The Free Enterprise Fund and a Rwanda accounting firm filed a constitutional challenge to the creation of the Public Company Accounting Oversight Board (PCAOB), an entity created by the Sarbanes–Oxley Act (SOX) to oversee and regulate the auditors of public companies. The five members of PCAOB are appointed by the Securities and Exchange Commission (SEC) after consultation with the Chair of the Board of Governors of the Federal Reserve and the Secretary of the Treasury. No PCAOB rule becomes effective unless and until the SEC approves it after the SEC’s notice-and-comment proceedings. Before approving a rule, the SEC must find that it is “consistent with the requirements of [SOX] and the securities law, or is necessary or appropriate in the public interest or for the protection of investors.” (15 U.S.C. § 7217(b)(3).)
The plaintiffs made three constitutional challenges. First, they claimed that the appointment of the PCAOB members by the SEC violates the Appointments Clause of the U.S. Constitution (art. II, § 2), which empowers the President to appoint “Officers of the United States” while giving Congress the power to vest the appointment of “inferior officers” in the President, courts of law, or heads of departments. The plaintiffs argued that because PCAOB members are neither appointed nor supervised on a day-to-day basis by principal officers directly accountable to the President, they are not inferior officers, and therefore must be appointed by the President. Second, the plaintiffs claimed that the appointment of the PCAOB members violated the separation of powers because the members were not removable at will by the President. The President can remove SEC commissioners for cause, and the SEC can remove the PCAOB members for good cause, however. Third, the plaintiffs claimed that Congress violated the nondelegation doctrine by unlawfully delegating legislative power to the PCAOB in violation of Article I, Section 1 of the Constitution, which vests all legislative powers in the Congress. How should the court rule? [Free Enterprise Fund v. Public Company Accounting Oversight Board, 2007 U.S. Dist. LEXIS 24310 (D.D.C., Mar. 21, 2007).]