What’s at Stake in the Sarbanes-Oxley Case

Yesterday, the U.S. Supreme Court agreed to hear a challenge to the constitutionality of the Public Corporation Accountability Oversight Board (PCAOB). That body, affectionately known as Peek-a-Boo, was created by the 2002 Sarbanes-Oxley Act to implement and administer a Byzantine accounting regime for all public corporations. To that end, PCAOB was granted expansive rulemaking powers, civil and criminal enforcement authority, and, for good measure, its own taxing authority. (PCAOB does not have its own air force.) Despite this awesome concentration of powers, PCAOB’s members are appointed, not by the president or even by a department head but rather by the Securities and Exchange Commission, another “independent” agency. The plaintiffs in the case insist that this arrangement violates the appointments clause of the U.S. Constitution. The federal Court of Appeals for the D.C. Circuit rejected that challenge in a 2-1 decision. The Supreme Court has now granted certiorari and will decide the case in its next term, beginning in October. A decision in the plaintiffs’ favor would kick PCAOB and Sarbanes-Oxley back into Congress, where anything could happen.scotus

To understand the salience of this case and its seemingly technical legal questions, two features of the litigation bear note.

One, the case presents a direct, dramatic confrontation between the political institutions’ government by free-form improvisation and the Supreme Court’s responsibility to protect the constitutional structure and order. PCAOB’s bizarre status is of one piece with a $700 billion blank check to the U.S. Treasury, financial “regulation” through seriatim deal-making, congressional rumblings about compelling state governors to accept stimulus funds, and other exotic, often “bipartisan” innovations that our so-called political process has come to throw up with alarming frequency. Somebody, soon, will have to cut back on this vegetation, and by the look of things, that somebody will have to be the U.S. Supreme Court.

Two, the case illustrates the tendency of even the most ill-conceived government schemes to gather, in very short order, political support from a broad coalition of the frightened. Behind closed doors, business leaders denounce PCAOB as a reign of terror and a menace to U.S. capital markets. No corporation, however, can or will do anything about it. The defense of good sense and constitutional order has thus been left in the capable hands of  free-market think tanks, notably the spunky Competitive Enterprise Institute, and a small team of lawyers at Jones, Day, headed by the one and only Michael Carvin. Their legal entrepreneurship merits a full-throated cheer and best wishes for success.

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