The U.S. Supreme Court upheld the overall constitutionality of the Sarbanes-Oxley Act on Monday, striking down only a narrow portion of the law and defusing what could have been a huge headache for Washington and Corporate America alike.

In its June 28 decision Free Enterprise Fund v. PCAOB, the Court said SOX will remain “fully operative as law,” with the exception of one change: The Securities and Exchange Commission now will be able to remove members of the Public Company Accounting Oversight Board at will. Previously the SEC could not, and conservative activists said that violated the appointments clause of the Constitution.

Their hope had been that the court would invalidate either large portions of SOX or the law in its entirety, since the original law lacks a “severability” clause—meaning that if one portion of SOX were struck down, in theory the rest of the law would go down with it.

Instead, however, the Supreme Court explicitly said its decision about the PCAOB is severable from the rest of SOX and that the PCAOB’s operations can continue as usual. Only the job security of its five board members has changed.

The ruling ends a three-year battle between the PCAOB and a small Nevada accounting firm, Beckstead and Watts, which sued the Board in 2006 with the help of the conservative activist group Free Enterprise Fund. The accounting firm (after being sanctioned by the PCAOB) contended that the Board was unconstitutional because the SEC, rather than the president, appoints its board members, which gives it too much regulatory power unchecked by the executive branch.

The Court met the plaintiffs halfway on that point, holding that the dual for-cause limitations on the removal of Board members violated the Constitution’s separation of powers principles. “The President cannot ‘take care that the laws be faithfully executed’ if he cannot oversee the faithfulness of the officers who execute them,” the Court said in its decision.



The U.S. Supreme Court today issued its decision in the constitutional lawsuit challenging the PCAOB, affirming in part and reversing in part the judgment of the Court of Appeals in favor of the PCAOB.

"We are pleased that the decision allows the PCAOB to continue without interruption to carry out its important mission of overseeing public company audits in order to protect investors and promote the public interest," said PCAOB Acting Chairman Daniel L. Goelzer.

The Supreme Court held that the Sarbanes-Oxley Act’s provisions making PCAOB Board members removable by the Securities and Exchange Commission (SEC) only for good cause were inconsistent with the Constitution’s separation of powers. Because the Court severed these provisions from the Act, however, no legislation is necessary to bring the Board’s structure within constitutional requirements. The consequence of the Court’s decision is that PCAOB Board members will be removable by the SEC at will, rather than only for good cause. All other aspects of the SEC’s oversight, the structure of the PCAOB and its programs are otherwise unaffected by the Court’s decision. Accordingly, all PCAOB programs will continue to operate as usual, including registration, inspection, enforcement, and standard-setting activities.

PCAOB Release on Free Enterprise Case (June 28, 2010)

The decision means that “the authority now resides with the president to appoint or fire PCAOB members as he sees fit,” says Pete Bible, a partner at the accounting firm Amper, Politziner & Mattia. “Prior to today’s decision, that was not the case.”


Susan Hackett, general counsel for the Association of Corporate Counsel, further says the decision is “important both in its content and in the manner in which the case was decided.” While the Court invalidated the PCAOB appointments process, it upheld the larger SOX legislation, “which it could have struck down in whole, given that they found a provision of the act unconstitutional,” she says.

“They inferred from Congressional intent and case precedent that they did not need to invalidate the entire act for the flaw in this relatively small provision,” Hackett adds. “We’re on the one hand assured of some level of continuity … but on the other hand, the court has succeeded in adding its voice and opinion on the difficult and contentious issue of whether and how the President, Congress, or regulators will have ultimate ability to control the direction of increasingly powerful institutions, such as the PCAOB, which are in charge of significant oversight of companies.”