Supreme Court Upholds Constitutionality of the Sarbanes-Oxley Act of 2002
On June 28, 2010, the United State Supreme Court issued a 5-4 decision in Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board and United States of America. The Supreme Court held that a provision in the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requiring the Securities and Exchange Commission (the “SEC”) to remove board members of the Public Company Accounting Oversight Board (the “PCAOB”) only for “good cause” is unconstitutional and, as a result, invalid. The Supreme Court, however, further held that this unconstitutional “for-cause” removal provision of the Sarbanes-Oxley Act is severable from its other provisions and, as a result, the remainder of the Sarbanes-Oxley Act remains in effect. The much anticipated ruling therefore did not result in the dramatic invalidation of the entire Sarbanes-Oxley Act, as some commentators had speculated might occur. Companies’ obligations under the Sarbanes-Oxley Act instead remain unchanged.
The PCAOB is a private-sector, nonprofit corporation created by the Sarbanes-Oxley Act to oversee accounting professionals who provide audit reports for publicly traded companies. The PCAOB is composed of five board members appointed by the SEC. PCAOB board members may only be removed by the SEC before the end of a five-year term “for good cause shown,” “in accordance with certain procedures.” SEC Commissioners, in turn, may be removed by the President of the United States for “inefficiency, neglect of duty, or malfeasance in office.” The Supreme Court held that these dual “for-cause” removal restrictions violated the separation of powers principle of the United States Constitution.
In the past where the Supreme Court has upheld limited removal restrictions on the President’s removal power, only one level of protected tenure separated the President from an officer exercising executive power. In such cases, the President, or an at-will subordinate of the President, would decide whether to remove the officer for cause. The unconstitutional “for-cause” removal provision in the Sarbanes-Oxley Act protects PCAOB board members from removal except for good cause, but also removes the President from all decisions on whether that good cause exists. The decision relating to whether good cause exists is made by SEC Commissioners who are not subject to the President’s direct control. The effect of this dual “for-cause” removal regime is that the President “cannot hold the [SEC] fully accountable for the [PCAOB]’s conduct, to the same extent that he may hold the [SEC] accountable for everything else that it does.”
The Supreme Court further held that the unconstitutional “for-cause” removal provision of the Sarbanes-Oxley Act is severable from the remainder of the statute. As a result, other than the unconstitutional “for-cause” removal provision, the Sarbanes-Oxley Act remains “fully operative as a law.” The removal of this provision leaves PCAOB board members removable at will by the SEC Commissioners and the President is separated from PCAOB board members “by only a single level of good-cause tenure.”
While the case has garnered attention as a result of the conjecture that the entire Sarbanes-Oxley Act would be invalidated by the Supreme Court, this decision ensures that the remainder of the Sarbanes-Oxley Act remains intact. Companies, therefore, are not relieved of their obligations under the Sarbanes-Oxley Act and the PCAOB continues as well.