Federal appeals court says Nasdaq, SEC diversity rules unlawful

A federal appeals court has ruled that the Nasdaq stock exchange cannot require listed companies to comply with diversity rules for board members.

The 5th U.S. Circuit Court of Appeals said the diversity disclosure rules do not have a connection to Congress’ purpose for the Exchange Act in 1934, which was to focus on removing barriers for competition in exchange, manipulation, and fraud.

The court, in its Wednesday decision, said the diversity rules do not comply with the law.

“The Board Diversity Proposal is far removed from these ordinary applications of the concept of just and equitable principles of trade,” stated the opinion authored by Judge Andrew Oldham, a Trump appointee. “It is obviously unethical to violate the law or to disregard a contractual promise. It is not unethical for a company to decline to disclose information about the racial, gender, and LGTBQ+ characteristics of its directors.”

Nasdaq proposed three rules in 2020 that were aimed at improving corporate governance through diversity.

Nasdaq wanted its listed companies to provide data about their boards composition based on race, gender and LGBTQ status. It also directed the listed companies to have one female board member and another member from a minority class either based on race or LGBTQ status. If the company did not comply, it had to explain why.

The U.S. Securities and Exchange Commission had approved the rules. It would have impacted roughly 3,000 companies, according to the Associated Press.

But the circuit court’s ruling said that the SEC’s move was unlawful.

“We are not aware of any established rule or custom of the securities trade that saddles companies with an obligation to explain why their boards of directors do not have as much racial, gender, or sexual orientation diversity as Nasdaq would prefer,” read the ruling.

Nasdaq said it won’t seek higher review and stands by the diversity rules, according to the Associated Press.

“We maintain that the rule simplified and standardized disclosure requirements to the benefit of both corporates and investors,” Nasdaq said. “That said, we respect the Court’s decision and do not intend to seek further review.”

An SEC spokesperson, though, noted they are reviewing the decision and exploring next steps.

Democrats have urged Fortune 500 companies to take steps to diversify their members.

But in recent months major companies have dialed back diversity efforts. Those include Harley-Davidson, Ford, Lowes, John Deere and Molson Coors.

The moves follow the Supreme Court in 2022 ruling that affirmative action at colleges and universities ran afoul of the Constitution.

The case was Alliance for Fair Board Recruitment, National Center for Public Policy Research v. SEC.

• This article is based in part on wire service reports.