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Case 15.3
FREEENTERPRISE FUND v. PUBLIC COMPANY
ACCOUNTINGOVERSIGHT BOARD
130S. Ct. 3138 (2010)
Asa part of the Sarbanes-Oxley Act Congress created
thePublic Company Accounting Oversight Board
(PCAOBor Board). This Board consists of five members
whoare appointed by the Securities and Exchange
Commissioners.Board members serve 5-year staggered
termsand are not considered Government officers
oremployers. This allows the recruitment from
theprivate sector since the Board members salaries
arenot subject to governmental limitations. These
memberscan be removed by the SEC Commissioners
onlyfor good cause if the Board member:
(A)has willfully violated any provision of the
Actthe rules of the Board or the securities laws; (B)
haswillfully abused the authority of that member; or
(C)without reasonable justification or excuse has failed
toenforce compliance with any such provision or rule
orany professional standard by any registered public
accountingfirm or any associated person thereof.
Thisarrangement concerning the appointment and
potentialremoval of Board members makes the PCAOB
aGovernment-created Government-appointed entity
withexpansive powers to govern an entire industry
(publicaccounting firms). It further makes the Board
membersinsulated from the direct supervision of the
SECCommissioners.
Followingthe Boards release of a negative report
aboutBeckstead and Watts LLP a public accounting
firmthis lawsuit was filed by that firm and The
FreeEnterprise Fund challenging the constitutionality
ofthe Sarbanes-Oxley Act at least as far as the
creationand operation of the PCAOB. The basis of
thischallenge is the Board members are not subject to
theappointed powers of the President of the United
States.The United States Government joined the suit
todefend the Sarbanes-Oxley Act and the PCAOB.
TheDistrict Judge granted summary judgment in
favorof the United States and the D.C. Circuit Court
ofAppeals affirmed. Certiorari was granted to review
theconstitutional issue.
ROBERTSC.J.: .. . We hold that the dual for-cause
limitationson the removal of Board members contravene
theConstitutions separation of powers.
TheConstitution provides that [t]he executive
Powershall be vested in a President of the United
Statesof America. Art. II 1cl. 1. As Madison stated
onthe floor of the First Congress if any power
whatsoeveris in its nature Executive it is the power
ofappointing overseeing and controlling those who
executethe laws.
Theremoval of executive officers was discussed
extensivelyin Congress when the first executive
departmentswere created. The view that prevailed as
mostconsonant to the text of the Constitution and
tothe requisite responsibility and harmony in the
ExecutiveDepartment was that the executive power
includeda power to oversee executive officers through
removal;because that traditional executive power
wasnot expressly taken away it remained with the
President.. . .
Thelandmark case of Myersv.UnitedStates
reaffirmedthe principle that Article II confers on the
Presidentthe general administrative control of those
executingthe laws. It is hisresponsibilityto take care
thatthe laws be faithfully executed. The buck stops
withthe President in Harry Trumans famous phrase.
Aswe explained in MyersthePresident therefore
musthave some power of removing those for whom
hecannot continue to be responsible.
Nearlya decade later in HumphreysExecutor
thisCourt held that Myersdidnot prevent Congress
fromconferring good-cause tenure on the principal
officersof certain independent agencies. That case
concernedthe members of the Federal Trade Commission
whoheld 7-year terms and could not be removed
bythe President except for inefficiency neglect of
dutyor malfeasance in office. The Court distinguished
Myersonthe ground that Myersconcerned
anofficer [who] is merely one of the units in the
executivedepartment and hence inherently subject to
theexclusive and illimitable power of removal by the
ChiefExecutive whose subordinate and aid he is. By
contrastthe Court characterized the FTC as quasilegislative
andquasi-judicial rather than purely
executiveand held that Congress could require it to
act. . . independently of executive control. Because
onewho holds his office only during the pleasure
ofanother cannot be depended upon to maintain an
attitudeof independence against the latters will the
Courtheld that Congress had power to fix the period
duringwhich [the Commissioners] shall continue in
officeand to forbid their removal except for cause in
themeantime.
HumphreysExecutor didnot address the
removalof inferior officers whose appointment Congress
mayvest in heads of departments. If Congress
doesso it is ordinarily the department head rather
thanthe President who enjoys the power of removal.
ThisCourt has upheld for-cause limitations on that
poweras well. . . .
Wehave previously upheld limited restrictions
onthe Presidents removal power. In those cases
howeveronly one level of protected tenure separated
thePresident from an officer exercising executive
power.It was the Presidentor a subordinate he
couldremove at willwho decided whether the officers
conductmerited removal under the good-cause
standard.The Act before us does something quite
different.It not only protects Board members from
removalexcept for good cause but withdraws from
thePresident any decision on whether that good cause
exists.That decision is vested instead in other tenured
officerstheCommissionersnone of whom is subject
tothe Presidents direct control. The result is a
Boardthat is not accountable to the President and a
Presidentwho is not responsible for the Board. The
addedlayer of tenure protection makes a difference.
Withouta layer of insulation between the Commission
andthe Board the Commission could remove a
Boardmember at any time and therefore would be
fullyresponsible for what the Board does. The President
couldthen hold the Commission to account for
itssupervision of the Board to the same extent that
hemay hold the Commission to account for everything
elseit does. A second level of tenure protection
changesthe nature of the Presidents review. Now the
Commissioncannot remove a Board member at will.
ThePresident therefore cannot hold the Commission
fullyaccountable for the Boards conduct to the same
extentthat he may hold the Commission accountable
foreverything else that it does. The Commissioners are
notresponsible for the Boards actions. They are only
responsiblefor their own determination of whether the
Actsrigorous good-cause standard is met. And even if
thePresident disagrees with their determination he is
powerlessto interveneunless that determination is
sounreasonable as to constitute inefficiency neglect of
dutyor malfeasance in office.
