A journalist reports from the Nasdaq MarketSite studio in New York's Times Square on 12 March, 2001. Stan Honda/AFP via Getty Images
By Katabella Roberts
12/12/2024 Updated: 12/12/2024
A U.S. appeals court on Dec. 11 struck down a Nasdaq rule requiring companies listed on the stock exchange to have “diverse representation” on their boards, finding the Securities and Exchange Commission (SEC) acted unlawfully in approving the policy.
The rule was introduced by the SEC and Nasdaq as part of efforts to boost racial and gender diversity in corporations. They say it is a disclosure requirement that provides standardized information on board diversity.
In a 9–8 ruling, the New Orleans-based Fifth U.S. Circuit Court of Appeals found the rule should not have been signed off by the SEC in August 2021 because the regulator lacked legal authority.
“SEC has intruded into territory far outside its ordinary domain,” U.S. Circuit Judge Andrew Oldham wrote for the majority.
According to the rule, companies listed on the exchange must have at least two “diverse board members,” including “at least one director who self-identifies as a female,” and at least one who “self-identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or as LGBTQ+.”
Companies that do not have at least two such members on their board of directors must explain why they do not. They must also disclose annually how board members identify in those categories.
The National Center for Public Policy Research and the Alliance for Fair Board Recruitment, a group formed by conservative legal activist Edward Blum, filed a lawsuit against the rule in August 2021.
They argued the rule amounted to an attempt to coerce companies into satisfying a “diversity quota,” was unconstitutional, and violated the Exchange Act, the Administrative Procedure Act, and free speech.
“Nasdaq’s discriminate-or-explain command is unlawful because it fails to advance any legitimate exchange purpose,” the plaintiffs wrote in their lawsuit.
The rule, plaintiffs said, is designed to promote board diversity as opposed to preventing fraud or further any other legitimate purpose under the Exchange Act.
“Even if Nasdaq’s diversity rule were legally permissible and supported by substantial evidence (and it is not), it is not permissible under the U.S. Constitution,” they argued.
Plaintiffs pointed to the U.S. Constitution’s Fifth Amendment, which prohibits federal discrimination based on sex, race, or sexual orientation except in very narrow circumstances.
“To approve the proposed discrimination, the SEC would have to conclude that Nasdaq’s rule survives the exacting scrutiny needed to justify the discriminatory treatment of individuals based on their sex, race, or sexual orientation,” they wrote.
A three-judge panel of the Fifth Circuit in October 2023 struck down the lawsuits challenging the Nasdaq rule, saying the SEC acted within its authority. However, the appeals court opted to have all of its judges reconsider the matter.
In Wednesday’s ruling, Oldham said the SEC’s rule was “far removed” from the 1934 Securities Exchange Act, which governs stock trading and dictates that stock exchange rules approved by the regulator must promote “just and equitable principles of trade.”
“We are not aware of any established rule or custom of the securities trade that saddles companies with an obligation to explain why their boards of directors do not have as much racial, gender, or sexual orientation diversity as Nasdaq would prefer,” Oldham wrote.
Eight judges dissented, including U.S. Circuit Judge Stephen Higginson, who stated that the SEC’s limited role in reviewing Nasdaq’s proposed rules precluded it from making a different decision.
In a statement to multiple media outlets after the ruling, a Nasdaq spokesperson said, “We maintain that the rule simplified and standardized disclosure requirements to the benefit of both corporates and investors.”
Separately, Mark Chenoweth, president of the New Civil Liberties Alliance, which represented the National Center for Public Policy Research, said the court’s ruling “should chasten SEC to stick to its knitting and stop trying to abuse its market-regulating power.”
The Epoch Times contacted Nasdaq for further comment but received no reply by publication time.
Reuters contributed to this report.
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