Corporate Governance

Free Enterprise Fund v. PCAOB: Regulation, the Free Market, and the Constitution (More Legal Arguments) (Part 4)

By J. Robert Brown

The second cluster of legal issues is a bit more complex.  They go not to the power of appointment but to removal authority.  The plaintiffs challenge the SEC's authority to remove members of the PCAOB only "for cause."  SOX generally requires cause to be some type of wilful misbehavior.   

The Constitution is silent on removal authority.  The courts are not, therefore, guided by specific text but instead must rely on amorphous concepts of separation of powers. The facts in this case raise three discrete issues. First, can Congress impose on the PCAOB limitations on removal of any kind? Second, can an independent agency be vested with the removal authority? Third, is the particular “for cause” provision unconstitutional?  

Were this Supreme Court (and, perforce, the Second Circuit) writing on a clean slate, it would probably strike down this removal authority. Indeed, it would probably rule the entire concept of independent agencies with broad regulatory authority unconstitutional. By allowing restrictions on removal, Congress effectively diminished the authority of the executive branch and, for people like Scalia, reduced political accountability. But the Court is not writing on a clean slate.

Morrison v. Olson, 487 US 654 (1988) made clear that “for cause” limitations on removal were constitutional in some cases. Unlike the test for Inferior Officers, the analysis focused more specifically on the authority of the office at issue.  The test is conceptually different for the one applicable to inferior officers but nonetheless has considerable practical overlap.  In the case of restrictions on removal, they will only be unconstitutional if they interfere with the President’s ability to carry out his or her executive responsibilities. Id. At 692 (limitation on removal unconstitutional if it “impermissibly burdens the President’s power to control or supervise [officers] in the execution of his or her duties.”). 

In Morrison, the Court found that a restriction on the removal of independent counsel did not raise these concerns. The position, however, was a narrow one, reporting to the Attorney General and having limited jurisdiction and limited duration. The facts provided little insight into “for cause” restrictions imposed on the heads of agencies charged with broad regulatory authority.

The analysis in Morrison threatened the constitutionality of most independent federal agencies. After all, can it be said with a straight face that the restrictions on removal of the members of the Federal Reserve Board don’t interfere with the President’s functions? The Court in Morrison, however, saw this coming and specifically reaffirmed the position from Humphreys Executor that restrictions on removal of the heads of the independent agencies (a tautology since independence arises from the restrictions on removal) were constitutional.  As the Court noted:

• At the other end of the spectrum from Myers, the characterization of the agencies in Humphrey's Executor and Wiener as "quasi-legislative" or "quasi-judicial" in large part reflected our judgment that it was not essential to the President's proper execution of his Article II powers that these agencies be headed up by individuals who were removable at will. We do not mean to suggest that an analysis of the functions served by the officials at issue is irrelevant. But the real question is whether the removal restrictions are of such a nature that they impede the President's ability to perform his constitutional duty, and the functions of the officials in question must be analyzed in that light. (footnote omitted)

Thus, an agency can have very broad duties (think of the Nuclear Regulatory Commission, the Federal Reserve Board, the Federal Communications Commission), yet be subject to “for cause” removal restrictions, cramping the President’s ability to govern.

In short, for cause restrictions are constitutional and can be imposed on agencies that have broad functions. To the extent for cause removal is constitutional for the Federal Trade Commission (the holding of Humphrey’s Executor), it is certainly constitutional for the PCAOB. Any other holding would throw the constitutionality of independent agencies into play, something that this Court has demonstrated it has no stomach to engender.

We have posted on the DU Corporate Governance web site most if not all of the important documents on the case, including the assorted amicus filed in the case.  

Full post as published by The Race to the Bottom on July 01, 2008 (boomark / email).