Separation of Powers, Independent Agencies, and Financial Regulation : The Case of the Sarbanes-Oxley Act

The Supreme Court will hear in December one of the most important separation-of-powers case in many years involving the structure of administrative agencies. The case, Free Enterprise Fund v. The Public Company Accounting Oversight Board, and this article, addresses virtually every major constitutional issue regarding the design of administrative governance: the line between principal and inferior officers of the United States; the appointment power; the removal power; separation of powers; and the status of independent agencies, including whether they can be Departments under the Constitution. The case is a challenge to the constitutionality of the Sarbanes-Oxley Act, which Congress enacted in 2002 to address the corporate auditing debacles in cases such as Enron, WorldCom, and others. The Act's centerpiece was a new regulatory body, located within the Securities and Exchange Commission, with the power to regulate and oversee the accounting industry in the United States, under the supervision of the SEC. Judicial resolution of this conflict will determine not only the constitutionality of regulatory oversight of the accounting industry that Sarbanes-Oxley sets up. That resolution will determine the kinds of options Congress has for designing politically-insulated administrative structures to deal with the current financial crisis and with other major regulatory needs in the coming years. This article analyzes these central constitutional issues in the context of the larger system of financial regulation. The analysis argues that the Sarbanes-Oxley Act and the new agency it creates is constitutional. This article is a substantially revised version, which addresses a number of new issues, of an earlier posted draft