State Board Report

January 2010

On December 7 the US Supreme Court heard oral arguments in Free Enterprise Fund v. Public Company Accounting Oversight Board and Noel Allen, as NASBA counsel who had submitted an amicus curiae brief in support of the PCAOB, attended the session. NASBA’s amicus brief can be found on www.nasba.org. Previously, the Free Enterprise Fund had lost their case before both a district judge and an appeals court; however, they continue to argue that the PCAOB violates the Constitution’s separation of powers provisions because the PCAOB’s members are not directly appointed or removed by the President but by the Securities and Exchange Commission.

During the oral arguments Chief Justice John Roberts and Associate Justices Samuel Alito and Antonin Scalia raised questions about how much control the President has over the PCAOB. Chief Justice Roberts observed: “In other words, the President can’t remove the SEC commissioners at will. They can’t remove the PCAOB commissioners at will. Or even if you look at it from the for‐cause perspective, there has to be two layers of for‐cause.” Justice Ruth Bader Ginsburg asked, if the SEC were able to fire PCAOB members at will, would that make the statute constitutional. The plaintiff’s attorney Michael A. Carvin responded that it wouldn’t because it “would be rewriting the statute and restriking the balance that Congress did.”

NASBA’s amicus brief noted that the petitioners must have suffered a specific injury by the PCAOB in order to have standing to bring their case. Justice Ginsburg raised this point when she said to Mr. Carvin, “You have another instance where Congress set up a scheme, and without having a particular case of an individual who has been hurt, you come in and say: We might sometime be hurt by this, so we want the whole thing knocked down in the absence of any concrete case.”

Following the hearing, Mr. Allen commented: “Overall the justices focused less on the PCAOB and NASBA’s contention that the SEC has widespread control over nearly all aspects of the PCAOB’s functioning. The Court did not question the argument raised in NASBA’s brief, that the PCAOB plays a vital and irreplaceable role in the regulation of accounting.”

The Court’s decision will not be released for several months. It could result in no change to the PCAOB, or it could result in a change in the President’s relationship to the PCAOB, or it could just end in a ruling that the petitioner’s claim is not proper for the Supreme Court to decide.

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