The Right Coast

March 03, 2006
The (Un)Constitutionality of the Public Company Accounting Oversight Board
By Mike Rappaport

Recently, the Public Company Accounting Oversight Board, the entity created by Sarbanes-Oxley, to oversee the auditing of public companies, was challenged in court as violating the Appointments Clause and the separation of powers. I recently read the complaint in Free Enterprise Fund v. Public Company Accounting Oversight Board (Board) . In my view, there are two significant issues, both relating to the status of the members of the Board.

The complaint makes a strong case that the Board members exercise significant governmental functions, since they are involved in enforcement, rulemaking, and administration of an entity that exercises coercive powers. This means that the Board members are officers of the United States who must be appointed in accordance with the Appointments Clause.

There are two potential problems with the Board under this view. First, the Board members may not be inferior officers, but superior officers and therefore must be appointed by the President with the advice and consent of the Senate. Under the statute, however, they are appointed by the SEC. Whether the Board members are superior officers turns on how much independence they have from the SEC, and that is hard to determine from the complaint and even from the statutory provisions. The answer may turn on whether the courts are willing to interpret the statute to make it constitutional by giving the SEC more power to supervise the Board.

Second, even if the Board members are inferior officers, they still might be unconstitutionally appointed. The Appointments Clause allows inferior officers to be appointed by the “head of a department.” Agencies that are run by multimember commissions, such as the SEC, raise questions under this provision. Generally, the chairs of these commissions appoint officers at the agency and therefore the chair is the head of the department. If the Chair of the SEC makes the appointment of other officers at the SEC (something I am not sure about), then he would be the head of the department; the entire SEC could not then be the head of the department for purposes of appointing the Accounting Oversight Board. Put differently, either the portion of the SEC statute allowing the Chair to make appointments of other officers or the portion allowing the SEC to appoint the Board would be unconstitutional.