Business Law Chapter 48 Homework Board Rules Are Subject Commission Approval Too

18 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW

that potential investors are relying on the opinion and financial statements; yet (4) fails to take reasonable steps to

correct or withdraw its opinion and/or the financial statements; and (5) all the other requirements for liability are

satisfied.

The additional components are those typical of all Rule 10b-5 claims, such as materiality, transaction

and Rule 10(b)(5) for failing to correct known errors in its certified opinion and/or accompanying financial statements.

See

2 Alan R. Bromberg & Lewis D. Lowenfels, Bromberg and Lowenfels on Securities Fraud and Commodities

Fraud § 5:318 (2d ed.2006) (noting that “[t]he duty to the trading market ... to correct one’s own prior statements ...

had been recognized as part of the general 10b-5 obligation to keep the market apprised of material information, or as

part of the special responsibility of independent accountants under the securities law”); 5C Arnold S. Jacobs,

to correct a statement made misleading by intervening events, even if the statement was true when made.

See

generally

(contrasting the duties to correct and update); Robert J. Haft & Michele H. Hudson, Liability of Attorneys

and Accountants for Securities Transactions § 7:9 (2006) (noting that an accountant’s “duty to update is on a far

weaker authoritative*488 foundation” than is its duty to correct);

see also

(applying § 10(b) to “private

District Court’s dismissal of plaintiffs’ state law claims. We Remand for further proceedings consistent with this

opinion. No costs are awarded at this time. In the event that Overton ultimately prevails on the merits of his

securities claim, the District Court may award plaintiffs the costs of the present appeal.

Supplemental Case Printout for:

20 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW

Shifting Legal Priorities for Business

C.A.D.C.,2008.

Free Enterprise Fund v. Public Co. Accounting Oversight Bd.

537 F.3d 667, 383 U.S.App.D.C. 119, Fed. Sec. L. Rep. P 94,812

United States Court of Appeals,

No. 07-5127.

Argued April 15, 2008.

Decided Aug. 22, 2008.

Rehearing En Banc Denied Nov. 17, 2008.

ROGERS, Circuit Judge:

In this facial challenge, appellants contend that Title I of the Sarbanes–Oxley Act of 2002 (“the Act”), 15 U.S.C. §§

7211–19, violates the Appointments Clause of the Constitution and separation of powers because it does not permit

runs afoul of the Supreme Court’s instruction regarding the nature of the President’s constitutional relationship with

independent administrative agencies. Supreme Court precedent as we have it does not support appellants’ singular

focus on removal powers as the be-all and end-all of Executive authority, but rather compels a more nuanced

approach that examines the myriad means of Executive control.

We hold, first, that the Act does not encroach upon the Appointment power because, in view of the Commission’s

U.S.C. §§ 7201

et seq.

subject to the securities laws … in order to protect the interests of investors and further the public interest in the

preparation of informative, accurate, and independent audit reports.” 15 U.S.C. § 7211(a). The five members of the

Board are appointed by the Commission after consultation with the Chairman of the Board of Governors of the

Federal Reserve and the Secretary of the Treasury.

Id.

§ 7211(e)(4)(A). The Act empowers the Board, subject to the

oversight of the Commission, to, among other things, register public accounting firms, establish auditing and ethics

standards, conduct inspections and investigations of registered firms, impose sanctions, and set its own budget,

which is funded by annual fees.

Id.

§§ 7211(c), 7219(c), (d).

FN1.

See

S. REP. No. 107-205, at 2 (2002); H.R. REP. No. 107-414, at 18-19 (2002).

The Commission’s authority over the Board is explicit and comprehensive.

Id.

§§ 7217, 7218. Indeed, it is

extraordinary. The Board could commence operations only upon the Commission’s determination that it was properly

organized and had appropriate rules and procedures in place,

id.

§ 7211(d), and “[n]o rule of the Board shall become

effective without prior approval of the Commission,”

id.

§ 7217(b)(2). The Commission is empowered to “abrogate,

violated the Act or abused authority, or failed to enforce compliance with a rule or standard without reasonable

justification,

id.

§ 7217(d)(3). The Commission is further empowered, by rule, to relieve the Board, consistent with the

public interest, of any enforcement authority whatsoever,

id.

