On Wednesday, the Fifth Circuit Court of Appeals upheld a Nasdaq Stock Market rule requiring corporations on the exchange to have women and minority directors on their board or provide information as to why they do not.
More specifically, the rule requires companies listed on the exchange to disclose certain voluntary self-identified information about a company’s board of directors related to their gender, racial characteristics, and LGBTQ+ status. If a listed company does not have at least one director who self-identifies as female and one who self-identifies as an underrepresented minority or LGBTQ+, it generally must explain why it does not.
The two lawsuits seeking to block the rule, brought by the National Center for Public Policy Research and the Alliance for Fair Board Recruitment, argued that the rule violated the First and Fourteenth Amendments to the U.S. Constitution and the SEC’s obligations under the Exchange Act and the Administrative Procedures Act (APA).
According to the panel, the U.S. Securities and Exchange Commission (SEC) was within its authority to determine that information about board diversity would inform investor behavior one way or the other – either informing decisions about corporate governance and the risks and costs of increased diversity for investors who support board diversity or informing decisions to vote to preserve existing boards for investors who do not think that diversity objectives would benefit a company.
The proposed rule was filed by Nasdaq with the SEC in December 2020, and the SEC approved the rule in August 2021 after Nasdaq responded to many comments on the rule, including comments from the National Center for Public Policy Research. The Alliance for Fair Board Recruitment filed a 78-page opposition to the proposed rule in April 2021. The SEC’s approval order noted that the rule did not force companies to reconfigure their boards, as they could either explain why their board does not meet the criteria set forth in the rule or list on a different exchange.
Furthermore, the panel noted that the constitutional claims failed because Nasdaq is a private company operating a securities exchange registered with the SEC. It is neither a government entity bound by the Constitution nor are its rules attributable to the government such that a constitutional restraint would apply, said the panel.
The Alliance for Fair Board Recruitment is a group founded by Edward Blum. Blum previously made headlines when lawsuits brought by another group of his won a favorable Supreme Court ruling concerning affirmative action admissions at Harvard and the University of North Carolina. He is also involved in challenging law firm diversity fellowships and a venture capital fund supporting Black women with small businesses.
Additional Reading
US court upholds Nasdaq board diversity rule, Reuters (October 18, 2023)
Showdown over Nasdaq board diversity rule heads to 5th Circuit, Reuters (August 29, 2022)
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