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Court Weighs Sarbanes-Oxley


Here in Washington today, the Supreme Court seemed on the edge of invalidating the anti-fraud law passed in the wake of the Enron scandal. The law overhauled the way publicly traded companies are audited. The goal was to ensure that investors get an accurate picture of a company's finances.

NPR legal affairs correspondent Nina Totenberg reports.

NINA TOTENBERG: Enron's collapse in 2001 was, at the time, the largest bankruptcy in U.S. history. Soon, other huge American corporations went belly-up, leaving investors who'd been deceived by sham outside audits holding the bag.

In response, Congress passed the so-called Sarbanes-Oxley Law, named for its principal authors. Whereas auditors had been self-regulated in the past, the law set up an independent board of top accounting specialists charged with monitoring outside audit firms.

The board is funded by a fee charged to the audited firms. It's appointed by the Securities and Exchange Commission and is supervised by the commission. But pro-business conservatives unhappy with the law are attacking it as unconstitutional.

On the steps of the Supreme Court today, lawyer Michael Carvin, representing the Free Enterprise Fund, acknowledged that if he's successful, business interests that have chafed at new regulations will have a chance to rewrite the law.

Mr. MICHAEL CARVIN (Lawyer, Free Enterprise Fund): If in the process of fixing the unconstitutional board, Congress makes some commonsense adjustments to the substance of Sarbanes-Oxley, I think the Free Enterprise Fund would be very happy.

TOTENBERG: Inside the courtroom, Carvin had a generally receptive audience. The Court's two most recent Bush appointees, Chief Justice John Roberts and Justice Samuel Alito, both railed against the independence of agency action when they served in the executive branch. They saw these agencies as rogue entities, unaccountable to the president. And Justice Antonin Scalia has long been an outspoken critic of any regulatory system that doesn't give the president the direct power to hire and fire.

That left the Court's more liberal justices, particularly Ginsburg and Breyer, asking the skeptical questions. Ginsburg objected to Carvin's characterization of the auditing oversight board as an unaccountable, independent agency. It's not independent of the SEC, she said. It can't do anything without the approval of the SEC. It can't even issue a subpoena.

Carvin contended, though, that the SEC itself is at the outermost limits of constitutional acceptability and that the oversight board imposes a burden on citizens outside the SEC's control. Justice Kennedy: What's the burden? Answer: The time and cost of compliance with the auditing rules.

Carvin had a pretty easy time of it compared to Solicitor General Elena Kagan, defending the statute. Kagan: The board is in no different position than the staff of the SEC. It must get its budget, its salaries, its investigative rules and its sanctions approved by the SEC.

Scalia, Roberts and Alito pounced. Roberts questioned the need for an independent board. Kagan replied, Congress wanted the board to be independent of the accounting industry, not the SEC.

Roberts: Then why did Congress set up a separate board? Answer: For two reasons. With the SEC strapped for resources, Congress wanted to set up a system of auditing oversight that has its own separate funding stream, namely fees paid by the audited companies. And second, Congress wanted to get the board outside of the normal civil service laws so that it could attract specialists who are normally paid much more. Kagan said this is the same system used by other quasi-public regulators that overseas stockbrokers and the stock exchanges.

Justice Alito: What are the salaries of the board members? Answer: They're over $500,000 and the SEC has been very active in reviewing them.

Justice Alito: Supposing the president reads about this and says, this is outrageous. I want to change it. How can he do that? Answer: Just as he would with any other SEC function, he or his staff would call the SEC commissioners and say, I have a problem with this.

Justice Scalia, sarcastically: I could do that. Kagan pushed back: Justice Scalia, that's what the Supreme Court held in 1935, that the president cannot order independent agencies to take specific actions in the same manner that he can order cabinet departments to act.

Chief Justice Roberts focused on the question of firing. The president can only remove the SEC commissioners for cause, meaning misconduct. And the SEC, in turn, can only remove board members for cause. Said Roberts: That's for cause squared and that's a significant limitation on the president's power that this court has not recognized before.

Representing the oversight board, lawyer Jeffrey Lamken contended that there's no real difference in the powers of the board and the powers of the SEC staff. In fact, right now, the SEC staff can issue subpoenas without asking the commission for consent. That's more than the accounting board can do.

As for the removal provisions for board members, he said, they are no different than those governing other boards under SEC control that exists throughout the financial regulatory system. If you start pulling at those regulatory threads, he seemed to say, you could be unraveling the fabric of the country's regulatory system and leaving investors with no meaningful protection.

Nina Totenberg, NPR News, Washington. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Nina Totenberg is NPR's award-winning legal affairs correspondent. Her reports air regularly on NPR's critically acclaimed newsmagazines All Things Considered, Morning Edition, and Weekend Edition.