On June 28, 2010, the United States Supreme Court issued a long-awaited decision concerning the validity of the Sarbanes-Oxley Act of 2002 (SOX). The decision largely left SOX undisturbed. However, the ruling in Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board potentially will have a significant impact on both administrative and securities law. The decision addressed two constitutional questions: (1) whether the provision of SOX creating the Public Company Accounting Oversight Board (PCAOB) violated the Constitution’s separation-of-powers provisions; and (2) whether the PCAOB violated the Constitution’s Appointments Clause.
The Court unanimously rejected the challenge under the Appointments Clause, but held, 5-4, that the for-cause limitations on the removal of PCAOB members contravened the Constitution’s separation-of-powers provisions. The Court found that PCAOB members, who are appointed by the Securities and Exchange Commission (SEC), were impermissibly insulated from presidential control by two layers of tenure protection: PCAOB members could only be removed by the SEC for cause, and the SEC commissioners could in turn only be removed by the President for cause. The Court severed the unconstitutional tenure provisions from SOX, but upheld the remainder of the statute.
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