SEC OKs Nasdaq’s Request to Scrap Corporate Board Diversity Rule

A federal appeals court recently ruled that the SEC lacked the authority to approve the diversity rule in 2021 because of its far-reaching economic impact.

The Nasdaq logo is displayed at the Nasdaq Market site in Times Square in New York City, on Dec. 3, 2021. Jeenah Moon/Reuters

The Securities and Exchange Commission (SEC) has approved Nasdaq’s request to rescind a rule that would impose diversity quotas on the boards of companies listed on the exchange.

In a Jan. 24 order, the SEC said Nasdaq can move forward to remove the rule from its rulebook, giving the stock exchange operator until Feb. 4 to implement the changes.

The rule in question would mandate Nasdaq-listed companies to make public board-level demographic data every year and have, or explain why they don’t have, a certain number of “diverse” directors on their boards.

Under the rule, companies with more than five board members must have two members of “underrepresented” background, including at least one director who “self-identifies as a female” and another who “self-identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or as LGBTQ+.” Boards with five or fewer members would need at least one “diverse” director.

The SEC approved the diversity rule in 2021 amid a wave of corporations embracing the ideology of diversity, equity, and inclusion (DEI) following the widespread civil unrest of 2020. However, the rule never went into effect, as it faced legal challenges over the past three years.

On Dec. 11, the U.S. Court of Appeals for the Fifth Circuit ruled 9-8 that the SEC lacked the authority to approve the Nasdaq rule. The majority opinion holds that the SEC had ventured “far outside its ordinary domain” as defined by the Securities Exchange Act of 1934, which tasked the regulatory body with keeping the market fair, transparent, and free from fraud.

The majority emphasized the enormous scope of Nasdaq’s influence, noting that by the end of 2024, the market capitalization of companies traded on the Nasdaq exchange exceeded $25 trillion—greater than the United States’ real GDP. This, the judges argued, makes the SEC’s action subject to the “major question” doctrine, a legal standard forbidding federal regulators from making decisions of “vast economic and political significance” without explicit congressional authorization.

“That is not to say that everything SEC does to regulate Nasdaq automatically implicates a major question,” Judge Andrew Oldham wrote for the majority. “But prescribing rules such as these, which attempt to transform the internal structure of many of the largest corporations in the world, surely does.”

“Such rules come close to regulating the entire economy,” Oldham said.

In response to the ruling, Nasdaq formally requested the removal of the diversity rule on Jan. 16, saying that the change “will not impose any burden on any listed company or on inter-market competition with any other exchange.”

Under SEC rules, Nasdaq would have had to wait 30 days after the filing to implement its plan, but the commission waived the waiting period because of the court mandate, which will come into effect on Feb. 4.

“Waiving the 30-day operative delay is consistent with the protection of investors and the public interest,” the order read.

The decision followed a leadership transition at the SEC. Former Chair Gary Gensler, a Democrat, stepped down on Jan. 20, the day of President Donald Trump’s second inauguration. Trump has named Republican Commissioner Mark Uyeda as acting chair until former Commissioner Paul Atkins, his nominee, is confirmed by the Senate.