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June 28, 2010 Monday
LENGTH: 400 words
HEADLINE: U.S. Supreme Court strikes down part of Sarbanes-Oxley
BYLINE: Allison Retka
The U.S. Supreme Court on Monday struck down part of the Sarbanes-Oxley Act as unconstitutional, but said its decision has limited consequences.
In fact, constitutional lawyers may be more interested in the decision than securities lawyers, said Phillip R. Stanton, a corporate attorney with Greensfelder, Hemker & Gale.
The justices voted 5-4 that the Sarbanes-Oxley law, enacted in 2002, violates the Constitution’s separation of powers mandate. The court says the president, or other officials appointed by him, must be able to remove members of the Public Company Accounting Oversight Board (PCAOB), created to tighten oversight of internal corporate controls and outside auditors.
The ruling won’t directly affect public companies regulated by the Securities and Exchange Commission because the board in question doesn’t regulate companies. It regulates the accounting firms that audit public companies and whose audits are included in SEC filings, Stanton said.
In the case before the U.S. Supreme Court, a small Nevada accounting firm investigated and penalized by the board sued it, claiming Congress’ creation of the board infringed on the president’s power to hire, fire or replace its members.
The accounting firm, Beckstead and Watts, wanted the U.S. Supreme Court to dissolve the board completely, said Stanton, the St. Louis attorney.
“The court very much did not do that,” he said.
Instead, in a majority opinion authored by Chief Justice John Roberts, the court ruled that SEC commissioners can remove the board members at will. That change, Roberts said, cures the constitutional problem.
“That’s the only substantive change,” Stanton said.
At-will terminations could make the oversight board more vulnerable to political influence, said Bill Quick, a Kansas City corporate securities attorney with Polsinelli Shughart.
“But you’ve still got a layer of bureaucracy between the president and the board,” Quick said. “The president would have to assert influence on the SEC itself, which then asserts power over the PCAOB. ”
Supreme Court nominee Elena Kagan, who spent Monday fielding questions from the Senate Judiciary Committee, defended the Sarbanes-Oxley provisions when she argued the case before the high court in December.
The case is Free Enterprise Fund and Beckstead and Watts v. Public Company Accounting Oversight Board, 08-86.
The Associated Press contributed reporting to this story.
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