Fifth Circuit Vacates SEC Order Approving Nasdaq Board Diversity Rules

In August 2021, the SEC approved Nasdaq’s proposed diversity rules, which required issuers listed on the exchange to:

• Have, or explain why it does not have, at least two directors who are diverse, including at least one director who self-identifies as female and at least one director who self-identifies as an underrepresented minority or LGBTQ+ (Rule 5605(f))
• Annually disclose statistical information about the self-identified diversity characteristics of the issuer’s board of directors in a board diversity matrix (Rule 5606).

The rules were previously upheld by a Fifth Circuit panel in Alliance for Fair Board Recruitment v. SEC (5th Cir. Oct. 18, 2023).

The Fifth Circuit, sitting en banc, reheard the case and vacated the SEC’s order approving the rules in a 9-8 decision. The majority opinion held that the Nasdaq rules did not relate to the purposes of the Exchange Act, which are “primarily about limiting speculation, manipulation, and fraud, and removing barriers to exchange competition.”[1] The Court further reasoned that the SEC lacked clear congressional authorization to approve these rules under the major questions doctrine, which requires clear and express congressional authorization to administrative agencies when such agencies regulate areas of vast economic and political significance.[2]

Section 19 of the Exchange Act requires that the SEC approve any proposed rule changes by self-regulatory organizations, such as Nasdaq, with limited exceptions. With the Fifth Circuit vacating the SEC’s order approving the diversity rules, the rules are no longer in effect and Nasdaq-listed issuers will no longer be required to comply with them. As a result, the board diversity matrix that would otherwise have been required to be included in next spring’s annual proxy statement for calendar year companies is no longer required and/or posting such matrix on company websites is no longer required.

Notably, although the New York Stock Exchange (NYSE) does not have diversity disclosure rules equivalent to the now-repealed Nasdaq regulations, DiversIQ reported that 55.5% of NYSE-listed S&P 500 companies met the previously required Nasdaq reporting standards. Further, 97.6% and 95.3% of all S&P 500 companies have disclosed aggregate gender and race data about their boards, respectively.[3]

A Nasdaq representative expressed disagreement with the Fifth Circuit’s ruling but confirmed that the exchange does not intend to appeal the decision. Meanwhile, an SEC spokesperson stated that the agency is currently reviewing the ruling and will determine the appropriate next steps.