The Times Square NASDAQ MarketSite is shown on March 2, 2015 in New York.
Bryan Thomas | Getty Images
A federal appeals court has agreed to rehear a challenge to Nasdaq’s board of directors variety rule relating to disclosure women and minority participation in boards of directors of listed companies.
The 5th Circuit US Court of Appealsin his Monday night order ordering a retrial, he also overturned an October ruling upholding the Nasdaq rule by a three-judge panel from the appeals court, which includes Texas, Louisiana and Mississippi.
Nasdaq’s rule requires companies to disclose details about the diversity of their boards and either have a minimum number of women and minorities on their boards or explain why they don’t.
The 5th Circuit’s order on Monday said it will review a challenge to the Securities and Exchange Commission’s approval of Nasdaq rule, with the full bench of judges in that court rehearing the case in a so-called en banc proceeding.
The order came after a majority of the sitting circuit judges voted to retry the case at the request of the petitioners. Rehearsals en banc are rarely granted. On Tuesday, the court orally tries the case for the week of May 13.
Edward Blum, president of the Alliance for Fair Board Recruitment, one of the petitioners challenging the rule, said in a statement that his group “is grateful that the entire Fifth Circuit Court of Appeals will reconsider the lower court’s opinion.”
“NASDAQ’s rule promotes racial discrimination and polarizing personal disclosures, and we hope this rule will be repealed,” Blum said.
Margaret Little, an attorney for the other petitioner in the case, the National Center for Public Policy Research, said: “We believe the panel wrongly concluded that discrimination based on race, gender and sexuality somehow fell within the purview of the Exchange Act.”
“We are excited that the Fifth Circuit will hear the panel’s decision and keep the SEC in its lane to focus on protecting investors,” Little said.
The SEC and Nasdaq did not immediately respond to requests for comment on the retrial order.
The diversity rule, proposed by Nasdaq to the SEC in December 2020, required every Nasdaq-listed company to publicly disclose information about the gender, racial characteristics and LGBTQ+ status of the company’s board of directors.
The rule further required that each publicly traded company “have, or explain why it does not have, at least two members of its board of directors who are diverse, including at least one director who self-identifies as a woman and at least one director who self-identifies as an Underrepresented Minority or LGBTQ+ ยป.
Underrepresented minorities include Black, African American, Hispanic, Native American or Alaska Native, Native Hawaiian or Pacific Islander. LGBTQ+ is defined as “a person who identifies as any of the following: lesbian, gay, bisexual, transgender, or as a member of the queer community.”
Nasdaq, at the time of the proposal, said its goal was to “provide stakeholders with a better understanding of the company’s current board composition and enhance investor confidence that all listed companies consider diversity in the selection of directors.” .
The exchange said its rationale for the rule was based in part on an analysis of “more than a dozen studies that found a correlation between diverse boards and better financial performance and corporate governance.”
The SEC approved the proposed rule in August 2021, finding that the rule could encourage some Nasdaq-listed companies to increase diversity on their boards, while noting that the rules do not mandate “any particular board composition.”
Days after that approval was issued, the Alliance for Fair Board Recruitment filed a petition with the 5th Circuit Court of Appeals seeking review of the SEC’s decision.
The National Center for Public Policy Research soon after was added as a petitioner in the challenge, which alleged that the rules violated both the First and Fourteenth Amendments to the US Constitution and the SEC’s obligations under the Exchange Act and the Administrative Procedure Act . The First Amendment protects freedom of speech and association, while the Fourteenth Amendment requires due process and equal protection under the law.
The three-judge panel on the appeals court said the challenge failed because the SEC’s approval of the diversity rule complied with both the Exchange Act and the Administrative Procedure Act.
The panel also rejected the petitioners’ argument that Nasdaq was a constitutionally bound government entity and that the exchange’s rules in the case are attributable to the government.
“Nasdaq is a private entity,” the judges noted in their ruling. “It is a private limited company wholly owned by Nasdaq, Inc., a publicly traded company.”
“While Nasdaq must be registered and is heavily regulated by the SEC, the Supreme Court has made clear that a private entity does not become a government actor simply by virtue of being regulated,” the panel wrote.