Corporate Governance

The Supreme Court and the PCAOB (Oral Argument): The Elephant in the Room (Part 3)

By J. Robert Brown

We have noted on this Blog that the source of the  "for cause" limits on the removal of SEC commissioners is at best unclear.  Unlike the FTC, the enabling statute is silent.  The parties largely assumed away the issue for purpose of the appeal.  Yet the issue may not be so easily resolved. 

The restrictions on the President's ability to remove SEC commissioners is a core component to Petitioner's argument.  If the President had broad authority to remove SEC commissioners, he/she could effectively control the actions of the PCAOB through this authority.  Moreover, its not enough to contend that the SEC commissioners can only be removed for cause.  The definition of "for cause" must be narrow enough to deprive the President of the ability to remove commissioners when he/she thinks they have not acted with sufficient alacrity with respect to PCABO behavior.

In other words, the argument for unconstitutionality is fundamentally premised on the President's inability to remove except for cause and a narrow reading of the circumstances when cause can be found.  The issue came up often in oral argument.  Perhaps the clearest example occurred in connection with a colloquy between Justice Kennedy and Solicitor General Kagan:

• JUSTICE KENNEDY: I want to ask -- I want to ask one thing: You want us to imply or find -- or you want us to infer from the statute that there's a power in the President to remove SEC commissioners for cause? You want us to find that that is implied in the statute?

• GENERAL KAGAN: Justice Kennedy, the conventional understanding, really, ever -- ever since Humphrey's Executor, is that SEC commissioners are subject to a for-cause removal provision. And the --

• JUSTICE KENNEDY: All right. What is --what is the authority for us to find that there is an implication in the statute to remove just for cause? There is -- wouldn't that be unique in our precedents?

• GENERAL KAGAN: I think that, if I understand the question correctly, I think that the --the implication about --

• JUSTICE KENNEDY: I mean, if there is a removal power implied, why isn't it removal for all purposes -- why can it be limited to just for cause? What authority do we have to do that?

• GENERAL KAGAN: Well, I think that the understanding about the SEC commissioners is that the SEC commissioners were, essentially, the same as the FTC commissioners, which, under -- which, under Humphrey's, were removable only for cause, and as I believe --

• JUSTICE SOTOMAYOR: But that's because the

• GENERAL KAGAN: Yes, but -- you are exactly right, and it's a -- it's a perplexity of this law, but for many, many decades, everybody has assumed that the SEC commissioners are subject to the same for-cause removal provision, and the government has not contested that in this case, nor has Mr. Carvin.?

Those favoring the PCAOB need not resolve the issue.  They can assume a for cause removal restriction and a narrow interpretation of the phrase yet conclude that the PCAOB is constitutional. 

Those wanting to strike down the PCAOB, however, have no such luxury.  Assuming predicate interpretations of a statute (that for cause was the appropriate standard and that it was a narrow interpretation) that may or may not ultimately be accurate is not a sound basis for striking down the PCAOB. 

It seems, therefore, that the opponents will have to resolve these issues.  Yet they were not briefed.  They will require an exegesis into statutory authority at the time of the adoption of the Exchange Act.  It seems unlikely that a majority on the Court will resolve these issues, suggesting that there will not be a majority on the Court to strike down the PCAOB. 

The transcript, briefs, and other primary materials can be found at the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on December 17, 2009 (boomark / email).