PCAOB Survives Constitutional Challenge Despite Supreme Court Holding that Congress Unconstitutionally Limited Removal of Board Members

On June 28, 2010, the United States Supreme Court held in Free Enterprise Fund  v. Public Company Accounting Oversight Board that Congress overstepped constitutional limits by granting the Public Company Accounting Oversight Board ("PCAOB") expansive powers to govern without the ability of the Executive branch to hold the Board accountable. The Court, however, left the PCAOB intact, did not curtail any of its power or functions, and did not strike down the Sarbanes-Oxley Act of 2002 that created the Board. In a 5-4 majority opinion authored by Chief Justice Roberts, the Court held that the existence of the Board does not violate the separation of powers doctrine, but that the provisions governing removal of Board members do. 

Prior to the ruling, the Securities and Exchange Commission could not remove a Board member at will, but could remove a Board member only "for good cause shown" after a formal hearing and SEC order subject to judicial review. Because the President can remove SEC Commissioners only "for cause," the Court concluded that the Executive branch lacked the ability to hold the Board members fully accountable, thereby effectively relegating the President to a "cajoler in chief" with respect to the Board. To remedy this constitutional defect, the Court invalidated the provisions of the law restricting removal of Board members while leaving intact the remainder of the SOX regulatory framework, including the other provisions relating to Board operations and oversight. With that result, the "Board may continue to function as before, but its members may be removed at will by the SEC." The holding does not address implications for, and thus there are open questions relating to, prior actions of the Board, which may be questioned by individuals who have been the subject of PCAOB enforcement actions.

In dissent, Justice Breyer noted that hundreds of other high-ranking federal positions could similarly be held unconstitutional under the majority's reasoning. The majority stated that there was no reason to address whether those positions were structured in a way that would unconstitutionally infringe on Executive powers.