On a day when the Supreme Court’s very important gun rights ruling in McDonald v Chicago is getting a lot of ink, many will overlook another interesting ruling and a quasi-victory for the free-market Free Enterprise Fund: In the case of Free Enterprise Fund v. Public Company Accounting Oversight Board, the Court ruled by its lately-usual 5-4 majority that the PCOAB as created by the Sarbanes-Oxley Act is unconstitutional because the way the law limits the ability for the president or the Security and Exchange Commission to fire Board members “contravene(s) the Constitution’s separation of powers.”
A Wall Street Journal article last year discusses the issue as well as the broader destructive impact of Sarb-Ox and notes that “A glimmer of hope lies in the fact that Sarbox, drafted in the political panic following the Enron and Worldcom accounting scandals, failed to include a ‘severability clause.’ Thus if PCAOB is struck down as unconstitutional, all of Sarbanes-Oxley could come crashing down with it.”
Unfortunately, despite the law having been written without the severability clause (which allows a law to stand even if some part is found to be unconstitutional), the Court specifically addressed the issue in a way that likely means that Sarb-Ox and the PCOAB will not be destroyed, as they should be:
The unconstitutional tenure provisions are severable from the remainder of the statute. Because “[t]he unconstitutionality of a part of an Act does not necessarily defeat or affect the validity of its remaining provisions”… the “normal rule” is “that partial… invalidation is the required course.” The Board’s existence does not violate the separation of powers, but the substantive removal restrictions imposed by §§7211(e)(6) and 7217(d)(3) do. Concluding that the removal restrictions here are invalid leaves the Board removable by the Commission at will. With the tenure restrictions excised, the Act remains “‘fully operative as a law,'” and nothing in the Act’s text or historical context makes it “evident” that Congress would have preferred no Board at all to a Board whose members are removable at will. The consequence is that the Board may continue to function as before, but its members may be removed at will by the Commission.
So while the Free Enterprise Fund won the technical point, the Court unfortunately created a narrowly-tailored remedy that does not have the plaintiffs’ desired impact, the negation of the Sarbanes-Oxley (“punish companies so that politicians look like they’re doing something”) Act.