Sarbanes-Oxley struck down? Not even close.

by Roger Parloff, legal analyst


FORTUNE -- Though headline writers may want to obscure this fact, the impact of today's U.S. Supreme Court ruling striking down a portion of the Sarbanes-Oxley Act of 2002 is easy to summarize: Zilch.

Yes, the case may be of enormous significance to constitutional scholars, but for businesspeople, the crux of the decision is buried on page 28: "The Sarbanes-Oxley Act remains fully operative as a law," except as to certain arcane tenure provisions relating to members of the Public Company Accounting Oversight Board (PCAOB).

"I don't think the ruling will seriously impact the board's future efforts," acknowledges Mike Carvin, an attorney at Jones Day who represented the plaintiff Free Enterprise Fund, a limited-government advocacy group that brought the case along with a small Nevada-based accounting firm.

Congress set up the PCAOB in the wake of the accounting scandals that brought down Enron and WorldCom, when it decided that the accounting profession could no longer be trusted to police itself. After today's ruling, auditors of public companies will still have to register with PCAOB -- better known as Peek-a-Boo -- and will still have to meet the various auditor independence and conflict-of-interest requirements imposed by SOX; public companies will still be subject to the Act's heightened disclosure requirements; CEOs and CFOs will still have take personal responsibility for the accuracy of financial reports, on pain of criminal sanctions; and on and on it goes.

Long story short, though the conservative wing of the Court, by a 5-4 margin, thought that there was a constitutional flaw in the way PCAOB was set up, it decided that the tainted provisions were "severable" from the rest of the law. As a consequence, the rest of it remains in full force.

The ruling was based on separation of power principles and, specifically, the appointments clause of the Constitution (Article II, Section II, Clause 2). Under that provision, the President alone can appoint certain key federal officers (with the advice and consent of the Senate), while certain "inferior" officers can be appointed in several other ways, including by those key federal officers who are themselves appointed by the President.

Presidential firing powers

And presidential power hinges not just on the right to appoint officers, but also on the ability to fire them. The President cannot "take Care that the Laws be faithfully executed" if he cannot oversee the faithfulness of the officers who execute them," Chief Justice John Roberts wrote in today's ruling. He was joined by Justices Samuel Alito, Anthony Kennedy, Antonin Scalia, and Clarence Thomas. (Justice Stephen Breyer dissented, joined by Justices Ruth Bader Ginsburg, Sonia Sotomayor, and John Paul Stevens.)

The issue here was whether the President had sufficient power to get rid of a PCAOB board member if he wanted to.

Previous rulings of the Supreme Court had established that Congress can place some limits on a president's power to remove his own appointees. For instance, in 1935 the Court decided that even though members of the Federal Trade Commission had to be appointed by the President, it was permissible for Congress, in an effort to give that agency some political independence, to provide that members could be removed by him only "for cause," rather than at will.

The PCAOB board posed a slightly different question. Its members were appointed by the Securities and Exchange Commission, not by the President, and they could be fired by the SEC only "for cause." While the SEC commissioners themselves are Presidential appointees, they, too, can only be removed by the President "for cause."

The conservative wing of the court ruled that this double layer of for-cause limitations went too far, violating the Constitution. According to Chief Justice Roberts, "It not only protects Board members from removal except for good cause, but withdraws from the President any decision on whether that good cause exists. That decision is vested instead in other tenured officers -- the Commissioners -- none of whom is subject to the President's direct control. The result is a Board that is not accountable to the President, and a President who is not responsible for the Board."

Roberts expressed concern that Congress might, in the future, try to stack even more layers of "for-cause" insulation between the President and federal officials. "The officers of such an agency -- safely encased within a Matryoshka doll of tenure protections -- would be immune from Presidential oversight, even as they exercised power in the people's name."

Still, rather than strike down the whole Sarbanes-Oxley law -- as the parties and many libertarian, pro-business, or anti-government "friends of the court" had begged them to -- the majority decided to fix the perceived problem by tweaking the law in a very minor way. From now on, the SEC will be entitled to remove PCAOB board members at will, rather than only "for cause."

Of course, since the SEC had already been empowered under the law to overrule any substantive action the PCAOB took, this hypothetical extra increment of indirect power that the conservative justices bestowed upon the President today may be hard for him to detect. To top of page

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