The Supremes and Sarbanes-Oxley…

December 8, 2009

Yesterday, we took a break from our normal trawl through the filings to cozy up with the transcript from the arguments before the Supreme Court over whether the Public Company Accounting Board (PCAOB), which was created under Sarbanes-Oxley, has a right to exist.

The arguments in the case, which was formally titled the Free Enterprise Fund vs. PCAOB, lasted a little over an hour and produced an 87 page transcript (pdf) that gave me new appreciation for the seeming simplicity of SEC filings! Maybe it’s just that after 6 years of digging in to the filings, we’re used to that particular version of English, but we found the language in yesterday’s transcripts to be overly complicated. In addition to the transcript, you can listen to the oral arguments (both pro and against) here. Footnoted friend Broc Romanek attended yesterday’s arguments in person and has some quick thoughts here. He’ll be posting more later this week.

Only one Justice — Justice Thomas — didn’t ask any questions, but the rest of the Court seemed pretty spirited and there was even some joking, which given the subject matter, seemed somewhat surprising. Basically, the argument boils down to how much control the SEC has over PCAOB. The plaintiffs basically argued that PCAOB is like a rogue government agency with the ability to wreak havoc on individual companies with little or no oversight. Solicitor General Elena Kagan argued that there was plenty of oversight. Here’s the key argument made by Jones Day partner Michael Carvin, who appeared on behalf of the Free Enterprise Fund:

The board is unique among Federal regulatory agencies in that the President can neither appoint nor remove its members, nor does he have any ability to designate the chairman or review the work product, so he is stripped of the traditional means of control that he has over the traditional independent agencies. On the other side of the balancing test, Congress provided no reason for stripping him of these traditional means of control.

And here’s a snip from Kagan’s main argument:

The President has constitutionally sufficient control over the SEC. The SEC has comprehensive control over the Accounting Board, therefore the President has constitutionally sufficient control over the Accounting Board.

We also liked a question from Chief Justice Roberts, who asked “Is there any other situation in the vast federal bureaucracy, where you have this two-level situation that we have here?” With that kind of question, it shouldn’t be any surprise on which way he’s going on this one!

As we’ve said many times before, we’re not attorneys (though Sonya is a former attorney) and this is the first Supreme Court case we’ve tried to parse, so our analysis is worth what you’re paying for it. But the WSJ, which does this more often, reported earlier today that it all seems to boil down to Justice Kennedy. A decision is expected by June.

UPDATE 12/9: Broc Romanek has posted his thoughts on Tuesday’s argument, which he attended in person.

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