WHETHER THE SPECIAL MASTER FOR TROUBLED ASSET RELIEF
PROGRAM EXECUTIVE COMPENSATION IS A PRINCIPAL OFFICER
          UNDER THE APPOINTMENTS CLAUSE

        The Special Master for Troubled Asset Relief Program Executive Compensation is not a
principal officer for purposes of the Appointments Clause and thus need not be appointed by the
President, by and with the advice and consent of the Senate.

                                                                November 5, 2010

 MEMORANDUM OPINION FOR THE GENERAL COUNSEL, DEPARTMENT
 OF THE TREASURY, AND THE SPECIAL INSPECTOR GENERAL FOR THE
              TROUBLED ASSET RELIEF PROGRAM

        You have asked for our opinion whether the Special Master for Troubled Asset
Relief Program Executive Compensation (“Special Master”) is a principal officer for
purposes of the Appointments Clause, U.S. Const. art. II, § 2, cl. 2, and thus must be
appointed by the President, by and with the advice and consent of the Senate. 1 The
position of Special Master was created by the Secretary of the Treasury, who has charged
the Special Master with assisting in the enforcement of the executive compensation and
corporate governance requirements established under the Emergency Economic
Stabilization Act (“EESA”), Pub. L. No. 110-343, § 111, 122 Stat. 3765, 3776-77 (2008),
as amended. See 31 C.F.R. § 30.16(a) (2010). For the reasons that follow, we conclude
that the Special Master is not a principal officer. 2

                                                    I

        On October 3, 2008, in the midst of a major crisis affecting the Nation’s financial
system, Congress enacted the EESA to provide the Secretary of the Treasury with
immediate authority and facilities “to restore liquidity and stability to the financial system
of the United States.” 12 U.S.C. § 5201(1) (2006 & Supp. III 2009). Generally speaking,
the “EESA vests the Secretary with the flexibility and power to take bold actions
necessary to stabilize the economy.” In re Motors Liquidation Co., 430 B.R. 65, 94
(S.D.N.Y. 2010).

        Title I of the EESA authorizes the Secretary “to establish the Troubled Asset
Relief Program (‘TARP’) to purchase, and to make and fund commitments to purchase,
troubled assets from any financial institution, on such terms and conditions as are

        1
           See Letter for the Honorable David J. Barron, Acting Assistant Attorney General, Office of
Legal Counsel, from Neil M. Barofsky, Special Inspector General, Office of the Special Inspector General
for the Troubled Asset Relief Program (Aug. 20, 2010) (“SIGTARP Letter”). The Treasury Department
General Counsel’s request was conveyed orally.
        2
           Both the Treasury Department General Counsel and the Special Inspector General for the
Troubled Asset Relief Program (“SIGTARP”) premise their shared opinion request on the assumption that
the Special Master is an officer of the United States. We take that assumption as a given for purposes of
this memorandum.
                       Opinions of the Office of Legal Counsel in Volume 34

determined by the Secretary.” 12 U.S.C. § 5211(a)(1). Section 111 of the EESA, as
amended, see Pub. L. No. 111-22, § 403, 123 Stat. 1632, 1658 (2009); Pub. L. No. 111-5,
§ 7001, 123 Stat. 115, 516-20 (2009), imposes requirements on TARP recipients related
to corporate governance and executive compensation. See 12 U.S.C. § 5221.
Subsections (b), (f), and (h) of that section are of particular relevance to determining the
status of the Special Master. Subsection (b) provides that “[t]he Secretary shall require
each TARP recipient to meet appropriate standards for executive compensation and
corporate governance,” id. § 5221(b)(2); see also id. § 5221(b)(1) (“During the period in
which any obligation arising from financial assistance provided under the TARP remains
outstanding, each TARP recipient shall be subject to . . . the standards established by the
Secretary under this section”), and it establishes a series of specific requirements that
must be included in those standards, see id. § 5221(b)(3). 3 Subsection (f) directs the


       3
           Those requirements include:

      (A) Limits on compensation that exclude incentives for senior executive officers of the
      TARP recipient to take unnecessary and excessive risks that threaten the value of such
      recipient during the period in which any obligation arising from financial assistance provided
      under the TARP remains outstanding.
      (B) A provision for the recovery by such TARP recipient of any bonus, retention award, or
      incentive compensation paid to a senior executive officer and any of the next 20 most highly-
      compensated employees of the TARP recipient based on statements of earnings, revenues,
      gains, or other criteria that are later found to be materially inaccurate.
      (C) A prohibition on such TARP recipient making any golden parachute payment to a senior
      executive officer or any of the next 5 most highly-compensated employees of the TARP
      recipient during the period in which any obligation arising from financial assistance provided
      under the TARP remains outstanding.
      (D) (i) A prohibition on such TARP recipient paying or accruing any bonus, retention award,
      or incentive compensation during the period in which any obligation arising from financial
      assistance provided under the TARP remains outstanding, except that any prohibition
      developed under this paragraph shall not apply to the payment of long-term restricted stock
      by such TARP recipient, provided that such long-term restricted stock—
      (I) does not fully vest during the period in which any obligation arising from financial
      assistance provided to that TARP recipient remains outstanding;
      (II) has a value in an amount that is not greater than 1/3 of the total amount of annual
      compensation of the employee receiving the stock; and
      (III) is subject to such other terms and conditions as the Secretary may determine is in the
      public interest.
      (ii) The prohibition required under clause (i) shall apply as follows:
      (I) For any financial institution that received financial assistance provided under the TARP
      equal to less than $25,000,000, the prohibition shall apply only to the most highly
      compensated employee of the financial institution.
      (II) For any financial institution that received financial assistance provided under the TARP
      equal to at least $25,000,000, but less than $250,000,000, the prohibition shall apply to at
      least the 5 most highly-compensated employees of the financial institution, or such higher
      number as the Secretary may determine is in the public interest with respect to any TARP
      recipient.
      (III) For any financial institution that received financial assistance provided under the TARP
      equal to at least $250,000,000, but less than $500,000,000, the prohibition shall apply to the
      senior executive officers and at least the 10 next most highly-compensated employees, or
      such higher number as the Secretary may determine is in the public interest with respect to
      any TARP recipient.