Thisnovel structure does not merely add to the
Boardsindependence but transforms it. Neither the
Presidentnor anyone directly responsible to him nor
evenan officer whose conduct he may review only for
goodcause has full control over the Board. The President
isstripped of the power our precedents have preserved
andhis ability to execute the lawsby holding
hissubordinates accountable for their conductis
impaired.
Thatarrangement is contrary to Article IIs vesting
ofthe executive power in the President. Without the
abilityto oversee the Board or to attribute the Boards
failingsto those whom he canoverseethe President
isno longer the judge of the Boards conduct. He is
notthe one who decides whether Board members are
abusingtheir offices or neglecting their duties. He can
neitherensure that the laws are faithfully executed
norbe held responsible for a Board members breach
offaith. This violates the basic principle that the President
cannotdelegate ultimate responsibility or the
activeobligation to supervise that goes with it because
ArticleII makes a single President responsible for the
actionsof the Executive Branch.
Indeedif allowed to stand this dispersion of
responsibilitycould be multiplied. If Congress can shelter
thebureaucracy behind two layers of good-cause
tenurewhy not a third? At oral argument the Government
wasunwilling to concede that even fivelayers
betweenthe President and the Board would be too
many.The officers of such an agencysafely encased
withina Matryoshka doll of tenure protections
wouldbe immune from Presidential oversight even as
theyexercised power in the peoples name.
Perhapsan individual President might find advantages
intying his own hands. But the separation of
powersdoes not depend on the views of individual
Presidentsnor on whether the encroached-upon
branchapproves the encroachment. The President can
alwayschoose to restrain himself in his dealings with
subordinates.He cannot however choose to bind his
successorsby diminishing their powers nor can he
escaperesponsibility for his choices by pretending that
theyare not his own.
Thediffusion of power carries with it a diffusion
ofaccountability. The people do not vote for the
Officersof the United States. They instead look to the
Presidentto guide the assistants or deputies . . . subject
tohis superintendence. Without a clear and effective
chainof command the public cannot determine on
whomthe blame or the punishment of a pernicious
measureor series of pernicious measures ought really
tofall. That is why the Framers sought to ensure that
thosewho are employed in the execution of the law
willbe in their proper situation and the chain of
dependencebe preserved; the lowest officers the middle
gradeand the highest will depend as they ought
onthe President and the President on the community.
Bygranting the Board executive power without the
Executivesoversight this Act subverts the Presidents
abilityto ensure that the laws are faithfully executed
aswell as the publics ability to pass judgment on his
efforts.The Acts restrictions are incompatible with the
Constitutionsseparation of powers. . . .
Thiscase presents an even more serious threat to
executivecontrol than an ordinary dual for-cause
standard.Congress enacted an unusually high standard
thatmust be met before Board members may be
removed.A Board member cannot be removed except
forwillful violations of the Act Board rules or the
securitieslaws; willful abuse of authority; or unreasonable
failureto enforce complianceas determined
ina formal Commission order rendered on the record
andafter notice and an opportunity for a hearing.
TheAct does not even give the Commission power to
fireBoard members for violations of otherlawsthat
donot relate to the Act the securities laws or the
Boardsauthority. The President might have less than
fullconfidence in say a Board member who cheats on
histaxes; but that discovery is not listed among the
groundsfor removal. . . .
Therigorous standard that must be met before a
Boardmember may be removed was drawn from statutes
concerningprivate organizations like the New
YorkStock Exchange. While we need not decide the
questionhere a removal standard appropriate for
limitingGovernment control over private bodies may
beinappropriate for officers wielding the executive
powerof the United States. . . .
Petitionerscomplaint argued that the Boards
freedomfrom Presidential oversight and control
renderedit and all power and authority exercised by
itin violation of Constitution. We reject such a broad
holding.Instead we agree with the Government that
theunconstitutional tenure provisions are severable
fromthe remainder of the statute.
Generallyspeaking when confronting a constitutional
flawin a statute we try to limit the solution to the
problemsevering any problematic portions while leaving
theremainder intact. . . . Concluding that the removal
restrictionsare invalid leaves the Board removable by the
Commissionat will and leaves the President separated
fromBoard members by only a single level of good-cause
tenure.The Commission is then fully responsible for the
Boardsactions which are no less subject than the Commissions
ownfunctions to Presidential oversight.
TheSarbanes-Oxley Act remains fully operative
asa law with these tenure restrictions excised.
Wetherefore must sustain its remaining provisions
[u]nlessit is evident that the Legislature would not
haveenacted those provisions . . . independently of that
whichis [invalid]. Though this inquiry can sometimes
beelusive the answer here seems clear: The remaining
provisionsare not incapable of functioning independently
andnothing in the statutes text or historical
contextmakes it evident that Congress faced with the
limitationsimposed by the Constitution would have
preferredno Board at all to a Board whose members are
removableat will.
Itis true that the language providing for goodcause
removalis only one of a number of statutory provisions
thatworking together produce a constitutional
violation.In theory perhaps the Court might bluepencil
asufficient number of the Boards responsibilities
sothat its members would no longer be Officers
ofthe United States. Or we could restrict the Boards
enforcementpowers so that it would be a purely recommendatory
panel.Or the Board members could in
futurebe made removable by the President for good
causeor at will. But such editorial freedomfar more
extensivethan our holding todaybelongs to the Legislature
notthe Judiciary. Congress of course remains
freeto pursue any of these options going forward. . . .
Itis so ordered.