In a significant legal development, a U.S. appeals court has ruled against Nasdaq’s attempt to impose diversity requirements on companies listed on the exchange. On Wednesday, the 5th U.S. Circuit Court of Appeals, based in New Orleans, determined that Nasdaq’s rules, which mandated that companies have women and minority directors or explain why they did not, violated federal securities laws.
The 9-8 decision represents a major win for critics of corporate diversity initiatives, particularly those aimed at increasing racial and gender representation in boardrooms.
The appeals court’s ruling reversed a previous decision by a three-judge panel and struck down the diversity rules, which had been approved by the U.S. Securities and Exchange Commission (SEC). According to the court, Nasdaq’s diversity mandate overstepped the SEC’s regulatory authority under the Securities Exchange Act of 1934.
In writing for the majority, U.S. Circuit Judge Andrew Oldham, appointed by former President Donald Trump, argued that the SEC’s approval of Nasdaq’s diversity requirements was an overreach. He emphasized that the SEC’s primary responsibility is to regulate securities markets, not to mandate diversity practices in corporate governance.
“The SEC has intruded into territory far outside its ordinary domain,” Judge Oldham stated, underscoring concerns that the rule did not align with the original intent of federal securities laws, which were designed to address issues like fraud and market manipulation.
The ruling follows a legal challenge brought by conservative advocacy groups, including the National Center for Public Policy Research and Alliance for Fair Board Recruitment, a group founded by Edward Blum, known for his role in opposing race-conscious policies such as affirmative action in college admissions.
The Nasdaq rules, which were originally implemented in 2021, required companies to have at least one woman or minority on their boards, or to explain why they did not meet this requirement. The rules also called for companies to disclose annually how their board members identify in terms of gender, race, and LGBTQ+ status.
Despite the court’s ruling, the SEC indicated that it was reviewing the decision and could appeal it to the U.S. Supreme Court. Nasdaq, however, stated that while it stood by the benefits of the diversity rules, it would not challenge the court’s decision.
The court’s decision was deeply divided, with all nine judges in the majority being appointed by Republican presidents. However, the ruling drew strong dissent from judges appointed by Democratic administrations. U.S. Circuit Judge Stephen Higginson, appointed by former President Barack Obama, argued that the SEC’s role in reviewing Nasdaq’s rules should have been limited to ensuring the rules’ connection to market-related matters.
Mark Chenoweth, executive director of the New Civil Liberties Alliance, which represented the National Center for Public Policy Research, praised the ruling, calling it a rebuke to the SEC’s attempt to broaden its regulatory reach. “This ruling should remind the SEC to focus on its core mission of regulating markets, not imposing ideological agendas,” Chenoweth said.
The court’s ruling is a significant setback for advocates of diversity in corporate governance, who argue that increasing the representation of women, minorities, and LGBTQ+ individuals on corporate boards is essential for fostering more inclusive and equitable business practices. Nasdaq’s diversity rules were seen by many as a progressive step toward diversifying an industry that has long been dominated by white men.
However, the ruling reinforces concerns about regulatory overreach and could have far-reaching implications for future efforts to mandate diversity in corporate leadership. For now, the legal battle appears far from over, with potential further appeals to the Supreme Court on the horizon.
The outcome of this case signals that any future efforts to mandate boardroom diversity may face increasing scrutiny from conservative legal circles and the judiciary. Corporate leaders and regulators alike will be closely watching how the Supreme Court, if it hears the case, addresses the intersection of corporate governance, securities law, and diversity policies.
For now, Nasdaq and the SEC face a setback in their efforts to enforce diversity in corporate America’s boardrooms, raising important questions about the scope of regulatory power and the future of corporate diversity mandates.
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