A MODEST PROPOSAL ABOLISHING AGENCY INDEPENDENCE IN FREE ENTERPRISE FUND V PCAOB Neomi Rao George Mason University School of Law Fordham Law Review Forthcoming George Mason University Law and Economics Research Paper Series 11 19 101 A MODEST PROPOSAL ABOLISHING AGENCY INDEPENDENCE IN FREE ENTERPRISE FUND V PCAOB Neomi Rao Free Enterprise Fund v Public Company Accounting Oversight Board1 outlines a modest proposal for abolishing agency independence The U S Supreme Court s decision creates a framework for challenging the constitutionality of agency independence and the restrictions on removal that shield the heads of independent agencies from presidential oversight In the course of assessing the constitutionality of the Public Company Accounting Oversight Board PCAOB or Board the Court provides the reasoning for undermining most forms of agency independence Yet the potential scope of the decision has gone largely unnoticed Most commentators have pronounced the decision insignificant for presidential authority This Article questions the conventional interpretation and demonstrates that the structure of the Court s argument which focuses on the importance of presidential control and accountability through the removal power logically calls into question the constitutionality of agency independence Moreover the Court s remedy of severing invalid for cause removal limits provides a workable approach for future cases eliminating agency independence without eliminating the independent agencies Free Enterprise Fund raises a question of first impression may executive branch officers such as members of the PCAOB be insulated from the President s oversight and removal power by two layers of tenure protection The PCAOB was created by the Sarbanes Oxley Act of 2002 the Act 2 in response to a number of high profile corporate and accounting scandals The Act gives the Board wide ranging authority over accounting firms that audit publicly held companies 3 Under the Act Commissioners of the Securities and Exchange Commission Commission or SEC appoint members of the Board and Board members can be removed by Assistant Professor of Law George Mason University School of Law For their helpful comments I thank Jonathan Adler Ross Davies Gary Lawson John Manning Gillian Metzger Aaron Saiger Peter Strauss Robert Vaughn Stephen Vladeck Todd Zywicki and participants at the Fordham Law School Symposium on Presidential Influence over Administrative Action and the Judges and Judging Workshop at American University Washington College of Law 1 130 S Ct 3138 2010 2 Pub L No 107 204 116 Stat 745 3 15 U S C 7211 7215 2006 outlining the responsibilities of the Board 102 FORDHAM LAW REVIEW Vol 79 Commissioners only for good cause shown 4 The Commissioners in turn can be removed by the President only for inefficiency neglect of duty or malfeasance in office creating the double for cause removal protection over the Board The Court holds this double layer contravenes separation of powers because the President cannot take Care that the Laws be faithfully executed if he cannot oversee the faithfulness of the officers who execute them 5 The Court emphasizes that the Board enjoys an unusual double layer of for cause removal protection and purports to limit the scope of its decision to this arrangement 6 Nonetheless in the course of reaching its conclusion the Court articulates a series of principles a sort of proof for the unconstitutionality of agency independence Writing for the 5 4 majority Chief Justice John Roberts calls the question presented a modest one that does not challenge for cause limitations in general 7 Yet the Chief Justice answers the modest question with ambitious constitutional principles that logically challenge most for cause removal restrictions The Court s reasoning strongly suggests that statutory limits on the President s removal power such as those protecting the officers of the independent agencies are unconstitutional The Court articulates three fundamental principles that lead to its conclusion that the Act s for cause removal provisions are unconstitutional First the Court establishes that the President must oversee the work of the executive branch This premise stems from separation of powers the vesting of the executive power in the President and the singular responsibility of the President to the people for the faithful execution of the laws 8 Second the Court argues that presidential oversight requires the capacity to remove subordinate officers The President cannot fully oversee subordinate officers if he cannot remove them from office when they fail to faithfully execute the law For the President to be held accountable for the work of the executive branch he must be able to hold his subordinates accountable by removal if necessary Other methods of control cannot substitute for the removal power 9 Third a statute cannot diminish or modify the President s removal power because removal provides a key constitutional means for the President to resist legislative encroachments and ensure adequate control over the executive branch 10 QED From these general principles the Court concludes that the Board s two layers of for cause removal protection are unconstitutional As a remedy however the Court does not enjoin the operations of the Board 4 Id 7211 e 6 see also id 7217 d 3 5 Free Enter Fund 130 S Ct at 3147 quoting U S CONST art II 6 Id at 3147 7 Id at 3157 8 Id at 3151 57 See infra Part II A 9 Free Enter Fund 130 S Ct at 3158 59 See infra Part II B 10 Free Enter Fund 130 S Ct at 3154 n 4 See infra Part II C 2011 ABOLISHING AGENCY INDEPENDENCE 103 Instead it severs the for cause removal protections that insulate the Board from the Commission 11 As a result of the Court s decision the Board can proceed with its statutory functions but with the possibility of at will removal by the SEC The SEC Commissioners however can be removed by the President only for cause as the parties to the case stipulated The Court decides the case