The news today that the Supreme Court will hear a constitutional challenge to Sarbanes-Oxley may spell trouble for the 2002 law that created a national board to oversee US public company auditors.
The reason the court’s decision to hear the case is so striking is that many of the usual reasons a case makes it to the Supreme Court are absent. There isn’t a split between different courts on the matter. There’s only been one constitutional challenge to the law that rose to the appeals court level, and there the court sided with the trial court by throwing out the complaint. The court’s decision to hear the case suggests that several justices have doubts about its constitutionality.
The case was brought by the Free Enterprise Fund and a smaller Nevada accounting firm. They argue that the law violates constitutional requirements on separation of powers because the board exercises executive functions but can’t be removed by the president. Members of the PCAOB are appointed by the SEC and can only be removed by the SEC for cause.
The challenge to Sarbox could have far more consequences than just abolishing the accounting oversight board or limiting its powers. Perhaps because of the haste with which the law was drafted, it contains no provision upholding the rest of the law if part of it is overturned. This could mean that if the Supreme Court overturns one part of the law, the entire Sarbox edifice would crumble.
The case could serve as an important signal of what kind of constitutional limits the court will place on financial regulations. Many of the proposals for financial regulatory reform have placed little emphasis on the constitutional limitations.
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