Last week the U.S. Supreme Court excised a relatively minor portion of the Sarbanes-Oxley Act, leaving intact much of that wide-ranging corporate reform law. In Free Enterprise Fund v. Public Company Accounting Oversight Bd., the Court declared the legal structure of the Act's enforcement body, the Public Company Accounting Oversight Board ("PCAOB"), unconstitutional as violating separation of powers.
Under the Sarbanes-Oxley Act, members of the PCAOB may be removed from office by members of the Securities and Exchange Commission ("SEC") only for good cause. Members of the SEC, in turn, may be removed by the President only for good cause. The Court found that Congress violated the Constitution by placing these "two layers" of protection from removal between the President and the members of the PCAOB. Chief Justice John Robers, writing for the Court, stated:
"[S]uch 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 disagrees with him. This contravenes the President’s 'constitutional obligation to ensure the faithful execution of the laws.' ”
Despite the constitutional flaw in the PCAOB's make-up, the court did not do away with the board. Instead, it ordered that PCAOB members must now be subject to removal at will by the SEC.
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