December 17, 2006

Weekend Question 4: Is Sarbanes-Oxley Unconstitutional?

Filed under: Business Moves,Economy,Taxes & Government,TWUQs — Tom @ 1:24 pm

ANSWER: The Free Enterprise Fund, a small accounting firm, and Ken Starr (yeah, THAT one) think so. If the Constitution means what it says, their case looks is very strong.
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From Starr’s subscription-only op-ed in Saturday’s Wall Street Journal:

The Sarbanes-Oxley Act powerfully illustrates the law of unintended consequences. Due to hasty drafting by Congress in the wake of the Enron and WorldCom scandals, Sarbox has cost the U.S. economy over $1 trillion, according to one study published by the AEI-Brookings Center. To add insult to grievous injury, it is unconstitutional.

That last point will be argued next Thursday before Judge James Robertson of the district court for the District of Columbia.

….. First, plaintiffs claim that Sarbox violates the constitutional requirement that power to enforce federal law be vested in the president or in executive branch officials answerable to the president.

Because the Board (the Public Company Accounting Oversight Board, or PCAOB — Ed.) exercises important governmental powers, its members are “officers of the United States,” who must be appointed in the manner set forth in the “appointments clause” of the Constitution (Article Two, Section Two) — that is, by the president and with the advice and consent of the Senate. Congress instead drafted the statute to insulate the Board’s wide-ranging exercise of executive and administrative powers from presidential oversight or control. By granting to the SEC, rather than the president, power to appoint Board members — Sarbox violates the appointments clause.

Second, Congress gave the Board disturbingly broad powers with only minimal oversight. The PCAOB has wide-ranging executive and administrative powers. These include setting standards regulating accounting firms and exercising disciplinary power over them. The Board is also immune from any effective control by the president or any head of an executive-branch department — the chairman of the SEC cannot remove PCAOB members at will.

Third, Sarbox confers impermissible legislative authority on the Board. The PCAOB can finance its own operations; it can levy fees on all public companies and even set its own salaries. But Congress cannot delegate its own legislative power: this is a basic violation of our bedrock system of separation of powers.

Responding to these arguments, the government says that because the Board is under the “broad and pervasive oversight” of the SEC, this cures any constitutional defects. Not so.

The Board’s members are clearly insulated from the checks and balances the Framers meant to impose. It is essentially a star chamber whose members are difficult to remove and who have been given unconstitutional power to levy taxes (“fees,” schmees).

On these arguments, the plaintiffs are, if you will, the Starrs of the show. A ruling in the FEF’s favor should be inevitable. The only question appears to be whether Judge Robertson and others involved will follow the Constitution they’ve sworn to uphold.

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