PUBLISHED:June 28, 2010

Cox comments on ruling in Free Enterprise Fund v. PCAOB

Commenting on the Supreme Court’s ruling in Free Enterprise Fund v. Public Company Accounting Oversight Board, James Cox, the Brainerd Currie Professor of Law, said that “victory can be declared by the PCAOB and the proponents of the Sarbanes-Oxley Act.”

Cox is a leading expert on securities law and corporate governance who has published extensively in the areas of market regulation and corporate governance and has testified before the U.S. House and Senate on insider trading, class actions and market reform issues. He is a member of the Public Company Accounting Oversight Board’s Standing Advisory Group.

“Today, the Sarbanes-Oxley Act dodged a bullet,” said Cox. “The Free Enterprise case could have rendered the Sarbanes-Oxley Act’s efforts to bring significant improvement in the quality and trustworthiness of financial reporting unconstitutional and, thus, stopping SOX’s positive contributions dead in its tracks.

“While the case addressed a rather arcane point of constitutional law, the outcome of this decision affects everyone who holds securities or whose retirement or insurance benefits are tied to such investments,” he said.

“The stakes were high as had the Court held the provision making the PCAOB’s board members removable only for cause could have been seen as so central to the creation of the PCAOB as to render the PCAOB constitutional vulnerable, given that the creation of the PCAOB was the keystone provision of SOX, this would have raised serious questions about the Act’s overall constitutionality since there was no severability provision in SOX. However, the majority opinion concludes that the unconstitutionality of the board members’ tenure provision is severable from the rest of the act such that partial invalidation does not impact the remaining portions of SOX. Thus, going forward, PCAOB board members are removable for cause but the balance of the legislation remains fully operative as a law. This means the many positive contributions of PCAOB and more generally Sox are unaffected by today’s decision.”

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