Comment on U.S. Supreme Court Free Enterprise ruling from Susan Hackett, senior vice president and general counsel, Association of Corporate Counsel.
The Supreme Court's recent decision is important both in its content and in the manner in which the case was decided. The Court invalidated a controversial provision in the Sarbanes-Oxley Act, which creates and provides for the appointment of the Public Company Accounting Oversight Board (PCAOB), and, in doing so, engaged in a significant and extensive discussion of Article II/Separation of Powers. One might therefore argue that the Court was concerned that agencies (such as the PCAOB) created by legislation (such as Sarbanes-Oxley) are likely to exercise substantial and growing independent powers in governing corporate behavior (without direct oversight), and thus must be firmly tied to the authority of the branch of government which creates them: they must not be allowed to travel too far from their charter.
The Court, however, voted their clear confidence in the regulation of corporate governance as proscribed by Sarbanes-Oxley, which they could have struck down in whole given that the Act does not contain a severability clause. The Court inferred from Congressional intent and case precedent that they did not need to invalidate the entire Act for the flaw in this relatively small provision.
(The dissent in this case, made by Justice Breyer and joined by Justices Stevens, Ginsberg and Sotomayor, suggested that there were no inappropriate constitutional tensions in the PCAOB appointment provisions in the Act.)
The meaning of this going forward is twofold: corporate lawyers should have the confidence to continue to focus their clients on compliance with the sweeping reforms contained in Sarbox. At the same time, with this decision, the Court has weighed in on the difficult and contentious issue of whether and how the President, Congress or regulators must have ultimate ability to control (and be responsible for) the direction of increasingly powerful institutions, such as the PCAOB, which are in charge of significant oversight of companies.