A U.S. appeals court on Dec. 11 struck down a Nasdaq rule requiring companies listed on the stock exchange to have “diverse representation” on their boards, finding the Securities and Exchange Commission (SEC) acted unlawfully in approving the policy.
“SEC has intruded into territory far outside its ordinary domain,” U.S. Circuit Judge Andrew Oldham wrote for the majority.
According to the rule, companies listed on the exchange must have at least two “diverse board members,” including “at least one director who self-identifies as a female,” and at least one 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+.”
Companies that do not have at least two such members on their board of directors must explain why they do not. They must also disclose annually how board members identify in those categories.
The National Center for Public Policy Research and the Alliance for Fair Board Recruitment, a group formed by conservative legal activist Edward Blum, filed a lawsuit against the rule in August 2021.
“Nasdaq’s discriminate-or-explain command is unlawful because it fails to advance any legitimate exchange purpose,” the plaintiffs wrote in their lawsuit.
The rule, plaintiffs said, is designed to promote board diversity as opposed to preventing fraud or further any other legitimate purpose under the Exchange Act.
“Even if Nasdaq’s diversity rule were legally permissible and supported by substantial evidence (and it is not), it is not permissible under the U.S. Constitution,” they argued.
Plaintiffs pointed to the U.S. Constitution’s Fifth Amendment, which prohibits federal discrimination based on sex, race, or sexual orientation except in very narrow circumstances.
“To approve the proposed discrimination, the SEC would have to conclude that Nasdaq’s rule survives the exacting scrutiny needed to justify the discriminatory treatment of individuals based on their sex, race, or sexual orientation,” they wrote.
“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,” Oldham wrote.
Eight judges dissented, including U.S. Circuit Judge Stephen Higginson, who stated that the SEC’s limited role in reviewing Nasdaq’s proposed rules precluded it from making a different decision.
The Epoch Times contacted Nasdaq for further comment but received no reply by publication time.