                                                    2
      Whether the Special Master for TARP Executive Compensation Is a Principal Officer

Secretary to “review bonuses, retention awards, and other compensation paid to the
senior executive officers and the next 20 most highly-compensated employees of each
entity receiving TARP assistance before February 17, 2009, to determine whether any
such payments were inconsistent with the purposes of this section or the TARP or were
otherwise contrary to the public interest.” Id. § 5221(f). Subsection (h) requires the
Secretary to “promulgate regulations to implement this section.” Id. § 5221(h).

        Subsection 101(c) of the EESA provides that “[t]he Secretary is authorized to take
such actions as the Secretary deems necessary to carry out the authorities in [the EESA].”
12 U.S.C. § 5211(c). These authorities include, “without limitation,” “direct hiring
authority with respect to the appointment of employees to administer [the EESA],” id.
§ 5211(c)(1), and “[i]ssuing such regulations and other guidance as may be necessary
or appropriate to define terms or carry out the authorities or purposes of [the EESA],”
id. § 5211(c)(5).

        On June 15, 2009, the Secretary issued an Interim Final Rule on TARP Standards
for Compensation and Corporate Governance (“Interim Rule”). See 74 Fed. Reg. 28,394-
28,423 (codified at 31 C.F.R. pt. 30). The Interim Rule, which became effective on the
day it was issued, see 74 Fed. Reg. at 28,423; 31 C.F.R. § 30.17 (2010), elaborates the
specific standards and other requirements relating to corporate governance and executive
compensation that section 111 of the EESA establishes for TARP recipients.

        To ensure that these requirements are applied “efficiently,” “consistently,”
and “equitably,” the Interim Rule further provides that the Secretary “shall establish
the Office of the Special Master for TARP Executive Compensation.” 74 Fed. Reg. at
28,403; 31 C.F.R. § 30.16(a). The Special Master is to “be appointed by, and serve at
the pleasure of, the Secretary,” and “may be removed by the Secretary without notice,
without cause, and prior to the naming of any successor Special Master.” Id. The
Interim Rule delegates to the Special Master certain of the Secretary’s “powers, duties,
and responsibilities” relating to enforcement of the Act. Id. These delegated functions
include: (1) interpreting how the requirements on executive compensation and corporate
governance established under section 111 of the EESA, the Interim Rule, and any other

      (IV) For any financial institution that received financial assistance provided under the TARP
      equal to $500,000,000 or more, the prohibition shall apply to the senior executive officers
      and at least the 20 next most highly-compensated employees, or such higher number as the
      Secretary may determine is in the public interest with respect to any TARP recipient.
      (iii) The prohibition required under clause (i) shall not be construed to prohibit any bonus
      payment required to be paid pursuant to a written employment contract executed on or before
      February 11, 2009, as such valid employment contracts are determined by the Secretary or
      the designee of the Secretary.
      (E) A prohibition on any compensation plan that would encourage manipulation of the
      reported earnings of such TARP recipient to enhance the compensation of any of its
      employees.
      (F) A requirement for the establishment of a Board Compensation Committee that meets the
      requirements of subsection (c).

12 U.S.C. § 5221(b)(3).



                                                   3
                       Opinions of the Office of Legal Counsel in Volume 34

applicable guidance apply to TARP recipients and their employees; (2) determining
whether compensation paid to employees of TARP recipients prior to February 17, 2009
was “inconsistent with the purposes of section 111 of [the] EESA or TARP, or otherwise
contrary to the public interest,” and, if so, negotiating with the TARP recipient and
the compensated employee for appropriate reimbursement to the Government;
(3) determining whether to approve compensation payments to, and compensation
structures for, certain highly compensated employees of TARP recipients receiving
financial assistance defined by the Interim Rule as “exceptional financial assistance”;
and (4) issuing advisory opinions on compensation payments to, and compensation
structures for, certain employees of TARP recipients generally. Id. § 30.16(a)(1)-(4).
In making determinations under paragraphs (2) or (3) and in offering opinions under
paragraph (4), the Special Master must follow a set of principles outlined in the Interim
Rule. See id. § 30.16(a)(2)-(4). 4

