Newswise — On Monday, Dec. 7, the U.S. Supreme Court will hear oral arguments in Free Enterprise Fund v. Public Company Accounting Oversight Board (PCAOB). It has been described by U.S. Court of Appeals Judge Brett Kavanaugh as "the most important separation-of-powers case regarding the president's appointment and removal powers to reach the courts in the last 20 years."

Established by Congress as the cornerstone of the Sarbanes-Oxley Act of 2002, the PCAOB was structured as a strong, independent board in the private sector, to oversee the conduct of public company auditors. Its principal mission was to prevent the type of auditing failures that contributed to the scandals at Enron and WorldCom.

Donna M. Nagy, C. Ben Dutton Professor of Law at the Indiana University Maurer School of Law, has been researching and writing about the constitutional status of the PCAOB for years. In 2005, the Notre Dame Law Review published her article, "Playing Peekaboo With Constitutional Law: The PCAOB and Its Public/Private Status," advancing what, at the time, was the novel claim that the PCAOB is part of the federal government for purposes of the Constitution, notwithstanding Sarbanes-Oxley's explicit provision that "[t]he Board shall not be an agency or establishment of the United States Government." In the course of the Free Enterprise Fund litigation, the PCAOB has conceded that it is subject to constitutional scrutiny.

This past August, on behalf of a group of corporate and securities law professors, Nagy filed an amici curiae brief with the Supreme Court supporting the petitioners' position that the PCAOB's structure is unconstitutional. The brief made clear that while Nagy and the other amici applauded Congress' decision to establish a new regulator to oversee the auditors of public companies, they were concerned that the PCAOB's design accords the board substantial discretion and autonomy without imposing constitutionally sufficient accountability. Nagy will be in attendance at Monday's arguments.

The constitutional issues center on whether the PCAOB's structure complies with the Appointments Clause and the doctrine of separation of powers.

"That structure has been called into question because the five members who head the PCAOB are neither appointed nor removable by the president," Nagy said. "Instead, PCAOB members are appointed for fixed, five-year terms by the U.S. Securities and Exchange Commission, an independent regulatory agency that is itself insulated from direct presidential control. PCAOB members are removable only by the SEC and only for willful or unjustifiable transgressions."

Nagy's most recent scholarship on the PCAOB will be published in a forthcoming symposium issue of the Pittsburgh Law Review. The article, "Is the PCAOB a 'Heavily Controlled Component' of the SEC?: An Essential Question in the Constitutional Controversy," challenges the D.C. Circuit's depiction of the PCAOB as "a heavily controlled component" of the SEC and argues that this flawed premise was essential to the court's 2-1 decision upholding the PCAOB's constitutionality. With a focus on statutory analysis and legislative history, the article seeks to show that Congress designed the PCAOB to operate with substantive independence from the SEC. It then argues that PCAOB members acting with significant discretion and autonomy outside the SEC's control are "principal officers" who, pursuant to the Appointments Clause, must be appointed by the president with the advice and consent of the Senate. And as "principal officers" performing significant executive functions, PCAOB members must be removable for cause by the president.

"The case is a tremendously important one -- both for the constitutional issues it raises and for its implications for securities enforcement and financial regulation in general," she said. "Securities scholars are often reluctant to delve into debates about constitutional law. But the Free Enterprise Fund case raises issues that call out for securities law expertise."

Nagy teaches courses in Securities Litigation, Securities Regulation, and Corporations, and is a frequent speaker at law schools and professional conferences. She is co-author of Securities Litigation and Enforcement: Cases and Materials, 2nd Edition (Thomson-West 2008) (with Richard W. Painter and Margaret V. Sachs).