Nasdaq board diversity rule challenge will be reheard en banc

The 5th U.S. Circuit Court of Appeals agreed to rehear a challenge to Nasdaq’s board executive diversity rule, according to court documents filed Feb. 19. In the filing, the court also vacated its earlier decision allowing the disclosure requirements.

Oral arguments for the rehearing en banc — that is, with all of the court’s judges — are tentatively scheduled for the week of May 13, according to court filings.

Nasdaq proposed the rule to the U.S. Securities and Exchange Commission in 2020, after which it was approved in 2021. It requires listed companies to publicly disclose the diversity statistics of their board of directors, and would require those businesses to have at least one director who self-identifies as female, as well as one who self-identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaskan Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities or as LGBTQ+. Companies would have to explain any failures to meet this standard.

The rule was immediately met with challenges. The National Center for Public Policy Research, a conservative think tank, and the Alliance for Fair Board Recruitment sued the SEC, asking the 5th Circuit to vacate the SEC’s order.

Those petitions were denied last year, but the plaintiffs filed for a rehearing; 19 Republican state attorneys general filed an amicus brief in support of a re-hearing, in part due to the 2023 U.S. Supreme Court ruling that struck down race-conscious admission practices at universities.

“Put simply, SEC is practicing what it is constitutionally bound to be eliminating,” the amicus brief said. “The agency has blessed explicit race-based requirements for listed corporations and further included overt sex-based mandates. And the types of preferences it adopted are particularly problematic: outright quotas rather than any sort of ‘plus factor.’”

The New Civil Liberties Alliance, which represented the National Center for Policy Research, said in a statement that it “looks forward” to the en banc revisitation.

“The panel erroneously concluded that discrimination based on race, gender, and sexuality somehow falls within the Exchange Act’s objective to promote ‘fair and open markets,’” said Sheng Li, litigation counsel for NCLA and one of the attorneys representing NCPR, said in a statement. “Nothing in the Act authorizes SEC to approve an Exchange’s use of quotas and compelled speech to facilitate invidious discrimination based on those characteristics.”

Nasdaq declined to comment.