       4
           The Interim Rule provides:

        In reviewing a compensation structure or a compensation payment to determine whether it
      is inconsistent with the purposes of section 111 of EESA or TARP or is otherwise contrary
      to the public interest, the Special Master shall apply the principles enumerated below. The
      principles are intended to be consistent with sound compensation practices appropriate for
      TARP recipients, and to advance the purposes and considerations described in EESA
      sections 2 and 103, including the maximization of overall returns to the taxpayers of the
      United States and providing stability and preventing disruptions to financial markets. The
      Special Master has discretion to determine the appropriate weight or relevance of a particular
      principle depending on the facts and circumstances surrounding the compensation structure
      or payment under consideration, such as whether a payment occurred in the past or is
      proposed for the future, the role of the employee within the TARP recipient, the situation of
      the TARP recipient within the marketplace and the amount and type of financial assistance
      provided. To the extent that two or more principles may appear inconsistent in a particular
      situation, the Special Master will determine the relative weight to be accorded each principle.
      In the case of any review of payments already made under paragraph (c)(2) of this section,
      or of any rights to bonuses, awards, or other compensation already granted, the Special
      Master shall apply these principles by considering the facts and circumstances at the time
      the compensation was granted, earned, or paid, as appropriate.
         (i) Risk. The compensation structure should avoid incentives to take unnecessary or
      excessive risks that could threaten the value of the TARP recipient, including incentives that
      reward employees for short-term or temporary increases in value, performance, or similar
      measure that may not ultimately be reflected by an increase in the long-term value of the
      TARP recipient. Accordingly, incentive payments or similar rewards should be structured
      to be paid over a time horizon that takes into account the risk horizon so that the payment or
      reward reflects whether the employee's performance over the particular service period has
      actually contributed to the long-term value of the TARP recipient.
         (ii) Taxpayer return. The compensation structure, and amount payable where applicable,
      should reflect the need for the TARP recipient to remain a competitive enterprise, to retain
      and recruit talented employees who will contribute to the TARP recipient's future success,
      and ultimately to be able to repay TARP obligations.
         (iii) Appropriate allocation. The compensation structure should appropriately allocate the
      components of compensation such as salary, short-term and long-term incentives, as well as
      the extent to which compensation is provided in cash, equity or other types of compensation
      such as executive pensions, other benefits, or perquisites, based on the specific role of the
      employee and other relevant circumstances, including the nature and amount of current
      compensation, deferred compensation, or other compensation and benefits previously paid or
      awarded. The appropriate allocation may be different for different positions and for different


                                                    4
      Whether the Special Master for TARP Executive Compensation Is a Principal Officer

         When acting under paragraphs (2) and (3), the Special Master must make an
“initial determination” within 60 days of receiving a “substantially complete submission”
from a TARP recipient. Id. § 30.16(c)(1). The TARP recipient then has 30 days to
request reconsideration of the initial determination, and the Special Master must provide
a “final determination” in writing within 30 days thereafter, setting forth the facts and
analysis that formed the basis for the determination. Id. If the TARP recipient does not
request reconsideration within 30 days, the initial determination “shall be treated as a
final determination.” Id.

        The Interim Rule also specifies the effects of the Special Master’s decisions.
The Interim Rule provides that “[i]n the case of any final determination that the TARP
recipient is required to receive, the final determination of the Special Master shall be final
and binding and treated as the determination of the Treasury.” Id. § 30.16(c)(2). “An
advisory opinion of the Special Master,” however, “shall not be binding upon any TARP
recipient or employee, but may be relied upon by a TARP recipient or employee if the
advisory opinion applies to the TARP recipient and the employee and the TARP recipient
and employee comply in all respects with the advisory opinion.” Id. § 30.16(c)(3).



       employees, but generally, in the case of an executive or other senior level position a
       significant portion of the overall compensation should be long-term compensation that aligns
       the interest of the employee with the interests of shareholders and taxpayers.
          (iv) Performance-based compensation. An appropriate portion of the compensation should
       be performance-based over a relevant performance period. Performance-based compensation
       should be determined through tailored metrics that encompass individual performance and/or
       the performance of the TARP recipient or a relevant business unit taking into consideration
       specific business objectives. Performance metrics may relate to employee compliance with
       relevant corporate policies. In addition, the likelihood of meeting the performance metrics
       should not be so great that the arrangement fails to provide an adequate incentive for the
       employee to perform, and performance metrics should be measurable, enforceable, and
       actually enforced if not met. The appropriate allocation and the appropriate performance
       metrics may be different for different positions and for different employees, but generally a
       significant portion of total compensation should be performance-based compensation, and
       generally that portion should be greater for positions that exercise higher levels of
       responsibility.
          (v) Comparable structures and payments. The compensation structure, and amount
       payable where applicable, should be consistent with, and not excessive, taking into account
       compensation structures and amounts for persons in similar positions or roles at similar
       entities that are similarly situated, including, as applicable, entities competing in the same
       markets and similarly situated entities that are financially distressed or that are contemplating
       or undergoing reorganization.
          (vi) Employee contribution to TARP recipient value. The compensation structure, and
       amount payable where applicable, should reflect the current or prospective contributions of
       an employee to the value of the TARP recipient, taking into account multiple factors such
       as revenue production, specific expertise, compliance with company policy and regulation
       (including risk management), and corporate leadership, as well as the role the employee may
       have had with respect to any change in the financial health or competitive position of the
       TARP recipient.

31 C.F.R. § 30.16(b).



                                                      5
                        Opinions of the Office of Legal Counsel in Volume 34

        Finally, the Interim Rule provides that the Special Master “shall have such
other duties and powers related to the application of compensation issues arising in the
administration of [the] EESA or TARP as the Secretary or the Secretary’s designate
may delegate to the Special Master, including, but not limited to, the interpretation or
application of contractual provisions between the Federal government and a TARP
recipient as those provisions relate to the compensation paid to, or accrued by, an
employee of such TARP recipient.” Id. § 30.16(a)(5). 5

                                                    II

         The Appointments Clause states:

         [The President] . . . shall nominate, and by and with the Advice and
         Consent of the Senate, shall appoint Ambassadors, other public Ministers
         and Consuls, Judges of the supreme Court, and all other Officers of the
         United States, whose Appointments are not herein otherwise provided for,
         and which shall be established by Law: but the Congress may by Law vest
         the Appointment of such inferior Officers, as they think proper, in the
         President alone, in the Courts of Law, or in the Heads of Departments.

