On June 28, the U.S. Supreme Court issued its ruling in Free Enterprise Fund v. Public Company Accounting Oversight Board (PCAOB), one for which many in the securities industry were waiting as it raised the constitutionality of the PCAOB, the regulatory body created by the Sarbanes-Oxley Act of 2002. The court held that the provision that restricted the executive branch’s ability to remove members of the PCAOB “contravened the [U.S.] Constitution’s separation of powers” because it conferred executive power on PCAOB members without subjecting them to presidential control.
Although it held that the substantive removal provisions of SOX are unconstitutional, the court determined that “the existence of the [PCAOB] does not violate the separation of powers” provisions of the Constitution. In its decision, the court merely severed the unconstitutional tenure provisions from the remainder of the statute and concluded that members of the PCAOB are subject to removal by the Securities and Exchange Commission “at will.” The court’s ruling leaves the PCAOB’s functionality intact, with a minor structural change, allowing it to continue to operate without reconsideration of its prior actions.
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