The Times Square NASDAQ MarketSite is seen on March 2, 2015 in New York City.
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A federal appeals court agreed to rehear a challenge by two conservative groups to the Nasdaq board diversity rule related to the disclosure of women and minority memberships on boards of publicly traded companies.
The 5th U.S. Circuit Court of Appeals, in its Monday night order ordering a rehearing, also reversed an October decision upholding the Nasdaq rule by a three-judge panel of the appeals court representing Texas, Louisiana and Mississippi includes.
The Nasdaq Rule requires companies to disclose details about the diversity of their boards and to either have a minimum number of women and minorities on their boards or explain why they do not do so.
The 5th Circuit’s order Monday said it will reconsider the Securities and Exchange Commission’s challenge to the Nasdaq Rule’s approval, with that court’s full bench hearing the case in a so-called en banc -Proceedings will be renegotiated.
The order came after a majority of active district judges voted to rehear the case at the plaintiffs’ request. En banc rehearsals are rarely granted. On Tuesday, the court tentatively scheduled oral argument in 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 full Fifth Circuit Court of Appeals will reconsider the lower court’s opinion.”
“The NASDAQ rule promotes racial discrimination and polarizing personal disclosures, and it remains to be hoped that this rule will be repealed,” Blum said.
Margaret Little, an attorney for the other plaintiff in the case, the National Center for Public Policy Research, said: “We believe the panel erred in concluding that discrimination based on race, gender and sexuality was somehow within the scope of the Exchange Act falls.”
“We are pleased that the Fifth Circuit will reiterate the panel’s decision and keep the SEC on its own course to focus on investor protection,” said Little, whose client is a conservative think tank.
An SEC spokeswoman said in a statement: “We believe the panel’s decision was correct and will continue to defend the commission’s order before the full court.”
A Nasdaq spokesman declined to comment.
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The diversity rule that Nasdaq proposed 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 also required that every publicly traded company “shall have, or explain why they do not have, at least two members of its board of directors who are of diverse races, including at least one board member who self-identifies as female and at least one board member of the Board of Directors.” Self-identifies as an underrepresented minority or LGBTQ+.”
Underrepresented minorities include Blacks, African Americans, Hispanics, Native Americans or Alaska Natives, Native Hawaiians or Pacific Islanders. LGBTQ+ is defined as “a person who self-identifies as one of the following: lesbian, gay, bisexual, transgender, or a member of the queer community.”
Nasdaq said at the time of the proposal that its goal was to “provide stakeholders with a better understanding of the current composition of the company’s board of directors and increase investor confidence that all publicly traded companies consider diversity when selecting board members.”
The exchange said its rationale for the rule was based in part on an analysis of “more than two dozen studies that have found a link between diverse boards of directors and better financial performance and corporate governance.”
The SEC approved the proposed rule in August 2021, noting that the rule could encourage some Nasdaq-listed companies to increase diversity on their boards, but noted that the rules do not require a “particular board composition.”
A few days after this approval was granted, the Alliance for Fair Board Recruitment filed a petition with the 5th Circuit requesting review of the SEC’s decision.
Shortly thereafter, the National Center for Public Policy Research was added as a petitioner for the challenge, claiming that the rules violated both the First and Fourteenth Amendments to the U.S. 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 appeals court’s three-judge panel 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 is a government entity bound by the Constitution and that the exchange’s rules in this case are the government’s responsibility.
“Nasdaq is a private entity,” the justices noted in their ruling. “It is a private, limited liability company wholly owned by Nasdaq, Inc., a publicly traded company.”
“While Nasdaq must register with and is heavily regulated by the SEC, the Supreme Court has made clear that the mere fact of being regulated does not make a private company a government actor,” the panel wrote.
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2024-02-20 20:20:19
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