U.S. Const. art. II, § 2, cl. 2. As the Clause thus makes clear, officers of the United States
fall into two basic categories: principal officers and inferior officers. See, e.g., United
States v. Germaine, 99 U.S. 508, 509 (1878) (“The Constitution for purposes of
appointment . . . divides all its officers into two classes.”); see also Morrison v. Olson,
487 U.S. 654, 670 (1988). Principal officers must be appointed by the President, by and
with the advice and consent of the Senate. Inferior officers must be appointed in the
same manner, unless Congress “by Law vest[s] the[ir] Appointment . . . in the President
alone, in the Courts of Law, or in the Heads of Departments.” U.S. Const. art. II, § 2, cl.
2; see Morrison, 487 U.S. at 670-71; Buckley v. Valeo, 424 U.S. 1, 132 (1976) (per
curiam). “[T]he terms of the Appointments Clause set out the only means by which
Congress may provide for the appointment of ‘Officers of the United States,’” The
Constitutional Separation of Powers Between the President and Congress, 20 Op. O.L.C.
124, 139 (1996) (citing Buckley, 424 U.S. at 124-37), and “[n]either Congress nor the
Executive can agree to waive this structural protection,” Freytag v. Commissioner of
Internal Revenue, 501 U.S. 868, 880 (1991).

      The Special Inspector General for the Troubled Asset Relief Program
(“SIGTARP”) questions whether the Special Master is a principal officer because, in his
         5
           The preamble to the Interim Rule characterizes the Special Master’s residual authority as limited
to matters arising under section 111 of the EESA. It states that “[t]he scope of the Special Master’s
authority and responsibility is limited to compensation and corporate governance matters under section 111
with respect to TARP recipients, and the Special Master has no authority to provide guidance or review any
submissions with respect to matters other than compensation and corporate governance matters under
section 111, or to provide guidance or review any submissions with respect to compensation or corporate
governance matters of employers that are not TARP recipients.” 74 Fed. Reg. at 28,404 (emphasis added).
The Treasury Department General Counsel’s Office has informed us that the Secretary has not assigned any
additional functions to the Special Master under this provision.



                                                     6
      Whether the Special Master for TARP Executive Compensation Is a Principal Officer

view, “the Secretary appears to be without authority to control the actions of the Special
Master in any . . . meaningful manner” other than removal. SIGTARP Letter at 5. 6 If the
Special Master were indeed a principal officer, his appointment by the Secretary would
not be in conformity with the Appointments Clause.

        In our view, the Special Master is not a principal officer. The Supreme Court has
“not set forth an exclusive criterion for distinguishing between principal and inferior
officers for Appointments Clause purposes.” Edmond v. United States, 520 U.S. 651,
661 (1997). But in three decisions over the past quarter century the Court has set out a
number of important guideposts by which to distinguish principal from inferior officers.

        In Morrison v. Olson, 487 U.S. 654 (1988), the Supreme Court considered
whether an independent counsel appointed pursuant to the Ethics in Government Act of
1978, 28 U.S.C. §§ 591-599 (1988), was an inferior officer. It concluded that she was,
based on four considerations. First, the Court noted that the independent counsel was
“subject to removal by a higher Executive Branch official” (the Attorney General).
Morrison, 487 U.S. at 671. The Court explained that this factor weighed in favor of
viewing the independent counsel as an inferior officer even though “she possesse[d] a
degree of independent discretion to exercise the powers delegated to her under the Act.”
Id. Second, the Court relied on the fact that the independent counsel performed what it
considered only “limited duties” because she was “restricted primarily to investigation
and, if appropriate, prosecution for certain federal crimes.” Id. The Court acknowledged
that the Ethics in Government Act gave the independent counsel “full power and
independent authority to exercise all investigative and prosecutorial functions and powers
of the Department of Justice,” but thought it significant that “this grant of authority does
not include any authority to formulate policy for the Government or the Executive
Branch, nor does it give appellant any administrative duties outside of those necessary
to operate her office.” Id. at 671-72. Third, the Court stressed that the independent
counsel’s jurisdiction was relatively narrow, both because the Ethics in Government
Act itself was “restricted in applicability to certain federal officials suspected of certain
serious federal crimes” and because “an independent counsel can only act within the
scope of the jurisdiction that has been granted by the Special Division pursuant to a
request by the Attorney General.” Id. at 672. Fourth, the Court pointed out that the
independent counsel’s tenure was “limited” because while her office had no fixed term,
it was “‘temporary’ in the sense that an independent counsel is appointed essentially to
accomplish a single task, and when that task is over the office is terminated.” Id.

       Almost a decade after Morrison, the Court returned to the distinction between
principal and inferior officers in Edmond v. United States, 520 U.S. 651 (1997). Edmond

        6
           The Office of the Special Inspector General for the Troubled Asset Relief Program was created
by the EESA. See 12 U.S.C. § 5231(a). The Office is headed by a Special Inspector General—the
SIGTARP—who is appointed by the President, with the advice and consent of the Senate. See id.
§ 5231(b). The duties of the SIGTARP include conducting audits and investigations of the Secretary’s
purchase, management, and sale of assets under the TARP and of the Secretary’s management of the
TARP, as well as conducting audits and investigations of other actions taken under the EESA. See id.
§ 5231(c)(1), (4).


                                                    7
                        Opinions of the Office of Legal Counsel in Volume 34

concerned civilians appointed by the Secretary of Transportation to serve as military
judges on the Coast Guard Court of Criminal Appeals. The Supreme Court concluded
that the judges were inferior officers, but it characterized the factors it had relied on in
Morrison as not “definitive” and adopted a somewhat different approach. Id. at 661.

