A federal appeals court on Wednesday ruled that Nasdaq can’t impose rules on companies listed on the exchange that aim to promote diversity by requiring listed firms to have women and minority directors on the boards or explain why they don’t.
The U.S. Fifth Circuit Court of Appeals, which is based in New Orleans and has a conservative majority, issued a 9-8 ruling that found the rules approved by the Securities and Exchange Commission (SEC) violated federal securities law.
The decision comes as a significant legal victory for critics of policies meant to boost corporate racial and gender diversity.
The rules were challenged by a conservative think tank known as the National Center for Public Policy Research and the Alliance for Fair Board Recruitment, a group founded by Edward Blum, who led the successful Supreme Court challenge against race-conscious college admissions policies.
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“SEC has intruded into territory far outside its ordinary domain,” U.S. Circuit Judge Andrew Oldham, who was appointed during President-elect Donald Trump’s first term, wrote for the majority.
The SEC said it’s reviewing the ruling and would have to appeal to the Supreme Court if it seeks to overturn the decision. Nasdaq said that while it believed its rule would benefit companies and investors, it respected the court’s ruling and doesn’t plan to appeal.
Nasdaq’s rule required companies to have at least one woman, racial minority or LGBTQ person on their boards or explain why they don’t. Companies were also required to submit an annual disclosure about how board members identify within those categories.
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A three-judge panel of the 5th Circuit that was entirely composed of Democratic appointees issued a ruling in October 2023 that upheld the SEC’s approval of Nasdaq’s rules, saying the decision was within the regulator’s authority.
The full court reconsidered the matter and the 9-8 decision was split along ideological lines, with Republican appointees in the majority deciding that the rule should be struck down.
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Oldham said the SEC wrongly concluded that because Nasdaq’s proposal would require information about exchange-listed companies to be disclosed, it fit within the purposes of the Securities Exchange Act of 1934, which governs stock trading.
He said that the disclosure rule must have “some connection to the ails Congress designed the Act to eradicate,” such as “speculation, manipulation, and fraud, and removing barriers to exchange competition.”
Mark Chenoweth, whose legal group the New Civil Liberties Alliance represented the National Center for Public Policy Research in challenging the rule, said the ruling “should chasten SEC to stick to its knitting and stop trying to abuse its market-regulating power.”
Eight judges dissented from the ruling, with U.S. Circuit Judge Stephen Higginson, an appointee of former President Barack Obama, arguing the SEC’s limited role in reviewing Nasdaq’s proposed rules precluded it from making a different decision.
Reuters contributed to this report.
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