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Appeals court rejects Nasdaq effort to boost director diversity
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The trio of measures would have compelled company disclosures about the racial, gender and sexual orientation composition of their directors. Those that did not comply with the rule, or explain why they had not, could have faced delisting.
The rules prescribed at least one director who self-identifies as female and one who self-identifies as Black, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or as LGBTQ+.
A listed company not meeting that threshold would have had to explain why its board did not have at least two directors who identify in those categories. Nasdaq did not propose to evaluate the substance or merits of a company’s explanation, the court noted, only whether one had been submitted.
“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,” Judge Andrew Oldham wrote for the majority, joined by eight of his colleagues.
The stock exchange operator sought to compel companies to disclose the diversity of their boardrooms, and offered a recruitment program to help identify potential directors to help companies increase their board diversity.
The SEC approved the slate of Nasdaq proposed rules on director diversity in August 2021.
“Nasdaq reviewed dozens of empirical studies and found that an extensive body of academic research demonstrates that diverse boards are positively associated with improved corporate governance and financial performance,” the New York-based company said in its proposal from 2020.
That was the same year which saw the killing of George Floyd in Minnesota, national unrest over police treatment of people of color, and a movement by many U.S. companies towards greater diversity, equity and inclusion principles.
The Fifth Circuit majority invoked the major questions doctrine for the SEC’s approval of the diversity rules, providing Nasdaq the power to reshape management of many large U.S. corporations. Given that issue, the court said, the SEC had “intruded into territory far outside its ordinary domain.”
If Congress had granted a diversity mandate to any federal agency, the court said it would expect that authority to rest with the Equal Employment Opportunity Commission or the Justice Department — not the SEC.
“Of course, even the agencies that regulate diversity in the workplace have not asserted the power SEC does in this case,” the court said in its ruling. “That makes SEC’s burden under the major questions doctrine all the heavier.”
The court also found that Congress had not authorized the SEC “to mandate disclosure of any information whatsoever” but given the agency only “a limited power to compel disclosure of basic corporate and financial information.”
The SEC lawsuit was brought by the Alliance for Fair Board Recruitment, a Texas-based nonprofit run by Edward Blum, a frequent litigant who targets diversity mandates. The National Center for Public Policy Research, a conservative think tank based in Washington, was a co-plaintiff.
“The SEC was reaching beyond its statutory authority to try and engage in progressive social engineering,” Stefan Padfield, executive director of the NCPPR’s Free Enterprise Project, said Thursday in a press release .