It was a busy morning for SCOTUS. In addition to the Bilski decision (see previous posting), the Court ruled on a number of other cases. One of those was the constitutionality of Sarbanes-Oxley. A lawsuit filed about two years ago (see earlier posting) challenged whether the way the Public Company Accounting Oversight Board was created was constitutional. The specifics of the issue was whether member of the Board, who are appointed by the SEC, have tenure or can be removed at will. Opponents of the law hoped to use this issue to have the law completely thrown out. However, the Court ruled that only the tenure part of the Board is unconstitutional and “the unconstitutional tenure provisions are severable from the remainder of the statute.” In other words, all the rest of the law remains valid.
The ruling, as the Wall Street Journal notes, “makes it unlikely that Congress will re-examine the full Sarbanes-Oxley legislation, as some opponents of the law had hoped. That reduces uncertainty for investors already grappling with looming changes in the financial-rules overhaul making its way through Congress.”
As I said before, gutting SOX would have a major negative effect on any attempt to create a financial market in intangibles. It would be a signal that the US is not serious in protecting investors from misleading claims and shaky accounting — and therefore investments in new assets such as intangible are extraordinarily risky. So, from my perspective, we dodged a bullet.
However, the case may have other ramifications. By ruling that the members of the Board can be removed at will by the SEC, the Court may have ruled that Commissioners and Directors all such “independent” agencies may not be independent but can be removed at will by the appointing authority, such as the President. That could make life for the regulatory agencies in Washington very interesting. And uncertain.
Here is the comment on the case from the Economist’s Schumpeter columnist:
But it is probably a good verdict from business’s point of view. Companies have spent millions on SOX compliance, and had just about got used to the legislation. Moreover, there is no guarantee that a broad reconsideration of SOX, in the current business climate, would produce better legislation. Far from it.
I couldn’t agree more — although maybe for a different reason. Our Schumpeter friend may fear a further tightening of accounting regulations. I fear that if SOX was opened up, the pressure would be for more loosing of accounting standards in the name of promoting growth (a la the market-to-myth controversy).
But the idea of every “independent” agency head or commissioner serving at the pleasure of the President still gives me pause.