with this understanding and does not reexamine the precedents upholding single layer restrictions on the President s removal power 12 Therefore the Court leaves Board members subject to removal by the SEC an independent agency The President s control over the Board only marginally increases which leads a number of commentators to call the case symbolic an insignificant win for proponents of the unitary executive theory 13 Yet the Court s reasoning proves both too much and too little for the case at hand which deals with the relatively unusual circumstance of two levels of for cause protections insulating the Board The broad principles about presidential control over the executive branch go too far for the Court s ultimate conclusion that the SEC an independent agency operating without full presidential control may provide constitutionally adequate oversight for the Board The disconnect between the reasoning and the remedy implicitly raises the question if two levels are unconstitutional why not one The Court s only answer to this is that the Court not the Constitution has previously allowed limitations on the President s removal power Since 1789 the Constitution has been understood to empower the President to keep executive officers accountable by removing them from office if necessary This Court has determined however that this authority is not without limit 14 The Court s precedents such as Humphrey s Executor v United States15 and subsequent cases sustained statutory limits on the President s removal power Although these precedents are not challenged in this case the Court makes clear that there may be a gap between the Court s precedents and the Constitution The Court s reasoning fails to explain how two layers of removal protection differ from one This tension in the Court s opinion sets the foundation for a wider assault on agency independence The proof applies logically to the more ordinary first layer of agency independence First the President must oversee 11 Free Enter Fund 130 S Ct at 3161 62 12 Id at 3147 The parties do not ask us to reexamine any of these precedents and we do not do so 13 See e g Rick Pildes The Unitary Executive Administrative Agencies and the Supreme Court BALKINIZATION May 18 2009 10 36 AM see infra notes 51 53 and accompanying text 14 Free Enter Fund 130 S Ct at 3146 emphasis added citing Humphrey s Executor 295 U S 602 620 1935 Myers v United States 272 U S 52 1926 15 295 U S at 628 30 upholding the constitutionality of statutory limitations on the President s removal power with regard to the Commissioners of the Federal Trade Commission 104 FORDHAM LAW REVIEW Vol 79 executive branch officials Second oversight requires the ability to remove such officials Third the President s removal power cannot be diminished or modified by statute QED The first layer of agency independence is unconstitutional because it insulates the heads of independent agencies from the President s removal power and consequently contravenes the constitutional structure that vests the executive power and accountability for the executive branch in the President The Court s logic can lead to the conclusion that even one layer of for cause removal protection is unconstitutional The proof can be applied beyond the narrow question presented here to the wider battle over agency independence Furthermore the Court s severance remedy increases the possibility that the decision may have a further reach because it separates independence from the independent agencies The Court severs the Board s for cause removal protections which leaves the Board intact but subject to removal by the SEC As the Court explains T he existence of the Board does not violate the separation of powers but the substantive removal restrictions imposed by the statute do 16 Similarly severing one layer of agency independence would make the officers of an independent agency subject to at will removal by the President but it would not otherwise alter the statutory responsibilities of the agency Congress might wish to restructure agencies that lose their independence but the judicial remedy would be relatively narrow it would bring agencies under presidential control but not abolish them altogether Both the proof and remedy proposed by the Court resolve the narrow question about the PCAOB but they gesture toward more The Court has made a modest proposal for abolishing agency independence The Chief Justice s opinion in time may be viewed like Marbury v Madison 17 reaching a narrow result on the immediate controversy at issue the Board continues largely as before while staking out ground for a judicial incursion against agency independence As in Marbury the Chief Justice could have gone a number of different directions but the decision reaches a result that minimizes political opposition while leaving open the possibility for more significant impact in future decisions To see this case as inconsequential is to miss the forest for the trees This Article focuses on the possible implications of Free Enterprise Fund for the constitutionality of agency independence 18 The Article first explains the background of the PCAOB case the Supreme Court s decision and responses to the case 19 Next it sets out the Court s proof for why the 16 Id at 3161 17 5 U S 1 Cranch 137 1803 18 This Article does not take up the broader questions about the appropriate scope of the removal power which are discussed in greater detail by other scholars See generally Steven G Calabresi Lawrence Lessig Geoffrey P Miller Independent Agencies 1986 SUP CT REV 41 42 43 Saikrishna Prakash New Light on the Decision of 1789 91 CORNELL L REV 1021 1022 23 2006 19 See infra Part I 2011 ABOLISHING AGENCY INDEPENDENCE 105 Board is unconstitutional and examines how the Court s focus on formal structural principles applies beyond the facts of this case 20 Then the Article explains how the Court s proof its emphasis on the importance of presidential control and accountability calls into