The Logistics Of Constitutionality In Financial Reform

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Today, the Supreme Court listened to a case that could have some implications for financial reform. It has to do with legislation from the last time Congress passed broad financial reforms -- in 2002 with audit-focused legislation called the "Sarbanes-Oxley Act." The bill was passed in response to the accounting fraud at Enron and Worldcom. The case questions whether the President should have direct authority over all regulators. If the case has legs, it might create practical difficulties for current financial regulation endeavors.

One requirement of Sarbanes-Oxley was to create a new oversight board called the Public Company Accounting Oversight Board (PCAOB). As the name suggests, would oversee public company accounting firms. Before, the accounting industry was self-regulated, where the old board in place was supported by fees paid by the very firms it regulated. Sarbanes-Oxley sought to eliminate this seeming conflict of interest.

The problem, however, is that the board is appointed by the Securities and Exchange Commission (SEC), not the President. Reuters explains:

At issue is the Constitution's separation of powers principle and appointments clause -- which requires the president to appoint principal officers.


Currently, the President has no direct control over the PCAOB, though he can directly control the SEC. So in a roundabout way, the President can affect the PCAOB through his SEC controls, but the Supreme Court might worry that this indirect control is not strong enough to satisfy the Constitution.


The new financial regulatory proposals out there all call for the creation of new regulators and sub-regulators. If this case declares that the President must have direct control over the PCAOB, then the same could be said for any regulators new legislation creates.

On some level, I wonder if this is wise. The Constitution must be heeded, so I don't mean to trample on its venerated words. But at some point, isn't there a logistical difficulty in the President appointing dozens and dozens of regulators? I hardly doubt our founding fathers could have begun to imagine the complex financial markets that would one day exist, so they also certainly couldn't have foreseen the copious appointments weighing on the President's shoulders that would result through its regulation.

I worry we'll end up with a situation where the President technically appoints all of these regulators, but that appointment really occurs through another regulator, like the SEC, telling the President who it wants in there. He would then thoughtlessly comply, since he couldn't possibly afford the time to independently fill those posts himself. Although this might satisfy the Constitution in a technical sense, it hardly captures the spirit of what the document calls for.

So I don't really see the harm in delegating some authority for such appointments to agencies over which the President has power. If the government isn't acting in the sprit of the Constitution, then it should be amended accordingly. As long as the U.S.'s regulatory framework grows, flexibility must be put in place to ensure that it's logistically feasible.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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