        The Court acknowledged that judges on the Coast Guard Court of Criminal
Appeals did not have a “narrow” jurisdiction or “limited” tenure, as those terms had been
used in Morrison, and that the third and fourth considerations discussed in Morrison thus
cut against characterizing the judges as inferior officers. See id. It nonetheless deemed
them inferior officers because their work was “directed and supervised at some level by
other [officers] who were appointed by Presidential nomination with the advice and
consent of the Senate.” Id. at 663. That supervision, the Court explained, was carried out
by two Executive Branch actors. The Judge Advocate General of the Coast Guard (the
Secretary of Transportation’s subordinate) “exercise[d] administrative oversight over the
Court of Criminal Appeals” in that the Judge Advocate General established the court’s
rules of procedure, could order any of its decisions submitted for review, and could
remove judges without cause. Id. at 664, 666. And the Court of Appeals for the Armed
Forces (an Executive Branch tribunal) could review and reverse the lower tribunal’s
decisions, and prevent any final order from being issued. See id. at 664-65. Thus,
“[w]hat is significant,” the Supreme Court explained, “is that the judges of the Court of
Criminal Appeals have no power to render a final decision on behalf of the United States
unless permitted to do so by other Executive officers.” Id. at 665.

        Rather than listing a number of non-exclusive factors as it had done in Morrison,
then, the Court in Edmond appeared to offer one overall standard for identifying inferior
officers. “Generally speaking,” the Court stated, “the term ‘inferior officer’ connotes a
relationship with some higher ranking officer or officers below the President: Whether
one is an ‘inferior’ officer depends on whether he has a superior.” Id. at 662. At the
same time, the Court indicated that determining whether an officer has a superior in this
sense may well require considering a number of factors, including whether the officer is
removable by an Executive Branch official below the President and whether the officer’s
work “is directed and supervised at some level by others who were appointed by
Presidential nomination with the advice and consent of the Senate.” Id. at 663.

        Earlier this year, the Supreme Court followed the Edmond approach for
distinguishing inferior from principal officers in Free Enterprise Fund v. Public
Company Accounting Oversight Board, 130 S. Ct. 3139 (June 28, 2010). In Free
Enterprise Fund, the Court considered separation-of-powers and Appointments Clause
challenges to the structure of the Public Company Accounting Oversight Board
(“PCAOB”), a statutorily created entity with “expansive powers to govern [the
accounting] industry.” Id. at 3147. The statute establishing the PCAOB, the Sarbanes-
Oxley Act of 2002, 15 U.S.C. §§ 7211-7219 (“SOX Act”), provided for the Securities
and Exchange Commission (“SEC”) to appoint the PCAOB’s members. 7 The SOX Act

         7
            The parties stipulated that SEC Commissioners could not be removed by the President except
for “‘inefficiency, neglect of duty, or malfeasance in office,’” and the Court decided the case based on that
understanding. Free Enterprise Fund, 130 S. Ct. at 3148-49.


                                                      8
      Whether the Special Master for TARP Executive Compensation Is a Principal Officer

also granted the SEC “[b]road power over [the PCAOB] functions,” id. at 3148,
including approving the PCAOB’s budget, issuing regulations that bind it, relieving the
PCAOB of authority, amending and denying approval for PCAOB sanctions and rules,
and enforcing PCAOB rules on its own. See id. at 3158. Under the SOX Act as enacted,
however, the SEC could remove PCAOB members only “‘for good cause shown,’”
“‘in accordance with’” specified procedures. Id. at 3148 (quoting 15 U.S.C.
§ 7211(e)(6)). The Court held that the resulting dual for-cause limitations on the
President’s ability to remove PCAOB members—with the SEC Commissioners
removable by the President only for good cause, and the PCAOB members removable by
the SEC only for another, more restrictive type of good cause specified in the SOX Act—
was “contrary to Article II’s vesting of the executive power in the President,” and
therefore violated the separation of powers. Id. at 3147, 3154. To remedy the infirmity,
the Court excised from the SOX Act the provision making PCAOB members removable
only for cause, thus rendering them removable by the SEC at will.

        Turning to the Appointments Clause challenge under this modified statutory
structure, the Court concluded that the PCAOB’s members were properly appointed
inferior officers. “Given that the Commission is properly viewed, under the Constitution,
as possessing the power to remove Board members at will,” the Court explained, “and
given the Commission’s other oversight authority, we have no hesitation in concluding
that under Edmond the Board members are inferior officers.” Id. at 3162.

        Both Edmond and Free Enterprise Foundation indicate that the level of direction
and supervision exercised by a superior over a subordinate need not be total for the
subordinate to qualify as an inferior officer. In Edmond, for example, the Court
acknowledged that the scope of substantive review that the Court of Appeals for the
Armed Forces exercised over the Court of Criminal Appeals “is narrower than that
exercised by the Court of Criminal Appeals,” because “so long as there is some
competent evidence in the record to establish each element of the offense beyond a
reasonable doubt, the Court of Appeals for the Armed Forces will not reevaluate the
facts.” 520 U.S. at 665. What was “significant” in concluding that the Court of Criminal
Appeals judges nonetheless were inferior officers, however, was that they “have no
power to render a final decision on behalf of the United States unless permitted to do so
by other Executive officers.” Id. Similarly, in Free Enterprise Foundation, the Court
rejected the proposition that the SEC’s power over the PCAOB’s activities was
“plenary.” 130 S. Ct. at 3159. Rather, the Court observed, the PCAOB “is empowered
to take significant enforcement actions, and does so largely independently of the
Commission”; indeed, “the Act nowhere gives the Commission effective power to start,
stop, or alter individual Board investigations.” Id.; see also id. at 3159 (“The Board . . .
has significant independence in determining its priorities and intervening in the affairs
of regulated firms (and the lives of their associated persons) without Commission
preapproval or direction.”). Thus, Edmond and Free Enterprise Foundation make clear
(as had Morrison) that an Executive official can exercise some level of independent
authority and still qualify as an inferior officer, so long as it can be said that the official
“is directed and supervised at some level by others who were appointed by Presidential




                                               9
                        Opinions of the Office of Legal Counsel in Volume 34

nomination with the advice and consent of the Senate.” Edmond, 520 U.S. at 663
(emphasis added).