§ 7217(d)(1), as well as, by order, to censure the Board

and, after notice and opportunity for a hearing, to “impose limitations upon the activities, functions, and operations of

the Board” upon finding that the Board has failed to abide by its statutory duties,

id.

§ 7217(d)(2).

356, 359 (D.C.Cir.2006);

Wilson v. Pena,

79 F.3d 154, 160 n. 1 (D.C.Cir.1996). To succeed in its facial challenge to

22 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW

Title I of the Act under the Appointments Clause and separation of powers,FN2 the Fund bears a heavy burden to

show that the provisions of which it complains are unduly severe in all circumstances and cannot be constitutionally

applied.

See Wash. State Grange v. Wash. State Republican Party,

552 U.S. 442, 128 S.Ct. 1184, 1190, 170 L.Ed.2d

FN2. The Fund does not pursue its non-delegation claim on appeal.

II.

[1] The Board and the United States contend, as a threshold matter, that the district court lacked jurisdiction because

the Fund failed to exhaust the Act’s statutory review procedures. The Act permits a person “aggrieved by a final

order

of the Commission” or a person “adversely affected by a

rule

of the Commission” to obtain review in the court of

(1994). In

Thunder Basin,

the Supreme Court acknowledged that the district court retains jurisdiction over claims

“considered ‘wholly collateral’ to a statute’s review provisions and outside the agency’s expertise.” 510 U.S. at 212,

114 S.Ct. 771 (quoting

Heckler v. Ringer,

466 U.S. 602, 618, 104 S.Ct. 2013, 80 L.Ed.2d 622 (1984)).

Jurisdiction over the Fund’s complaint is consistent with the distinction drawn by this court in

Time Warner

Entertainment Co. v. FCC,

93 F.3d 957 (D.C.Cir.1996), which held that the district court has “general federal question

Therefore, because the Fund’s constitutional challenges to the Act are collateral to the Act’s administrative review

scheme, the exhaustion doctrine does not apply, and we hold that the district court had subject matter jurisdiction

over the complaint and properly denied the motion to dismiss.

III.

The Appointments Clause provides:

members means that Board members are not inferior officers and therefore must be appointed by the President.

Alternatively, the Fund contends that even if Board members are inferior officers, they cannot be appointed by the

Commission because the Commission is not a “Department[ ]” and the Commissioners are not its “Head[ ].”

A.

“Generally speaking, the term ‘inferior officer’ connotes a relationship with some higher ranking officer or officers

v. SEC,

48 F.3d 987, 990 (7th Cir.1995);

Shultz v. SEC,

614 F.2d 561, 568 (7th Cir.1980). The Commission both

appoints and removes Board members,

id.

§§ 7211(e)(4)(A), (e)(6). It also may impose limitations upon Board

activities,

id.

§ 7217(d)(2), and relieve the Board of its enforcement authority altogether,

id.

§ 7217(d)(1).

Consequently, the Board’s work is necessarily “directed and supervised at some level” by the Commission,

Edmond,

520 U.S. at 663, 117 S.Ct. 1573. Notably for purposes of this facial challenge, the Act subjects Board members to

U.S.C. § 7211(c), but its exercise of those duties is subject to check by the Commission at every significant step.

Board members are also subject to greater oversight than the Independent Counsel in

Morrison v. Olson,

487 U.S.

654, 662, 108 S.Ct. 2597, 101 L.Ed.2d 569 (1988). Whereas the Act specifies that every decision of the Board is

“subject to action by the Commission,” 15 U.S.C. § 7211(c), the Ethics in Government Act vested the Independent

Counsel with “full power and independent authority to exercise all investigative and prosecutorial functions and

FN3.

Morrison

presents a significant obstacle to our dissenting colleague’s proposed test for inferior officer

status, Dis. Op. at 708-09, because the Independent Counsel had broad final decision-making authority

unchecked by any other Executive officer. The dissent’s attempt to limit

Morrison

to situations in which the

office is temporary,

id.

at 709 n. 17, 96 S.Ct. 612, ignores the fact that the Supreme Court has rejected the

interpretation of

Morrison

as a bright-line test,

see Edmond,

520 U.S. at 661, 117 S.Ct. 1573. But even

responsibilities, the Fund’s approach would sanction flouting one statutory goal in service of another, an untenable

interpretation of congressional intent where the goals can be reconciled.

