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Monday, June 28, 2010

Sarbanes-Oxley Accounting Board Ruled Unconstitutional

An important decision handed down today by the Supreme Court (see www.supremecourt.gov/opinions/09pdf/08-861.pdf) in the case of Free Enterprise Fund v. Public Company Accounting Oversight Board.

The Court has ruled the Public Company Accounting Oversight Board (PCAOB) unconstitutional on separation of powers grounds because board members had executive branch execution powers, without being subject to executive branch removal, insofar as they could be removed only for "good cause" and only by other commissioners of the Securities and Exchange Commission (whom in turn are removable by the President only for cause).  The second level of limited removal powers was found to be an unconstitutional limitation on presidential power.  Sounds eminently reasonable.

Consider this may open the door to argue that the entire Sarbanes-Oxley Act is unconstitutional because it lacks a "severability" clause that would preserve the rest of the Act if one part was struck down.  That does not mean the entire Act will be invalidated, but expect an attack anyway.

Congress can now act to strengthen Sarbanes Oxley, especially before the November elections and anticipated Democratic losses.  An alternative would be to pass an entirely new anti-fraud act.  The opponents of Sarbanes-Oxley may be premature in any celebration.

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