                                                    III

        Applying the principles established by the Supreme Court, we think it clear that
the Special Master is not a principal officer. If one looks to the four Morrison factors—
removal, duties, jurisdiction, and tenure—they all point in favor of the conclusion that the
Special Master is not a principal officer. The Special Master is subject to at-will removal
by the Secretary (without “notice” or “cause”). 31 C.F.R. § 30.16(a). The Special
Master’s duties are limited. As indicated above, they consist of interpreting EESA-
related requirements on TARP recipients’ executive compensation and corporate
governance, negotiating reimbursements for improper compensation payments made
by TARP recipients before February 17, 2009, determining whether to approve
compensation payments and structures relating to certain employees of TARP recipients
receiving “exceptional financial assistance,” and issuing advisory opinions. See supra
pp. 3-5 & n.4. Like the independent counsel in Morrison, the Special Master thus lacks
both “authority to formulate policy for the Government or the Executive Branch” and
significant administrative duties. 487 U.S. at 671-72.8 While the Special Master is
entrusted with authority to interpret section 111 of the EESA, the Interim Rule, and
related guidance, the Special Master is authorized to do so only in applying those
provisions to the compensation practices of particular TARP recipients and certain
of their employees. The Special Master’s jurisdiction is limited to TARP recipients’
executive compensation and corporate governance. See id. And the Special Master’s
tenure is limited to the duration of the Secretary’s authority under section 111 of EESA,
namely “the period in which any obligation arising from financial assistance provided
under the TARP remains outstanding.” 12 U.S.C. § 5221(b)(1). The Special Master,
then, bears each of the marks of inferior officer status attributed to the independent
counsel in Morrison.

       If one looks not to the Morrison factors, but instead to the Edmond considerations
of whether the Special Master is removable by an officer other than the President and
whether the Special Master’s work is subject to “some level” of “direct[ion] and
supervis[ion]” by an official appointed by the President, with the advice and consent of
the Senate—here, the Secretary of the Treasury—again we think it clear that the Special
Master is not a principal officer. 520 U.S. at 663.


         8
           Under the Interim Rule’s residual clause, the Special Master may also be given those “duties
and powers related to the application of compensation [and corporate governance] issues arising in the
administration of [the] EESA or TARP as the Secretary or the Secretary’s designate may delegate to the
Special Master.” 31 C.F.R. § 30.16(a)(5). But while the outer limit of those potential duties—none of
which has been granted—is not precisely defined, the clause by its terms encompasses only the
“application” of compensation issues. Id. Accordingly, we do not believe that the clause contemplates the
Secretary’s delegation to the Special Master of authorities under section 111 that might be characterized as
more closely resembling policymaking, such as the establishment of executive compensation and corporate
governance standards. Cf. 12 U.S.C. § 5221(b)(2).



                                                    10
      Whether the Special Master for TARP Executive Compensation Is a Principal Officer

        First, the Special Master is removable by the Treasury Secretary at will. The
Special Master serves “at the pleasure of the Secretary, and may be removed by the
Secretary without notice, without cause, and prior to the naming of any successor Special
Master.” 31 C.F.R. § 30.16(a). As the Supreme Court has remarked more than once,
“[t]he power to remove officers . . . is a powerful tool for control.” Edmond, 520 U.S. at
664 (citing Bowsher v. Synar, 478 U.S. 714, 727 (1986) and Myers v. United States, 272
U.S. 52 (1927)); see Free Enterprise Fund, 130 S. Ct. at 3162 (“‘[t]he power to remove
officers’ at will and without cause ‘is a powerful tool for control’ of an inferior” (quoting
Edmond)).

       Second, the Treasury Department has reasonably construed the Interim Rule as
not precluding the Treasury Secretary from reviewing and revising the Special Master’s
determinations should the Secretary choose to exercise that authority.

        Whether the Interim Rule permits the Special Master’s determinations to be
reviewed by the Treasury Secretary is a point of contention between the SIGTARP and
the Treasury Department. The SIGTARP argues that the Interim Rule insulates the
Special Master’s determinations from Secretarial review. He notes that the Interim Rule
“does not expressly authorize any internal approval or review of the Special Master’s
actions.” SIGTARP Letter at 8. Instead, by making the “final determinations” of the
Special Master “final and binding” and “treated as the determination of the Treasury,”
the SIGTARP contends, the Interim Rule precludes further review. Id. The Treasury
Department, by contrast, takes the view that the Special Master’s “decisions remain
subject to further review within the Treasury.” 9

        Our approach to this question is informed by the familiar principle that the
Secretary’s interpretation of his own regulations is entitled to deference “unless plainly
erroneous or inconsistent with the regulation.” Auer v. Robbins, 519 U.S. 452, 461
(1997) (quoting Robertson v. Methow Valley Citizens Council, 490 U.S. 332, 359 (1989),
in turn quoting Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945)). We
think the Treasury Department’s interpretation of the Interim Rule readily meets that
standard.

        The Interim Rule’s lack of an express authorization for Secretarial review of
the Special Master’s determination does not imply preclusion of such review. On the
contrary, by statute the Secretary is “the head of the Department,” 31 U.S.C. § 301(b),
and is vested with the “[d]uties and powers of the officers and employees of the
Department,” id. § 321(c). In our view, these statutes create a strong presumption that
officials within the Department are subject to the Secretary’s supervision, including the
        9
           Letter for Bryan Saddler, Chief Counsel, SIGTARP, from Timothy G. Massad, Chief Counsel,
Office of Financial Stability at 2 (Mar. 26, 2010); see Letter for Bryan Saddler, Chief Counsel, Special
Inspector General for the Troubled Asset Relief Program, Department of the Treasury, from Timothy G.
Massad, Chief Counsel, Office of Financial Stability, at 1 (July 29, 2010) (“the decisions of the Special
Master are subject to review (i.e., can be reviewed) by other officials within Treasury”). The Treasury
Department General Counsel’s Office has confirmed for us that these statements reflect the view of the
Secretary of the Treasury.



