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The Mistake of Free Enterprise Fund v. PCAOB

In my last post, I discussed the great importance of the Free Enterprise Fund decision for a strict separation of powers approach to the Constitution.  Among other things, the Supreme Court opinion held a removal provision unconstitutional for violating the Executive Power Vesting Clause – the first time since prior to the New Deal.  (For background on the case, see the post.)

Despite its virtues, the Free Enterprise Fund decision was problematic.  The Court assumed, because both parties had accepted it, that the SEC was an independent agency (whose commissioners could only be removed for cause). But that was not true. The statute creating the SEC had not stated that the Commissioners could only be removed for cause, which very strongly suggested that they were removable at the pleasure of the President. Moreover, when the SEC was created in 1934, Supreme Court precedent in Myers v. United States indicated that the commissioners had to be removable by the President. It was only a year later that the Supreme Court held in Humphrey’s Executor v. United States that such commissioners could be made removable for cause. Thus, the text and context of the law strongly indicated the commissioners serve at the pleasure of the President.

In Free Enterprise Fund, the Court should have held that the SEC’s members served at the pleasure of the President. That would have been a big deal, as it would have made clear an agency that many had wrongly assumed to be an independent agency was by law an executive branch agency. It would have both served correct statutory interpretation and cut back a little on independent agencies (which are constitutionally problematic).

If the Court had reached that conclusion about the SEC, how then would it have decided the case? First, the PCAOB for cause removal provision would not have violated the double for cause removal provisions since the SEC would not have been removable for cause. But the Court could still have announced that a double for cause provision was unconstitutional, while approving the PCAOB. (For example, the Court could have stated in response to the argument that the SEC was an independent agency, that if the SEC was independent, then the PCAOB would unconstitutionally employ double for cause removal.)

While the removal provisions of the PCAOB would have been constitutional, the appointment of the PCAOB commissioners would be unconstitutional. The PCAOB members would then be removable only for cause and therefore would be superior officers, who cannot be appointed by the SEC (as a head of a department). Thus, the Supreme Court would have had to hold the for-cause removal provision of the PCAOB members unconstitutional to render the PCAOB members inferior officers.

The bottom line is that this alternative route for the Supreme Court’s decision could have done pretty much all it did in the actual Free Enterprise Fund case, but it could have also properly rendered the SEC a non-independent agency subject to presidential control. Unfortunately, the Court probably believed it would have been too radical a move to hold the SEC a non-independent agency.

Reader Discussion

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on March 29, 2018 at 12:16:59 pm

I think it is more of the Court respecting its role in only deciding cases and controversies. There was no case or controversy as to the SEC being removable, as such it was outside of the power of the Court. It can assume that the SEC was not removable because both parties agreed on that point, but that doesn't mean it is the holding of the Court. Anyone that wants to challenge the SEC's removability can still do so.

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Devin Watkins
on March 29, 2018 at 12:55:39 pm

Based on Rappaport and Watkins, I would like Trump to do just that - challenge the SEC removability by firing one of the SEC members, (not to sound callous, but I am sure there must be (at least) one deserving, or at least one with whom Trump is displeased), it almost certainly would end-up before SCOTUS; I write this mostly in jest, but in a sense, if its to be challenged, who better to try than this current President? Not sure another so brazen will ever come along again anytime soon. In any event, (except for the one terminated, of course) there is little to lose, and much to gain.

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Paul Binotto

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