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Appeals court overturns Nasdaq requirement for diversity on boards
In a 51-page opinion, nine of 17 judges on the full 5th Circuit found the rule violates the Securities Exchange Act of 1934.
Appeals for the 5th Circuit struck down a Nasdaq rule that sought to promote diversity on corporate boards, representing the latest blow to those efforts in the private sector.
In a 51-page opinion issued Wednesday, nine of 17 judges on the full 5th Circuit found the rule violates the Securities Exchange Act of 1934.
“In sum, Congress passed the original Exchange Act primarily to protect investors and the American economy from speculative, manipulative, and fraudulent practices,” the panel wrote.“SEC may not approve even a disclosure rule unless it can establish the rule has some connection to an actual, enumerated purpose of the Act.”
Eight judges dissented, saying the rule was consistent with the law and merely standardized relevant information sought by investors. The Securities and Exchange Commission approved the rule because the law “doesn’t permit the SEC to displace Nasdaq’s private business judgment — informed by investor behavior — with agency policy priorities,” the dissenters wrote.
The rule, approved by the SEC in August 2021, requires companies listed on the exchange to have at least two corporate board members from “diverse” backgroundsor explain in filings why they do not.
Groups opposed to diversity, equity and inclusion (DEI) practices subsequently challenged the rule, arguing it mandated an unconstitutional “quota” and amounted to “compelled speech” in violation of the First Amendment. The groups further argued the SEC exceeded its authority when it approved the rule.
In October 2023, a three-judge panel on the 5th Circuit sided with the SEC and the Nasdaq, finding the SEC had the authority to approve the rule. The panel also found that because the Nasdaq is not a government actor, the rule does not violate the equal protection clause. That ruling was appealed to the full 5th Circuit, which is composed mostly of judges appointed by Republicans.
Nasdaq officials have reviewed the decision, said Emily Pan, a spokeswoman for the exchange.
“We maintain that the rule simplified and standardized disclosure requirements to the benefit of both corporates and investors,” she said. “That said, we respect the court’s decision and do not intend to seek further review.”
The SEC said in a statement that it is reviewing the decision “and will determine next steps as appropriate.”
In an email Thursday to The Washington Post, longtime affirmative action opponent Edward Blum cheered the decision.
“The rule was an unlawful attempt to alter the racial and sexual composition of corporate boards across America and penalize any company that failed to conform,” wrote Blum, who leads the American Alliance for Fair Board Recruitment, a plaintiff in the Nasdaq case. “Race and sex quotas have no place in American public policies.”
The Nasdaq is one of the most active stock exchanges in the world and lists some of the world’s most valuable companies, including Apple, Nvidia and Microsoft. Some of the companies listed on the exchange, including Microsoft and Intel, defended the rule in a joint filing, writing that it helps investors find uniform data about boardroom diversity. On Wednesday, the composite index closed at a record high of over 20,000 points.
The rule “offends no part of the Constitution and falls squarely within the bounds of the SEC’s statutory authority,” lawyers for the companies wrote in their May filing.
The ruling comes as conservative groups continue a legal onslaught against DEI initiatives, emboldened by a Supreme Court ruling in June 2023 that overturned affirmative action in college admissions. A portion of the challenges take aim at requirements that government and corporate boards include a specified number of minorities or women.
The Blum-led alliance challenged a California law that required companies headquartered in the state to include a certain number of minorities. In May 2023, a California judge found the law unconstitutional.
The 5th Circuit’s ruling potentially sets up the case for Supreme Court review should the SEC or the Nasdaq appeal.The court has not ruled on a case dealing directly with diversity initiatives since its landmark ruling against race-conscious admissions at Harvard University and the University of North Carolina at Chapel Hill.But the high court’s majority has been inclined to limit the power of federal agencies, having ruled against the federal government in several key cases this most recent term.
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