                                                    11
                        Opinions of the Office of Legal Counsel in Volume 34

authority to review and reverse their decisions. This default rule may be overcome, we
have suggested, when there is “specific and explicit reservation of ‘final decisionmaking
power’ in a subordinate official,” in the sense of a preclusion of the presumptive
reviewing authority possessed by the department head. Memorandum for the Deputy
Attorney General, from Leon Ulman, Deputy Assistant Attorney General, Office of Legal
Counsel, Re: Authority of the Attorney General Over the National Institute of Justice and
the Bureau of Justice Statistics at 2 (Oct. 14, 1980) (“NIJ/BJS Memo”) (emphasis added);
see also Memorandum for David D. Aufhauser, General Counsel, Department of the
Treasury, from M. Edward Whelan III, Principal Deputy Assistant Attorney General,
Office of Legal Counsel, Re: Under Secretary of Treasury for Enforcement, at 3 (Dec.
19, 2002) (applying similar principle to Treasury Department). But we think it
reasonable to conclude that the Interim Rule lacks a clear enough preclusion of
Secretarial review to overcome the presumption of Secretarial supervisory authority.

         To be sure, the Interim Rule characterizes the Special Master’s final
determinations as “final and binding” and directs that they be “treated as the
determination of the Treasury.” 31 C.F.R. § 30.16(c)(2). But those phrases by
themselves do not necessarily, or even most naturally, amount to the sort of specific and
explicit reservation of decision-making power in the Special Master that would insulate
the Special Master’s final determinations from Secretarial review. Indeed, on at least two
occasions we have concluded that similar phrases were inadequate to demonstrate an
intent to insulate subordinate officials’ decisions from review by the head of a
Department. See Memorandum for Alan C. Raul, General Counsel, Department of
Agriculture, from Doug R. Cox, Deputy Assistant Attorney General, Re: Secretary of
Agriculture Review of ALJ Decisions (Feb. 20, 1991) (“Secretary of Agriculture Review
of ALJ Decisions”) (statute providing that subordinate officials’ decisions “shall be final”
and “shall take effect” thirty days after notice of their delivery did not prohibit issuance
of regulations providing for Secretarial review); Secretary of Education Review of
Administrative Law Judge Decisions, 15 Op. O.L.C. 8, 10-13 (1991) (“Secretary of
Education Review of ALJ Decisions”) (statute providing that an administrative law
judge’s decision “shall be considered to be a final agency action” did not preclude further
agency review). As we explained in the earlier of those opinions, when a statute (or
regulation) refers to a decision as “final agency action” it is often “understood to mean
that action which is necessary and sufficient for judicial review” under the Administrative
Procedure Act even though the decision may be “subject to reconsideration or appeal to
a higher authority within the agency.” Id. at 10-11; cf. Darby v. Cisneros, 509 U.S. 137,
144-47 (1993) (explaining that agency decisions may be final for purposes of judicial
review even though additional, optional levels of administrative review may be
available). As we made clear in the later of those prior opinions, we have concluded
that it was reasonable to attach the same interpretation to a statute (or regulation) that
characterizes an official’s decision as “final.” See Secretary of Agriculture Review of
ALJ Decisions at 1-2. 10

         10
            The SIGTARP contends that our opinion in Secretary of Education Review of ALJ Decisions is
“largely inapposite” because the statute at issue there and the Interim Rule differ in two material respects.
SIGTARP Letter at 6. First, the SIGTARP points out that the statute at issue in Secretary of Education
Review of ALJ Decisions used the phrase “shall be considered to be a final agency action,” whereas the


                                                     12
       Whether the Special Master for TARP Executive Compensation Is a Principal Officer


        Similarly, the Interim Rule’s characterization of the Special Master’s final
determinations as “final and binding” may reasonably be understood as intended not to
insulate the Special Master’s decisions from Secretarial review, but instead to make clear
when the Special Master’s decisions take effect and thus become ripe for judicial review.
This understanding draws support from the Interim Rule’s distinction between “initial
determinations” and “final determinations.” 31 C.F.R. § 30.16(c)(1). After the Special
Master renders an “initial determination,” the TARP recipient has 30 days to request
reconsideration, and the Special Master must provide a “final determination” in writing
within 30 days thereafter, setting forth the facts and analysis that formed the basis for
the determination. Id. If the TARP recipient does not request reconsideration within
30 days, the initial determination “shall be treated as a final determination.” Id. Initial
determinations trigger a deadline for a reconsideration request; final determinations
impose an obligation to abide by the Special Master’s directives and thus signal an
entitlement to seek judicial review. Given these other legal effects, we do not see any
reason to conclude that the terms “final and binding” in the Interim Rule must be read to
have the additional effect of insulating the Special Master’s decisions from further review
by the Secretary.

