WASHINGTON – The U.S. Court of Appeals for the Fifth Circuit has upheld the Securities and Exchange Commission’s (SEC) approval of Nasdaq’s board diversity disclosure rule, a significant development for corporate governance. This decision, made on October 18, 2023, by a three-judge panel from the court, reinforces the SEC’s stance that Nasdaq-listed companies disclose their board members’ demographic backgrounds and include diverse representation.
The SEC initially approved the rule on August 6, 2021, mandating that listed companies have at least one female director and one who identifies as an underrepresented minority or LGBTQ+. For companies with five or fewer directors, at least one diverse director is required. The rule aims to enhance transparency rather than dictate board composition and requires companies to use a standardized template for annual demographic disclosures. The initial compliance deadline was set for December 31, 2023.
Challenges to this rule were presented by the Alliance for Fair Board Recruitment (AFBR) and the National Center for Public Policy Research (NCPPR), led by Edward Blum. They argued that the rule was unconstitutional under the Fifth Amendment’s Equal Protection Clause and the First Amendment’s Freedom of Expression clause. Additionally, they claimed that the SEC exceeded its authority and violated statutory obligations under the Securities Exchange Act of 1934 and the Administrative Procedure Act.
However, the Fifth Circuit’s panel rejected these arguments, clarifying that Nasdaq operates as a private entity and is not subject to such constitutional challenges. The court also confirmed that the SEC acted within its authority in approving the rule and that it aligns with the Securities Exchange Act’s objective of ensuring full disclosure in the securities industry.
This decision is part of a broader context where legal challenges to diversity, equity, and inclusion (DEI) policies are becoming more frequent. Despite unsuccessful attempts to overturn Nasdaq’s diversity rule, organizations like AFBR and NCPPR have been involved in similar legal actions against DEI initiatives. For instance, NCPPR had filed a complaint against Starbucks (NASDAQ:) regarding its DEI policies, which was dismissed by the Eastern District of Washington.
The court’s decision today may bolster confidence among boards and companies in developing and disclosing corporate diversity policies. With investors increasingly considering board diversity in their investment decisions, this ruling upholds a framework that supports transparency in corporate governance practices.
As companies approach the first reporting deadline under this rule on December 31, 2023, they now have judicial affirmation of the SEC’s mandate for board diversity disclosures, which remains effective despite challenges. The court’s decision ensures the rule’s enforcement and firms are expected to meet the compliance deadline by the end of this year. The disclosure tenet within this rule is likely to influence corporate strategies concerning DEI policies.
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