Supreme Court issues limited ruling against Sarbanes-Oxley board

The Supreme Court on Monday ruled that the 2002 Sarbanes-Oxley Act gave too much independence to a new accounting oversight board, but it left the underlying law largely intact.

In a 5-4 decision, the justices found that the Public Company Accounting Oversight Board (PCAOB), created as part of the law to regulate the accounting industry, violated the separation of powers by limiting the president’s power to oust its members. Yet the high court kept its decision narrow, saying the board could remain in place as long as the rules governing the appointment and removal of its members were changed.

The Sarbanes-Oxley law was enacted as a response to the corporate accounting scandals involving Enron, WorldCom and other companies that roiled the financial-services industry. The anti-fraud reform was named for its chief authors, former Sen. Paul Sarbanes (D-Md.) and ex-Rep. Michael Oxley (R-Ohio).

The justices on Monday also expanded on their landmark 2008 decision on gun rights, ruling that the individual right to bear arms that they recognized in the Heller case also extended to state and local laws. The 5-4 decision, made in connection with a challenge to a handgun ban in Chicago, could have a far-reaching impact by encouraging court challenges to an array of municipal gun-control laws.

The end-of-term rulings on Monday marked the final day on the bench for Justice John Paul Stevens, who is retiring after 35 years. The Senate confirmation hearings for the nominee to replace him, Elena Kagan, also began Monday. 

In the Sarbanes-Oxley case, the Supreme Court ruled that Congress essentially overreached when it tried to craft a regulatory agency with enough independence to shield it from political influence. As devised in the Sarbanes-Oxley law, the accounting oversight board was housed within the Securities and Exchange Commission, itself an independent agency. The SEC oversaw the PCAOB and appointed its members, but it could remove them only “for good cause.”

The justices ruled that this configuration left the board insufficiently accountable to the people because the president was so far removed from the appointment process.

“The buck stops with the president, in Harry Truman’s famous phrase,” Chief Justice John Roberts wrote in the majority opinion. Citing an earlier court opinion, he continued, the president “must have some ‘power of removing those for whom he cannot continue to be responsible.’ ”

Explaining the court’s objection to the board, Roberts wrote: “Neither the president, nor anyone directly responsible to him, nor even an officer whose conduct he may review only for good cause, has full control over the board. The president is stripped of the power our precedents have preserved, and his ability to execute the laws — by holding his subordinates accountable for their conduct — is impaired. 

“The president can always choose to restrain himself in his dealings with subordinates. He cannot, however, choose to bind his successors by diminishing their powers, nor can he escape responsibility for his choices by pretending that they are not his own.”

Roberts later added that Congress could not “reduce the chief magistrate to the cajoler in chief.”

The decision split the court along traditional lines, with the five conservatives in the majority and the four members of the court’s liberal wing dissenting.

Writing in dissent, Justice Stephen Breyer warned that he could see “no way to avoid sweeping hundreds, perhaps thousands of high-level government officials within the scope of the court’s holding, putting their job security and their administrative actions and decisions constitutionally at risk.”

The narrow finding is a blow to the petitioners, the accounting firm Beckstead and Watts and the Competitive Enterprise Institute (CEI), who wanted the justices to invalidate the PCAOB entirely, a move that would leave the broader law in doubt.

“The existence of the board does not violate the separation of powers, but the substantive removal restrictions … do,” the court ruled. “The Sarbanes-Oxley Act remains ‘fully operative as a law’ with these tenure restrictions excised.” 

Both sides in the case seized on the narrow ruling to declare victory. Attorneys for CEI said in a statement they had beaten “the proverbial Goliath.”

While acknowledging “there’s some disappointment” that the court did not invalidate the oversight board, CEI attorney Sam Kazman said in an interview that the limited finding against the Sarbanes-Oxley law “is a win, and it’s an important win.”

He said the ruling could open the door for more challenges to the oversight board’s authority. Industry officials have long complained that the auditing requirements in Sarbanes-Oxley are onerous and carry steep compliance costs that penalize smaller public firms. They are seeking changes to the law in the financial reform bill nearing final passage in Congress.

The Obama administration had defended the law before the court, putting it in the unusual position of protecting a provision limiting presidential authority. 

SEC Chairwoman Mary Schapiro applauded the decision. “I am pleased that the court has determined that the board’s operations may continue and the Sarbanes-Oxley Act, with the board’s tenure restrictions excised, remains fully in effect,” Schapiro said in a statement. “The PCAOB is a cornerstone of the Sarbanes-Oxley Act and serves a critical role in promoting investor protection and audit quality.”

In the ruling, the court specified a fix to the law: The SEC will now be able to remove members of the accounting oversight board “at will,” instead of “for good cause” only. As a result, the board said in a statement reacting to the decision, “no legislation is required to bring the board’s structure within constitutional requirements.”