        A comparison of the Interim Rule with a regulation the Supreme Court has found
to impose a limitation on review by the head of a department underscores the point that
the Treasury Department’s understanding of the Interim Rule as not involving such
elimination of Secretarial review is reasonable. In United States v. Nixon, 418 U.S.
683 (1974), the Court found that a regulation delegating authority in certain matters to
a Special Prosecutor and providing that “[t]he Attorney General will not countermand
or interfere with the Special Prosecutor’s decisions or actions” shielded the Special
Prosecutor’s decisions from revision by the Attorney General. Id. at 694 n.8. That
language is much more direct and specific than the language in the Interim Rule. It

Interim Rule provides that “final determinations” of the Special Master “shall be final and binding and
treated as the determination of the Treasury.” See SIGTARP Letter at 6-7. We do not think, however, that
the absence of the verb “considered” is decisive (particularly given the Interim Rule’s use of the similar
verb “treated”). Indeed, we have previously rejected such a distinction. Admittedly, in Secretary of
Education Review of ALJ Decisions, we determined that Congress’s use of “shall be considered” instead of
the more unequivocal “shall be” made it easier to conclude that Congress did not intend to preclude further
agency review. “[L]anguage that the ALJ’s decision ‘shall be the final agency action’,” we explained,
“would, at a minimum, present a question as to whether Congress intended for the ALJ decision to be final
in the sense that no further agency review is available.” 15 Op. O.L.C. at 10 n.3. Nevertheless, we
concluded that it was “unlikely that we would construe even this language to express an intent to foreclose
secretarial review, absent affirmative evidence that Congress so intended.” Id. A month later we made
good on that prediction by finding that a statute using the phrase “shall be final”—without the “considered”
phrasing—also did not preclude Secretarial review. See Secretary of Agriculture Review of ALJ decisions
at 1-2. Second, the SIGTARP emphasizes that the statute at issue in Secretary of Education Review of ALJ
Decisions used the phrase “final agency action,” a term borrowed almost directly from the Administrative
Procedure Act, see 5 U.S.C. § 704 (“final agency action for which there is no other adequate remedy in a
court [is] subject to judicial review”), while the Interim Rule uses “final determination” and “final and
binding.” See SIGTARP Letter at 7. Again, we hardly think that difference is decisive, as our
memorandum on Secretary of Agriculture Review of ALJ Decisions, which addressed a statute
characterizing officials’ decisions as “final” (rather than as “final agency action”), indicates.



                                                    13
                         Opinions of the Office of Legal Counsel in Volume 34

constitutes the sort of “specific and explicit reservation of ‘final decisionmaking power’”
that we have indicated would be necessary to shield a subordinate official’s decisions
from review by a Department head.

        For all these reasons, we think the Treasury Department’s interpretation of the
Interim Rule as not precluding Secretarial review of the Special Master’s determinations
is not plainly erroneous or inconsistent with the Interim Rule. 11

        A third consideration, not necessary to our analysis, may offer some further
support for the conclusion that the Special Master is not a principal officer. The
Secretary has established the specific functions of the Special Master by regulation and
thus may alter the Special Master’s powers, or even abolish the position, by regulation.
The degree of incremental control this regulatory power over the Special Master affords
the Secretary is not clear, given both that (i) were the Secretary to eliminate or modify
the position of Special Master, he would need to do so by regulation, and that revising
regulation would have to conform to statutes placing procedural limits on the Secretary’s
rulemaking authority and (ii) the Special Master is already subject to removal by the
Secretary without cause. 12 But this power may represent some small additional lever
of “direct[ion] and supervis[ion].” Edmond, 520 U.S. at 663.

         11
            We do not mean to suggest that use of the term “final,” when considered in context and in
conjunction with other considerations, may never lead to the conclusion that a statute or regulation was
intended to insulate a subordinate official’s decisions from review by the head of a Department. In at least
one instance, for example, we have advised that an explicit statutory delegation of “final authority over all
grants, cooperative agreements, and contracts” to the “Directors” of certain entities established by statute
within the Department of Justice precluded the Attorney General from overturning the Directors’ decisions.
NIJ/BJS Memo at 2. But our reasoning in reaching that conclusion only confirms the reasonableness of
interpreting the Interim Rule as not precluding Secretarial review.

          First, the statute at issue in that earlier memorandum did not characterize the subordinate officials’
individual decisions as “final,” let alone contrast such “final determinations” with “initial determinations,”
as the Interim Rule does. Rather, that statute endowed those officials with “final authority” over several
classes of decisions. Id. at 1. The latter wording is not easily understood as simply identifying certain
decisions as ready for judicial review; instead it is much more readily understood as granting certain
officials the last word in the Department. Second, as we noted, the legislative history of the statute at issue
in that memorandum supported the conclusion that Congress intended the Directors created by the statute
to be protected from reversal by the Attorney General. See id. Third, the Directors, unlike the Special
Master, were appointed by the President, with the advice and consent of the Senate. That eliminated any
concern rooted in the Appointments Clause that might have counseled against finding that the Directors’
decisions were shielded from review by the Attorney General. Here, such constitutional avoidance
concerns would, if anything, support the reasonableness of reading the Interim Rule as not precluding
Secretarial review of the Special Master’s decisions. See generally Application of 28 U.S.C. § 458 to
Presidential Appointments of Federal Judges, 19 Op. O.L.C. 350, 352 (1995) (describing avoidance canon
and noting its use in Executive Branch legal interpretation).
         12
            Compare Morrison, 487 U.S. at 721 (Scalia, J., dissenting) (characterizing power of “amending
or revoking [an authorizing] regulation” as a means of at-will removal); and In re Sealed Case, 829 F.2d
50, 56-57 (D.C. Cir. 1987) (Attorney General’s ability to abolish position of Iran-Contra Independent
Counsel by rescinding authorizing regulation supports conclusion that Independent Counsel is not a
principal officer), with Free Enterprise Fund, 130 S. Ct at 3158-59 (“[A]ltering the . . . powers of an
agency as a whole is a problematic way to control an inferior officer. The Commission cannot wield a
free hand to supervise individual members if it must destroy the Board in order to fix it.”).


                                                      14
     Whether the Special Master for TARP Executive Compensation Is a Principal Officer


                                 *       *         *      *

       Accordingly, whether we apply the Morrison or the Edmond analysis, the Special
Master is not a principal officer and therefore need not be appointed by the President, by
and with the advice and consent of the Senate.



                                                              /s/

                                                       Jonathan G. Cedarbaum
                                                  Acting Assistant Attorney General




                                             15