Cf. Richards v. United States,

369 U.S. 1,

11, 82 S.Ct. 585, 7 L.Ed.2d 492 (1962). Moreover, in

Edmond

the Supreme Court held that the “limitation upon review

does not … render the judges of the Court of Criminal Appeals principal officers.” 520 U.S. at 665, 117 S.Ct. 1573.

The Fund ignores that the Commission’s regulatory control does not end with its review of Board rules. The Act

who were subject to the Judge Advocate General’s at-will removal authority, 520 U.S. at 664, 117 S.Ct. 1573, and the

Independent Counsel in

Morrison,

who was subject to removal only for cause, 487 U.S. at 663, 108 S.Ct. 2597, were

inferior officers. Here, the Act vests removal authority in the Commission, providing that “[a] member of the Board

may be removed by the Commission from office, in accordance with section [107(d)(3)], for good cause shown.” 15

U.S.C. § 7211(e)(6).FN5 Just as in

Morrison,

“the fact that [Board members] can be removed by the [Commission]

indicates that [they are] to some degree ‘inferior’ in rank and authority,” 487 U.S. at 671, 108 S.Ct. 2597.

FN4. Our dissenting colleague’s reading of

Edmond

to mean that at-will removal authority is “the key initial

1573. As the dissent acknowledges, at-will removal authority is not the linchpin of the analysis; rather, an

CHAPTER 48: PROFESSIONAL LIABILITY AND ACCOUNTABILITY 25

FN5. Section 107(d)(3) provides that the Commission may remove a Board member upon finding that the

member

(A) has willfully violated any provision of this Act, the rules of the Board, or the securities laws; (B) has

willfully abused the authority of that member; or (C) without reasonable justification or excuse, has failed to

enforce compliance with any such provision or rule, or any professional standard by any registered public

States,

272 U.S. 52, 47 S.Ct. 21, 71 L.Ed. 160 (1926), the Court reaffirmed that “Congress, in committing the

appointment of such inferior officers to the heads of departments, may prescribe incidental regulations controlling and

restricting the latter in the exercise of the power of removal,”

id.

at 161, 47 S.Ct. 21, although not to the point of

requiring Senate approval of removals,

id.

at 164, 47 S.Ct. 21;

see also Bowsher v. Synar,

478 U.S. 714, 726, 106

S.Ct. 3181, 92 L.Ed.2d 583 (1986).

some level,

” 520 U.S. at 663, 117 S.Ct. 1573 (emphasis added), necessitates “manag[ing] the ongoing conduct,” Dis.

Op. at 709, of every day-to-day function. Surely both the Coast Guard judges in

Edmond

and the Independent

Counsel in

Morrison

would have failed such a narrow test. But even under the terms of this novel test, the Act

survives scrutiny. Indeed, the Act commands that

all

of the Board’s duties are “subject to action by the Commission.”

15 U.S.C. § 7211(c). As in

Edmond,

any sanctions imposed by the Board are “subject to review by the [Commission]

“affirmatively command” an investigation, Dis. Op. at 709, given that the Act preserves the Commission’s own

authority to take administrative or disciplinary action against a firm, 15 U.S.C. § 7202(c)(3). The fact that the

Commission’s investigative authority remains intact is consistent with the role of the Board as a specialized

component of the Commission that exercises authority for purposes of efficiency and convenience but cannot usurp it.

Third, and most important, because the Board must establish by rule “fair procedures for the investigation and

FN6. In suggesting that the Commission is somehow limited by its statutory obligation to promulgate rules “in

furtherance of this Act,” Dis. Op. at 711, our dissenting colleague ignores that the Act’s purpose in

establishing the Board was “to protect the interests of investors and further the public interest,” 15 U.S.C. §

1. As used in the Appointments Clause, the phrase “ ‘Heads of Departments’ … suggests that the Departments

referred to are themselves in the Executive Branch or at least have some connection with that branch.”

