Fifth Circuit Upholds Nasdaq’s Rules on Board Diversity

By: Michael E. Flowers, Matthew L. Roberts

Published: November 1, 2023

In Alliance for Fair Board Recruitment v. SEC, a panel of three 5th U.S. Circuit Court of Appeals judges upheld Nasdaq’s rules on board diversity. The rules require each Nasdaq-listed company to disclose information on the voluntary self-identified gender and racial characteristics of its board of directors. The rules also require each company to have or explain why it does not have at least one female and one underrepresented minority or LGBTQ+ director.

The petitioners claimed Nasdaq’s diversity disclosure rules are unconstitutional because they infringe on freedom of speech and confer preferential treatment based on gender and race. However, the Fifth Circuit did not reach those questions. It found that Nasdaq is a private company, and not subject to the constitutional restraints applied to state actors. The Court held that although “Nasdaq must register with and is heavily regulated by the Securities Exchange Commission (SEC), the Supreme Court has made clear that a private entity does not become a state actor merely by virtue of being regulated.”

The Court held that the SEC acted within its statutory authority by approving Nasdaq’s diversity rules. The petitioners argued that the SEC failed to rely on evidence that race, gender, and sexual preference “bear any relationship to corporate governance or performance.” The Court found that the SEC was not required to do so, noting that the SEC decided “board diversity information ‘contribute[s] to investors’ investment and voting decisions’ based on substantial evidence of industry demand for this information to use in managing funds.”

The petitioners can seek a rehearing by the full Fifth Circuit. Notably, a group of 17 Republican attorneys general filed an amicus brief in support of the petitioners. Regardless of the ultimate outcome, the Court’s decision reinforces that companies have a legitimate interest in taking steps to ensure that they meaningfully consider the appointment of minority and female directors.

Groups will continue to devote tremendous resources in challenging corporate diversity and inclusion policies and requirements. Steptoe & Johnson’s SEC Compliance and Securities Team and Labor & Employment Compliance Team can help review diversity and inclusion programs to enhance best practices and avoid pitfalls that may result in litigation.

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