DC Circuit Upholds Constitutionality of SEC Audit Panel

Holding:

In a 2-1 ruling, the U.S. Court of Appeals for the District of Columbia Circuit ("DC Circuit") upheld the constitutionality of Title I of the Sarbanes-Oxley Act of 2002 ("Act") creating the Public Company Accounting Oversight Board ("Board"). The Board's function is to oversee auditors, while its five members are appointed by the Securities and Exchange Commission ("SEC"). Appellants Free Enterprise Fund ("Fund") and Beckstead and Watts, LLP had earlier challenged the creation of the Board, alleging violation of the Appointments Clause, separation powers and non-delegation principles of the U.S. Constitution. The U.S. District Court for the District of Columbia dismissed the Fund's suit. On appeal, the DC Circuit affirmed the grant of summary judgment to the Board. The DC Circuit specifically held, first, that the Act does not encroach upon the Appointment power. Second, the DC Circuit held that the for-cause limitations on the SEC’s power to remove Board members and the President’s power to remove SEC Commissioners do not strip the President of sufficient power to influence the Board and thus do not contravene separation of powers. In his lone dissent, Judge Brett Kavanaugh wrote that the Board's structure unconstitutionally restricts the U.S. President's appointment and removal powers.

Detailed Summary:

Congress enacted the Act, 15 U.S.C. §§ 7201 et seq., following the Enron and Worldcom accounting scandals that exposed serious weaknesses in industry self-regulatory reporting requirements for certain publicly held companies. Opinion, p. 4.

Title I of the Act establishes the Board “to oversee the audit of public companies that are subject to the securities laws . . . in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports.” Id., citing 15 U.S.C. § 7211(a). The five members of the Board are appointed by the SEC after consultation…

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