to ensure that the reporting requirements and auditing standards to which they are subject will be enforced only by a constitutional agency accountable to the Executive.

So, in sum, this case may be a victory for the enforcement of the separation of powers, but not much of a victory for the petitioners.