Free Enterprise Fund v. Public Co. Account. over.

Decision Date22 August 2008
Docket NumberNo. 07-5127.,07-5127.
Citation537 F.3d 667
PartiesFREE ENTERPRISE FUND and Beckstead and Watts, LLP, Appellants v. PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD, et al., Appellees.
CourtU.S. Court of Appeals — District of Columbia Circuit

Appeal from the United States District Court for the District of Columbia (No. 06cv00217).

Michael A. Carvin argued the cause for appellants. With him on the briefs were Viet D. Dinh, Sam Kazman, Hans F. Bader, Christian G. Vergonis, and Kenneth W. Starr.

Elizabeth Gallaway and William P. Pendley were on the brief for amicus curiae Mountain States Legal Foundation.

Daniel J. Popeo, Paul D. Kamenar, Helgi C. Walker, and Thomas R. McCarthy were on the brief for amicus curiae Washington Legal Foundation in support of appellants.

Jeffrey A. Lamken argued the cause for appellees Public Company Accounting Oversight Board, et al. With him on the brief were Joe Robert Caldwell Jr. and James R. Doty.

Mark B. Stern, Attorney, U.S. Department of Justice, argued the cause for appellee United States of America. With him on the brief were Jeffrey S. Bucholtz, Acting Assistant Attorney General, Jeffrey A. Taylor, U.S. Attorney, Mark R. Freeman, Attorney, Brian G. Cartwright, General Counsel, Securities & Exchange Commission, Andrew N. Vollmer, Deputy General Counsel, Jacob H. Stillman, Solicitor, and John W. Avery, Special Counsel. Robert J. Katerberg, Attorney, U.S. Department of Justice, and R. Craig Lawrence, Assistant U.S. Attorney, entered appearances.

Richard H. Pildes was on the brief for amici curiae G. Bradford Cook, et al.

Ira M. Millstein, Gregory S. Coleman, and Christian J. Ward were on the brief for amicus curiae Council of Institutional Investors in support of appellees.

Before: ROGERS, BROWN and KAVANAUGH, Circuit Judges.

Opinion for the court by Circuit Judge ROGERS.

Dissenting opinion by Circuit Judge KAVANAUGH.

ROGERS, Circuit Judge:

In this facial challenge, appellants contend that Title I of the Sarbanes-Oxley Act of 2002 ("the Act"), 15 U.S.C. §§ 7211-19, violates the Appointments Clause of the Constitution and separation of powers because it does not permit adequate Presidential control of the Public Company Accounting Oversight Board ("the Board"). Congress, however, made the Board's exercise of its duties subject to the comprehensive control of the Securities and Exchange Commission ("the Commission"). Under the Act, the Commission is empowered to set Board rules and procedures, to overturn any sanction proposed by the Board, and to limit or relieve the Board of its powers, id. §§ 7217(b)(2), (b)(5), (c)(3), (d)(1), (2); the Commission also may remove members of the Board for cause, id. § 7211(e)(6). Members of the Commission, in turn, are appointed by the President with the advice and consent of the Senate and subject to removal by the President for cause; its chairman is selected by and serves at the pleasure of the President. In appellants' view this statutory scheme vests Board members "with far reaching executive power while completely stripping the President of the authority to appoint or remove those members or otherwise supervise or control their exercise of that power." Appellants' Br. at 1. But their facial challenge ignores the entirety of the statutory scheme and runs afoul of the Supreme Court's instruction regarding the nature of the President's constitutional relationship with independent administrative agencies. Supreme Court precedent as we have it does not support appellants' singular focus on removal powers as the be-all and end-all of Executive authority, but rather compels a more nuanced approach that examines the myriad means of Executive control.

We hold, first, that the Act does not encroach upon the Appointment power because, in view of the Commission's comprehensive control of the Board, Board members are subject to direction and supervision of the Commission and thus are inferior officers not required to be appointed by the President. Second, we hold that the for-cause limitations on the Commission's power to remove Board members and the President's power to remove Commissioners do not strip the President of sufficient power to influence the Board and thus do not contravene separation of powers, as that principle embraces independent agencies like the Commission and their exercise of broad authority over their subordinates. Accordingly, we affirm the grant of summary judgment to the Board and the United States.