Buckley,

424

U.S. at 127, 96 S.Ct. 612. The Supreme Court has explained that “Departments” refers to “the subdivision of the

power of the Executive into departments, for the more convenient exercise of that power.”

United States v. Germaine,

916-17, 111 S.Ct. 2631, and that the Court has not held that “ ‘the Heads of Departments’ are Cabinet members,”

id.

at 917, 111 S.Ct. 2631, the concurring justices observed that even the sparse history of the Appointments Clause

included the 1792 Act creating a Post-Master General, who, while not a cabinet member, had power to appoint an

assistant and deputies,

id.

As Congress has continued to empower non-Cabinet officers to appoint inferior officers,

id.

at 918, 111 S.Ct. 2631, the concurring justices cautioned that to conclude such action violated the Appointments

2. The Commissioners as a group exercise the same final authority as is vested in a single head of an executive

department. Congress has vested “the Commission” with rulemaking, investigative, and adjudicatory authority.

See,

e.g.,

15 U.S.C. § 7202. Just as independent agencies are “Departments” capable of receiving appointment powers

even though they are structured to give the President less control over their functioning,

see Freytag,

501 U.S. at 919,

at 1038. The same is true here. Congress, in the Act as well as the Securities Exchange Act of 1934, 15 U.S.C. § 78a

28 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW

et seq.,

vested authority in “the Commission” to promulgate rules, initiate investigations, sue to enjoin violations of

securities laws, review disciplinary sanctions, appoint Board members, approve Board rules and the Board’s budget,

and censure and remove Board members.

Silver

was an inferior officer appointed and removable by the nine governors,

see

951 F.2d at 1040, the Chairman is

not inferior to the Commission but rather is simply one commissioner who has additional administrative functions. Just

as the Chairman has no power to remove another commissioner, the Commission as a whole may neither appoint nor

remove one of its own. Moreover, the Reorganization Act addressed in

Silver

mandated that the head of an agency

be either a civil service position or subject to Presidential appointment with the advice and consent of the Senate, 5

IV.

[4][5] Although not expressly included in the Constitution itself, the principle of separation of powers is implicit in the

first three articles of the Constitution that define separate roles for the legislative, executive, and judicial branches.

See Nat’l Mut. Ins. Co. of D.C. v. Tidewater Transfer Co.,

337 U.S. 582, 591, 69 S.Ct. 1173, 93 L.Ed. 1556 (1949);

Kilbourn v. Thompson,

103 U.S. 168, 190, 26 L.Ed. 377 (1880).FN7 CONSIDERED A BULWARK OF A JUST

government,

see

THE FEDERALIST No. 47 (James Madison), this principle, however, “by no means contemplates

FN7. This principle has been more recently reaffirmed by the Supreme Court in a series of opinions

interpreting the President’s Article II powers.

See Boumediene v. Bush,

553 U.S. 723, 128 S.Ct. 2229, 171

L.Ed.2d 41 (2008);

Hamdan v. Rumsfeld,

548 U.S. 557, 126 S.Ct. 2749, 165 L.Ed.2d 723 (2006);

Hamdi v.

Rumsfeld,

542 U.S. 507, 124 S.Ct. 2633, 159 L.Ed.2d 578 (2004).

A.

considered the “two related issues” of restrictions on the President’s power to remove and the impact of the Ethics in

Government Act as a whole in order to address the “real question” of “whether … the President’s ability to perform his

constitutional duty,”

Morrison,

487 U.S. at 691, 108 S.Ct. 2597, to “take Care that the Laws be faithfully executed,”

U.S. CONST., art. II, § 3, was impeded. Noting the Attorney General’s powers to request appointment of the

Independent Counsel and to remove her for cause alongside her limited jurisdiction and tenure and lack of

obviously, by appointment of the Commission chairman, who serves at the pleasure of the President and often

“dominate[s] commission policymaking,” the President can influence Commission policy and control who directs “the

administrative side of commission business, select[s] most staff, set[s] budgetary policy, and as a consequence

command[s] staff loyalties.” Peter L. Strauss,

The Place of Agencies in Government: Separation of Powers and the

Fourth Branch,

84 COLUM. L.REV. 573, 591 (1984) (citing DAVID M. WELBORN, GOVERNANCE OF FEDERAL

FN8. The Supreme Court has held that the restrictions on the President’s removal of Commissioners for

“inefficiency, neglect of duty, or malfeasance in office” are “very broad and … could sustain removal … for any

number of actual or perceived transgressions.”

