Corporate Governance

FEF v. PCAOB and the Threat to SEC Independence (Part 3)

By J Robert Brown Jr.

So, with all of that background, we return to FEF v. PCAOB. 

Congress, in creating the PCAOB, provided that Board members could only be removed by the Commission.  Moreover, the Commission could only remove them "for cause."  See 15 USC §7211(e)(6).  At the same time, however, the members of the Commission could only be removed by the President "for cause."  The most significant issue in the case was the constitutionality of the "dual for-cause limitations."

To address the issue, however, the Court had to first determine whether the SEC commissioners were subject to a "for cause" restriction on removal.  Certainly, this is how the Commission has been viewed.  Yet the enabling statute (Securities Exchange Act of 1934) is frustratingly silent on the issue.  The Statute provides for five year terms for the commissioners and prohibits the appointment of more than three from the same party.  Nonetheless, Section 4 of the Exchange Act says nothing about restrictions on the President's right to remove. 

In short, to address the constitutionality of the double layer of for cause removal restrictions, the Court had to first conclude that the SEC commissioners could only be removed for cause, despite the statutory silence.  The Court merely said this:

• The parties agree that the Commissioners cannot themselves be removed by the President except under the Humphrey's Executor standard of 'inefficiency, neglect of duty, or malfeasance in office,' 295  U. S., at 620 (internal quotation marks omitted); see Brief for Petitioners 31; Brief for United States 43; Brief for Respondent Public Company Accounting Oversight Board (hereinafter PCAOB Brief); Tr. of Oral Arg. 47, and we decide the case with that understanding.

The use of the term "understanding" sounds as if the Court assumed for sake of the decision that SEC commissioners could only be removed for cause.  Certainly there was no analysis and no explanation for the interpretion given the void in the statute. 

Justice Bryer in dissent rightfully noted the anomaly of the decision.  After noting the "understanding" by the majority, he had this to say: 

• Unless the Commissioners themselves are in fact protected by a 'for cause' requirement, the Accounting Board statute, on the Court's own reasoning, is not constitutionally defective. I am not aware of any other instance in which the Court has similarly (on its own or through stipulation) created a constitutional defect in a statute and then relied on that defect to strike a statute down as unconstitutional.

Justice Breyer went on to analyze the issue in his dissent.  His conclusion?  Commissioners on the SEC are not subject to for cause removal.  We'll deal with that in the next post. 

Full post as published by The Race to the Bottom on October 13, 2010 (boomark / email).