Following the Enron and Worldcom accounting scandals that exposed serious weaknesses in industry self-regulatory reporting requirements for certain publicly held companies, Congress enacted the Sarbanes-Oxley Act of 2002, 15 U.S.C. §§ 7201 et seq.1 Title I of the Act established 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." 15 U.S.C. § 7211(a). The five members of the Board are appointed by the Commission after consultation with the Chairman of the Board of Governors of the Federal Reserve and the Secretary of the Treasury. Id. § 7211(e)(4)(A). The Act empowers the Board, subject to the oversight of the Commission, to, among other things, register public accounting firms, establish auditing and ethics standards, conduct inspections and investigations of registered firms, impose sanctions, and set its own budget, which is funded by annual fees. Id. §§ 7211(c), 7219(c), (d).

The Commission's authority over the Board is explicit and comprehensive. Id. §§ 7217, 7218. Indeed, it is extraordinary. The Board could commence operations only upon the Commission's determination that it was properly organized and had appropriate rules and procedures in place, id. § 7211(d), and "[n]o rule of the Board shall become effective without prior approval of the Commission," id. § 7217(b)(2). The Commission is empowered to "abrogate, add to, and delete from" the Board's rules "to assure the fair administration of the [Board], conform the rules promulgated by that Board to the requirements of title I of the [Act], or otherwise further purposes of that Act, the securities laws, and the rules and regulations thereunder applicable to that Board." Id. §§ 7217(b)(5), 78s(c). In addition to these ex ante controls, all Board adjudications are subject to the Commission's de novo review, id. § 7217(c)(2); Nat'l Ass'n of Sec. Dealers, Inc. v. SEC, 431 F.3d 803, 804 (D.C.Cir.2005) ("NASD"), upon an immediate stay when an application for review is filed or sua sponte by the Commission, 15 U.S.C. §§ 7215(e)(1), 7217(c)(2)(A). The Commission is empowered to "enhance, modify, cancel, reduce, or require the remission of a sanction imposed by the Board." Id. § 7217(c)(3). The Commission alone determines whether the Board may "sue and be sued" in any court. Id. § 7211(f)(1). A member of the Board may be censured or removed from office "for good cause shown," id. § 7211(e)(6), upon a finding by the Commission, after notice and opportunity for a hearing, that the member willfully violated the Act or abused authority, or failed to enforce compliance with a rule or standard without reasonable justification, id. § 7217(d)(3). The Commission is further empowered, by rule, to relieve the Board, consistent with the public interest, of any enforcement authority whatsoever, id. § 7217(d)(1), as well as, by order, to censure the Board and, after notice and opportunity for a hearing, to "impose limitations upon the activities, functions, and operations of the Board" upon finding that the Board has failed to abide by its statutory duties, id. § 7217(d)(2).

This facial challenge to the Act is brought by the Free Enterprise Fund, a non-profit public interest organization that "promotes economic growth, lower taxes, and limited government." Compl. ¶ 11. It is joined by one of its members, Beckstead and Watts, LLP ("B & W"), a Nevada accounting firm that is registered with the Board and is subject to an ongoing formal investigation that was commenced in 2005. Id. ¶ 79. On February 7, 2006, the Free Enterprise Fund and B & W (collectively "the Fund") filed a complaint alleging that the creation of the Board violated the Appointments Clause, separation of powers, and non-delegation principles. The Fund sought declaratory and injunctive relief prohibiting the Board from carrying out its duties, including taking "any further action" against B & W. The United States intervened to defend the constitutionality of the Act. The district court denied the Board's motion to dismiss the complaint for lack of jurisdiction and granted the motions for summary judgment of the Board and the United States.

The Fund appeals, and our review is de novo. See Simpson v. Socialist People's Libyan Arab Jamahiriya, 470 F.3d 356, 359 (D.C.Cir.2006); Wilson v. Pena, 79 F.3d 154, 160 n. 1 (D.C.Cir.1996). To succeed in its facial challenge to Title I of the Act under the Appointments Clause and separation of powers,2 the Fund bears a heavy burden to show that the provisions of which it complains are unduly severe in all circumstances and cannot be constitutionally applied. See Wash. State Grange v. Wash. State Republican Party, ___ U.S. ___, 128 S.Ct. 1184, 1190, 170 L.Ed.2d 151 (2008) (citing United States v. Salerno, 481 U.S. 739, 745, 107 S.Ct. 2095, 95 L.Ed.2d 697 (1987)).


The Board and the United States contend, as a threshold matter, that the district court lacked jurisdiction because the Fund failed to exhaust the Act's statutory review procedures. The Act permits a person "aggrieved by a final order of the Commission" or a person "adversely affected by a rule of the Commission" to obtain review in the court of appeals. 15 U.S.C. § 78y(a)(1), (b)(1) (emphasis added). The Act further provides that "[n]o objection to an order or rule of the Commission,...

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