Appeals court will rehear challenge to Nasdaq board diversity rule, putting mandate at risk


The Times Square NASDAQ MarketSite is seen on March 2, 2015 in New York City.

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A federal appeals court agreed to rehear a challenge by two conservative groups to Nasdaq’s board diversity rule related to the disclosure of women and minority membership on boards of companies listed on the stock exchange.

The 5th Circuit U.S. Court of Appeals, in its order Monday night setting a rehearing, also vacated a decision in October upholding the Nasdaq rule by a three-judge panel from the appeals court, which encompasses Texas, Louisiana, and Mississippi.

The Nasdaq rule requires companies to disclose details about the diversity of their boards of directors and to either have a minimum number of women and minorities on their boards or explain why they do not.

The 5th Circuit’s order Monday said it will reconsider the challenge to the Securities and Exchange Commission’s approval of the Nasdaq rule, with the full lineup of judges on that court rehearing the case in a so-called en banc proceeding.

The order came after a majority of the circuit judges in active service voted to rehear the case at the request of the petitioners. En banc rehearings are rarely granted. On Tuesday, the court tentatively oral arguments in the case for the week of May 13.

Edward Blum, president of the Alliance for Fair Board Recruitment, one of the petitioners challenging the rule, in a statement said that his group “is grateful that the entire Fifth Circuit Court of Appeals will reconsider the lower court’s opinion.”

“NASDAQ’s rule promotes racial discrimination and polarizing personal disclosures and it is to be hoped that this rule is struck down,” Blum said.

Margaret Little, an attorney for the other petitioner in the case, the National Center for Public Policy Research, said, “We think the panel erroneously concluded that discrimination regarding race, gender and sexuality somehow falls with the Exchange Act purview.”

“We are delighted that the Fifth Circuit will rehear the panel’s decision and keep the SEC in its own lane to focus on investor protection,” said Little, whose client is a conservative think tank.

An SEC spokeswoman in a statement said, “We believe the panel decision was correct and will continue to defend the Commission’s order before the full court.”

A Nasdaq spokesman declined to comment.

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The diversity rule, proposed by Nasdaq to the SEC in December 2020, required each Nasdaq-listed company to publicly disclose information on the gender, racial characteristics, and LGBTQ+ status of the company’s board of directors.

The rule further required each exchange-listed company “to have, or explain why it does not have, at least two members of its board of directors who are Diverse, including at least one director who self-identifies as female and at least one director who self-identifies as an Underrepresented Minority or LGBTQ+.”

Underrepresented minorities include Blacks, African-Americans, Hispanics, Native Americans or Alaska Native, Native Hawaiian or Pacific Islands. LGBTQ+ is defined as “an individual who self-identifies as any of the following: lesbian, gay, bisexual, transgender, or as a member of the queer community.”

Nasdaq, at the time of the proposal, said its goal was “to provide stakeholders with a better understanding of the company’s current board composition and enhance investor confidence that all listed companies are considering diversity in the context of selecting directors.”

The exchange said its rationale for the rule was partly based on an analysis of “more than two dozen studies that found an association between diverse boards and better financial performance and corporate governance.”

The SEC approved the proposed rule in August 2021, finding that the rule could encourage some Nasdaq-listed companies to increase diversity on their boards while noting that the rules did not mandate “any particular board composition.”

Days after that approval was issued, the Alliance for Fair Board Recruitment filed a petition with the 5th Circuit Court of Appeals seeking review of the SEC’s decision.

The National Center for Public Policy Research soon after was added as a petitioner for the challenge, which claimed the rules violated both the First and Fourteenth Amendments of the U.S. Constitution and the SEC’s obligations under the Exchange Act and the Administrative Procedure Act. The First Amendment protects freedom of speech and of association, while the Fourteenth Amendment requires due process and equal protection under the law.

The three-judge panel on the appeals court said the challenge failed because the SEC’s approval of the diversity rule complied with both the Exchange Act and the Administrative Procedure Act.

The panel also rejected the argument by the petitioners that Nasdaq was a government entity bound by the Constitution and that the exchange’s rules in the case are attributable to the government.

“Nasdaq is a private entity,” the judges noted in their ruling. “It is a private limited liability company wholly owned by Nasdaq, Inc., a publicly traded corporation.”

“While Nasdaq must register with and is heavily regulated by the SEC, the Supreme Court has made clear that a private entity does not become a state actor merely by virtue of being regulated,” the panel wrote.



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