Bowsher,

478 U.S. at 729, 106 S.Ct. 3181.

(2). Additionally, the Act fully preserves the Commission’s authority to regulate the accounting profession, set

standards, and take any action against a company or individual.

Id.

§ 7202(c). “Because the Commission can

FN9. Our dissenting colleague wholly misreads both the court’s opinion and the Board’s brief to suggest that

the Board is itself an independent agency. Dis. Op. at 685-86, 686-87, 701 n. 9. Indeed, with that premise the

dissent’s conclusion that the Board’s structure is unconstitutional conveniently follows. But repeatedly

referring to the Board as an independent agency,

see, e.g., id.

at 697 & n. 7, 697-98, 698-99, 701 n. 9, 704,

708 & n. 16, does not make it so. As explained in Part III above, by statutory design the Board is composed of

FN10. Thus, the Independent Counsel “possessed core and largely unchecked federal prosecutorial powers,

FN11. Even viewing

Morrison

as authorizing a “significant intrusion” on the Executive power, Dis. Op. at 696,

because the Board is subject to much greater Executive control than the Independent Counsel, the Board

would withstand constitutional scrutiny if the Independent Counsel had not. The “sky is falling” approach to

the Board’s separation of powers implications is an exaggerated response to a relatively insignificant

innovation.

Morrison

was the proverbial mountain; the present case, by comparison, is a molehill.

FN12. Our dissenting colleague’s assertion that

Morrison

“all but resolves the removal issue in this case” so

as to “require[ ] invalidation of the [Board],” Dis. Op. at 698, is remarkable in light of the fact that in

Morrison

the Supreme Court did not purport to establish what removal restrictions would “completely strip[ ]” the

President of removal authority, 487 U.S. at 692, 108 S.Ct. 2597.

FN13. The Fund’s suggestion that the Board’s creation represents an effective diminution of Executive

Branch power or an unprecedented Congressional innovation is also unavailing. The Commission’s wide-

ranging oversight over the Board was modeled after the rules regarding Commission authority over self-

at 806.

Our dissenting colleague asks why the Board is removable only for cause, Dis. Op. at 711-12, concluding that it is to

preserve the Board’s independence of the Commission. But for-cause removal is not the end of the constitutional

inquiry. We might ask in return, why has Congress granted such pervasive Commission authority over the Board if not

to preserve the means of Executive control? Indeed, why would Congress deny the Commission at-will removal

authority on the one hand and then provide the Commission with the authority to abolish Board powers on the other,

essentially granting at-will removal power over Board functions if not Board members? Certainly the latter power

n. 8. While the Fund points to the fact that two of the three provisions that authorize removal of Board members refer

to actions taken “willfully,”

see supra

n. 5, the meaning of that word “is often being influenced by its context,”

Spies v.

United States,

317 U.S. 492, 497, 63 S.Ct. 364, 87 L.Ed. 418 (1943), and the Fund points to no basis for assuming

that the Commission would view 15 U.S.C. § 7217(d)(3) as necessarily defining the exclusive circumstances in which

FN14. Contrary to our dissenting colleague, Dis. Op. at 704 n. 12, the fact that this is a facial challenge

significantly affects the analysis, for the Fund bears a heavy burden to demonstrate that the Act unduly

constrains the President’s ability to see that the laws are faithfully executed in

all

circumstances and

cannot

be constitutionally applied,

see supra

p. 670-71. In making that determination, the court must look at the

extent of the Commission’s authority under the Act, not to whether and how it has exercised that authority,

FN15. To the extent our dissenting colleague asserts both that overturning the Act would have no impact on

other independent agencies, Dis. Op. at 687-89, and that failing to overturn the Act would produce a parade

of horribles were Congress to adopt a double-for-cause approach generally,

id.

at 699-700, again he ignores

the statutory scheme in a singular focus on the removal power. If that is to be the Supreme Court’s approach,