question the constitutionality of agency independence more generally 21 Finally it presents evidence that the Court may be receptive to reconsidering its earlier precedents and suggests some implications for future challenges to the constitutionality of agency independence I BACKGROUND OF FREE ENTERPRISE FUND V PCAOB AND REACTIONS TO THE DECISION A Summary of the Case As part of accounting and financial services reforms in the Sarbanes Oxley Act Congress created the PCAOB to standardize and regulate the auditing of public companies Accounting firms that audit publicly traded companies must register with the Board22 and must comply with auditing and other standards issued by the Board 23 The Board must regularly inspect registered accounting firms and has authority to conduct investigations of any action or practice that may violate the Act the securities laws the Board s rules or the SEC s rules 24 The Board was modeled on private self regulatory organizations such as the New York Stock Exchange but u nlike the self regulatory organizations the Board is a Government created Government appointed entity with expansive powers to govern an entire industry 25 The Commission appoints the five members of the Board and oversees their issuance of rules and imposition of sanctions 26 The Commission can remove Board members only for good cause shown and in accordance with certain procedures 27 The standard for removal is unusually high as the Court observed 28 In order to remove a Board member the Commission must make a finding on the record after notice and opportunity for a hearing that 1 the Board member willfully violated the Act the rules of the Board or the securities laws 2 willfully abused his authority or 3 failed to enforce compliance by an accounting firm of relevant statutory provisions or professional standards 29 Beckstead and Watts LLP a Nevada accounting firm registered with the Board After the Board released a report critical of the firm s auditing 20 See infra Part II 21 See infra Part III 22 15 U S C 7212 a 2006 23 Id 7213 a 1 24 Id 7214 7215 25 Free Enter Fund v Pub Co Accounting Oversight Bd 130 S Ct 3138 3147 2010 26 15 U S C 7211 e 1 7217 b c 27 Id 7211 e 6 28 Free Enter Fund 130 S Ct at 3158 29 15 U S C 7217 d 3 106 FORDHAM LAW REVIEW Vol 79 procedures the firm along with Free Enterprise Fund a nonprofit organization sued the Board and challenged its constitutionality The two organizations petitioners argued that the Act was unconstitutional because it violated the Appointments Clause and separation of powers principles The parties stipulated that the SEC Commissioners could be removed from office only under the Humphrey s Executor standard of inefficiency neglect of duty or malfeasance in office 30 The Court emphasized that it decides the case with that understanding 31 Moreover none of the parties asked the Court to reexamine Humphrey s Executor or the constitutionality of the SEC s independence 32 Accordingly the central question in the case was whether the for cause limitation on the removal of Board members by the Commission was constitutional In particular petitioners argued that the Act violated separation of powers by insulating the PCAOB from presidential oversight control and supervision 33 Moreover petitioners contended that the Act violated the Appointments Clause because Board members are principal officers who must be appointed by the President with the Advice and Consent of the Senate 34 Even if the Board members were treated as inferior officers Article II requires their appointment be vested in the Head of a Department not by the majority of Commissioners 35 Petitioners argued that independent agencies are not Departments and that the Head of the SEC is its Chairman 36 As a remedy they sought a declaratory judgment that the Board is unconstitutional and an injunction enjoining further operations of the Board The district court rejected these arguments on the merits and held that the Act was constitutional 37 The U S Court of Appeals for the District of Columbia affirmed 38 with Judge Brett Kavanaugh dissenting 39 In a 5 4 decision the Supreme Court reversed in part the Court of Appeals and held that the dual for cause limitations on the removal of Board members contravened the Constitution s separation of powers 40 Writing for the majority Chief Justice Roberts focused on the issue of first impression presented by the particular structure of the Board in which its 30 Free Enter Fund 130 S Ct at 3148 49 For an interesting discussion of this aspect of the case see Gary Lawson Stipulating the Law 109 MICH L REV forthcoming available at arguing contrary to standard American practice that parties should be able to stipulate legal conclusions 31 Free Enter Fund 130 S Ct at 3149 32 Id at 3147 The parties do not ask us to reexamine any of these precedents and we do not do so 33 Brief for Petitioners at 7 8 Free Enter Fund v Pub Co Accounting Oversight Bd 130 S Ct 3138 2010 No 08 861 2009 WL 2247130 at 7 8 34 Id 35 Id at 8 36 Id 37 Free Enter Fund v Pub Co Accounting Oversight Bd No 06 0217 2007 WL 891675 at 4 6 D D C Mar 21 2007 38 Free Enter Fund v Pub Co Accounting Oversight Bd 537 F 3d 667 715 D C Cir 2008 39 Id at 685 Kavanaugh J dissenting 40 Free Enter Fund v Pub Co Accounting Oversight Bd 130 S Ct 3138 3151 2010 2011 ABOLISHING AGENCY INDEPENDENCE 107 members are protected by two levels of for cause removal In the Court s precedents only one level of protected tenure separated the President from an officer exercising executive power It was the President or a subordinate he could remove at will who decided whether the officer s conduct merited removal under the good cause standard 41 As the Court explained Board members may be removed only for good cause and the determination over whether good cause exists is vested with the SEC Commissioners who may only be removed for cause The result is a Board that is not accountable to th
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