The Structure of Government and The Argument in the Sarbanes-Oxley Act Case: Part II

Rick Pildes

A previous post noted that I was surprised by many aspects of this week’s argument in one of the most important cases in years on the Constitution and administrative agencies. By surprised, I don’t mean arguments I disagree with. I mean things like views from the Court about big issues in administrative agency design that have never been expressed before, or uncertainty even about what an independent agency is.

So here’s another surprise: there was virtually no discussion of what the consequences across the government might be if the Court were to hold unconstitutional the administrative structures created to enforce the Sarbanes-Oxley Act. The Court seemed most concerned about the “dual for-cause” removal structure: because the SEC is an independent agency (or has always been assumed to be), the President cannot remove SEC Commissioners except for good cause. And the SEC cannot remove members of the Public Company Accounting Oversight Board (the Board), who work under the control of the SEC, except for good cause. How common is this kind of structure? If the Court holds the Act unconstitutional, how destabilizing would such a decision be?

For starters, it’s worth noting that this would create special constitutional doctrines that apply only to independent agencies. Other agencies and departments, like the Treasury Department or the EPA, can include inferior officers protected from at-will removal. But the independent agencies could not. The Justice who has argued most convincingly against such a regime is, perhaps ironically, Justice Scalia. For he is the Justice who has been most committed to the view that independent agencies are, per se, unconstitutional. But he has also written that, once the constitutionality of independent agencies is accepted, it would be a mistake for the Court to create special constitutional rules for those agencies, or to try to adjust the rest of the Constitution to compensate for the existence of these agencies: “adjusting the remainder of the Constitution to compensate for Humphrey’s Executor is a fruitless endeavor.” Freytag v. Commissioner, 501 U.S. 868, 921 (1991) (Scalia, J., concurring in judgment). In other words, as I understand it, once the constitutionality of independent agencies is accepted, they should be treated, constitutionally, like all the other agencies.

In any event, on the substantive issue: Dual for-cause removal structures, or variations of them, might be more common than the Court assumes. The question is how common is it for independent agencies – the various “commissions,” such as the FCC, FTC, FEC, NRC, and the like – to have inferior officers working for them who are protected by “for-cause” removal provisions. The entire Senior Executive Service (SES) of the government, which includes many high-level policy figures (who are certainly inferior officers) is protected by such provisions. See 5 U.S.C 7543 (a). Employees who fall under the protections of the Civil Service system are similarly protected by “for-cause” removal provisions, see 5 U.S.C. 7513 (a); I cannot say how many, if any, of this latter group would be considered inferior officers. From these sources alone, there are probably, then, hundreds of officials in the independent agencies who are separated from direct Presidential control by a “dual for-cause” removal structure. Indeed, my understanding is that the head of the SEC’s Enforcement Division would be protected by these for-cause removal provisions. If so, the President would have about the same amount of direct control over him as he does over the Board. There is one difference: even though independent agencies cannot fire at will inferior officers who are protected by the SES laws, the agencies can transfer them to perform other functions. Does that make a constitutional difference? The answer is hardly obvious, since the SEC can strip Board members of authority and enforce the Act itself -- thus essentially reassigning any Board investigation or the like to its own staff. See 15 U.S.C. 7202(b), 7217(d)(1).

Beyond that, there are other specific agency structures that include dual for-cause removal structures. For example, Congress in 1975 created the MSRB, which pervasively regulates the municipal-bond markets, under the SEC’s control. And the SEC can remove MSRB members only under what is, essentially, a for-cause standard. 15 U.S.C. § 78o-4(c)(8) (SEC can remove Board members, after notice and hearing, only if they have willfully violated any provision of the Act, or relevant regulations and rules, or abused their authority). And the financial regulatory system makes use of many so-called “self-regulatory organizations,” which function under the control and supervision of the SEC. Here, too, the SEC can remove the heads of these organizations only for cause. 15 U.S.C. § 78s(h)(4) (SEC can remove heads of these organizations, on the record after notice and hearing, only if they have violated or are unable to comply with any relevant Act, rule, or regulation, or without reasonable justification or excuse has failed to enforce compliance). Outside the area of financial regulation, there are other examples of dual-cause removal structures, such as officers who serve under and are appointed by agencies as diverse as the Social Security Administration, the Federal Labor Relations Authority, the Postal Service, and others, not to mention all the administrative law judges who can only be removed for cause (arguably, though, judges are different from those who propose rules and orders, like the Board).

It’s not possible to know how many of these other dual for-cause removal structures would be unconstitutional, should the Court strike down Sarbanes-Oxley on that basis. For one, we’d have to see what the Court’s analysis would be. For another, we would have to sort through each of these officials and decide which ones are “inferior officers of the United States,” in the constitutional sense. But what can safely be predicted is that a Court decision on this basis would provoke uncertainty and challenges to these structures; we can certainly expect years of litigation to sort out all the arguable distinctions. To return, then, to the main point: I was surprised that the Court neither asked about these possibilities, nor seemed aware of them at all.
Posted 12:08 PM by Rick Pildes [link]