The U.S. Supreme Court today issued its decision in the lawsuit challenging the constitutionality of the Public Company Accounting Oversight Board (“PCAOB”), affirming in part and reversing in part the judgment of the Court of Appeals in favor of the PCAOB.  Despite the partial reversal, the decision is a major victory for not only the PCAOB but for proponents of the Sarbanes Oxley Act of 2002 (“the Act”), which survived the Supreme Court’s decision.

The Free Enterprise Fund, one of the two plaintiffs to the lawsuit, brought this case in order to find some constitutional deficiency with the Act in order to achieve its ultimate goal of revisiting, and perhaps invalidating, the internal control provisions embedded in the Act’s Section 404.  At the time of the original filing of the lawsuit, which was early 2006, there were many who thought that the Act’s internal control provisions were overly burdensome and would have a negative impact on small businesses and U.S. competitiveness overall.  As the Act contained no “severability clause,” many believed that if one provision was found to be unconstitutional that the Act would fail in its entirety.  This turned out to be wrong.

Although the Court found unconstitutional a provision stating that the SEC could only remove a PCAOB Board member “for good cause” (and thus was a provision that interfered with the President’s executive power), the Court found that this deficiency could easily be severed from the rest of the Act.  Accordingly, the Court noted that no Congressional legislation is necessary to bring the PCAOB’s structure within constitutional parameters, and the internal control provisions in the Act will not have to be revisited as hoped for by the plaintiff.  Indeed, as Justice Roberts wrote:

[T]he Act remains ‘fully operative as a law,’ “ New York v. United States, 505 U. S. 144, 186, and nothing in the Act’s text or historical context makes it “evident” that Congress would have preferred no Board at all to a Board whose members are removable at will, Alaska Airlines, Inc. v. Brock, 480 U. S. 678, 684.  The consequence is that the Board may continue to function as before, but its members may be removed at will by the Commission.

The takeaway is that despite the small change to how PCAOB Board members could be removed by the SEC, all other aspects of the PCAOB and its programs will continue to operate as usual.  This includes the PCAOB’s registration, inspection, enforcement, and standard-setting functions.  More importantly, the SEC is now in a position to appoint three new Board members to the PCAOB to replace holdovers Charles D. Niemeier and Bill Gradison, and the spot vacated by former Chairman Mark W. Olson, who left the PCAOB last year.