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The Unitary Executive, Administrative Agencies, and The Supreme Court

By Jack M. Balkin

The Supreme Court granted cert. today in a case, Free Enterprise Fund v. PCAOB, that is the most important challenge in two decades in the ongoing debate between those who believe in the ?unitary executive branch? theory of Art. II of the Constitution and those who endorse the constitutional validity of independent agencies. The case involves a separation of powers challenge to the administrative structure Congress created in the Sarbanes-Oxley Act (SOX), in the wake of the Enron, Worldcomm, and similar corporate scandals of the late 1990s and early 2000s. Because it involves the structure of financial regulation, the case could well have a bearing on the options Congress has when it decides what new structures of financial regulation are appropriate in the wake of the current financial crisis. The case had already attracted a good deal of attention earlier, see http://volokh.com/posts/1219426233.shtml and http://www.theconglomerate.org, and now that the Court has decided to hear it, I thought it would be worth providing some perspective here. I am counsel to seven former Chairmen of the SEC, appointed by Presidents of both parties, who filed amicus briefs in the lower courts to support the constitutionality of the Sarbanes-Oxley Act.

Given that the en banc DC Circuit divided 5-4 on the case, it is perhaps not surprising that the Supreme Court agreed to hear it. Nonetheless, I believe once the Court digs deeply into the case, it will turn out that there is actually less here than meets the eye. As long as independent agencies themselves remain constitutional, as they have been since at least the New Deal, the structure Congress created to enforce SOX should be constitutional as well. Put another way, unless the Court is prepared to hold independent agencies unconstitutional ? a position that would not only require overruling precedents going back 70 years, but would require concluding that long-standing agencies such as the Federal Reserve Board, the SEC, the FTC, and all other independent agencies are unconstitutional ? the separation of powers challenge in Free Enterprise Fund is likely to fail.

Congress created a new agency, the Public Company Accounting Oversight Board (PCAOB), under the SEC?s control, to enforce SOX. The Board has the power to propose regulations for the accounting industry in the United States, and to propose orders and sanctions for firms that violate those regulations. The SEC appoints Board members and can remove them for cause. The crucial fact in the statutory structure is that the Board operates under the pervasive control and authority of the SEC itself. No proposed rule or order of the Board has any legal effect unless and until the SEC approves it. The SEC can take over any function of the Board at any time, and the SEC has the power to control every aspect of the Board, including its budget. If all the powers of the Board had been given directly to the SEC, there would be no constitutional challenge.

There are two main challenges to the way Congress designed the relationship of the Board to the SEC. The first is that Board members are ?principal officers? (rather than ?inferior? ones), as the Constitution understands those terms. If Board members are principal officers, there is no question this structure is unconstitutional. Art. II of the Constitution requires Presidential nomination and Senate confirmation of principal officers. The Court has not fully elaborated the line between principal and inferior officers, but under any approach, it is hard to see how Board members could be principal officers. The Board is subordinate to the pervasive control and authority of the SEC itself. Nothing the Board does can have legal effect unless the SEC approves it. And the SEC can take over the Board?s functions, should the SEC so decide. Unlike agencies that can adopt rules or issue orders on their own authority, the Board is subservient to its master, the SEC. Indeed, the Board could not even defend its own constitutionality in this case without the approval of the SEC. In my view, this makes Board members inferior officers.

The second challenge focuses on the fact that the SEC cannot remove Board members from office except for good cause. Even if Board members are inferior officers, this constraint on the SEC?s removal power makes the Board, in this challenge, unconstitutional. This is the more interesting challenge, in my view, because this kind of constraint on the removal of an inferior officer is uncommon. But both factually and constitutionally, this provision should not make the Board unconstitutional. Factually, the nature of the SEC?s removal power does not seem particularly important or meaningful in the context of all the other pervasive powers and control the SEC has over the Board. If the SEC had no way to control the Board other than through the removal power, this provision might be of practical significance. But since the SEC can take over Board functions, refuse to approve Board proposed rules, can control the Board?s budget, and the like, the SEC has extraordinary powers to exercise effective control over the Board ? with or without the power to remove Board members at pleasure or only for good cause.

Even apart from this factual point, the legal theory underlying this challenge is difficult to grasp. The theory of this challenge is either that the SEC has to have more power over the Board ? the power to remove for any reason ? or the President has to have the power to remove Board members. I don?t understand the claim really to involve the second theory. If that were the claim, it would be tantamount to the view that the President has to have the power to remove directly, for any reason, all the inferior officers in the government. But the Court rejected that theory way back in the 19th century and that is far from the reality on which government has been structured. Yet if the supposed problem here is that the SEC does not have enough control over the Board, note how odd that is: supposedly, in order to protect the President?s Art. II powers, an independent agency, like the SEC, has to have more power to remove officers who work for it. As a means of protecting the President?s Art. II powers, that seems an exceedingly strange view ? especially in a context in which the SEC already, in any event, does have pervasive power over the Board.

Long ago, Justice Scalia ? who believes independent agencies are indeed unconstitutional ? argued that, nonetheless, because the Court has accepted these agencies, it should accept the logical implications of their existence. That, it seems to me, is the principal that should control the separation of powers challenge to SOX. Because the SEC itself is constitutional, Congress can create an entity, structured like the PCAOB, that functions under the pervasive control and legal authority of the SEC itself. In the aftermath of the current economic crisis, Congress might want to create similar entities that serve under the Federal Reserve Board, or the SEC, or other independent agencies. If those entities are inferior to the Federal Reserve or the SEC, and subject to their pervasive legal control and authority, Congress ought to have the power to make that choice in how to design the institutions of financial regulation. Whether the Court agrees we shall learn next Term.

Full post as published by Balkinization on May 18, 2009 (boomark / email).