A U.S. appeals court on Wednesday ruled that Nasdaq could not impose rules designed to increase diversity in corporate America by requiring companies listed on the exchange to have women and minority directors on their boards or explain why they do not.
The 9-8 ruling by the conservative-majority New Orleans-based 5th U.S. Circuit Court of Appeals found that the rules approved by the U.S. Securities and Exchange Commission ran afoul of federal securities law.
The decision is a significant legal victory for opponents of policies meant to boost racial and gender diversity in corporations.
The diversity rules were challenged by conservative think tank the National Center for Public Policy Research and Alliance for Fair Board Recruitment, a group founded by Edward Blum, who led the successful U.S. Supreme Court challenge against race-conscious college admissions policies.
“SEC has intruded into territory far outside its ordinary domain,” U.S. Circuit Judge Andrew Oldham, who was appointed by Republican President-elect Donald Trump in his first term, wrote for the majority.
The SEC said it was reviewing the ruling, which it would have to appeal to the Supreme Court to overturn. Nasdaq said that while it believed its rule would benefit companies and investors, it respected Tuesday’s ruling and would not appeal.
At issue was a Nasdaq requirement designed to bolster the diversity of corporate boards that have long been mostly white and male, studies show.
Nasdaq required companies to have at least one woman, racial minority, or LGBTQ person on their boards or explain why they do not. Companies must also disclose annually how board members identify in those categories.
A three-judge panel of the 5th Circuit comprised entirely of appointees of Democratic presidents in October 2023 upheld the SEC’s decision to approve Nasdaq’s rules, saying the regulator acted within its authority.
But the conservative-majority court opted to have all of its judges reconsider the matter. All nine judges in the majority were appointed by Republican presidents.
Oldham said the SEC wrongly concluded that because Nasdaq’s proposal would require information about exchange-listed companies to be disclosed, it fit within the purposes of the Securities Exchange Act of 1934, which governs stock trading.
He said any disclosure rule must have “some connection to the ails Congress designed the Act to eradicate,” such as “speculation, manipulation, and fraud, and removing barriers to exchange competition.”
Mark Chenoweth, whose legal group the New Civil Liberties Alliance represented the National Center for Public Policy Research, said the ruling “should chasten SEC to stick to its knitting and stop trying to abuse its market-regulating power.”
Eight judges dissented including U.S. Circuit Judge Stephen Higginson, an appointee of Democratic former President Barack Obama, who said the SEC’s limited role in reviewing Nasdaq’s proposed rules precluded it from making a different decision.
