Last week, a federal appeals court upheld Nasdaq’s diversity rule, which could impact the large number of companies with initiatives to promote gender and racially diverse talent.
Nasdaq Stock Market, LLC proposed a rule that would require publicly traded companies to have women and minority directors on their boards, or explain why they don’t.
A three-judge panel of the Fifth Circuit Court of Appeals explained that the “fundamental purpose” of the Securities Exchange Act of 1934 is to enforce “a philosophy of full disclosure.” . . in the securities industry.” Nasdaq is a privately held company that operates a stock exchange.
In accordance with this goal, on December 4, 2020, Nasdaq filed proposed rule changes to address board diversity.
The proposed rules include two parts: In the Board Diversity proposal, Nasdaq proposed to “require each Nasdaq listed company, subject to certain exceptions, to disclose in aggregate form, to the extent permitted by applicable law, information about the voluntary self-identified gender and racial characteristics and the LGBTQ+ status of the company’s board of directors.”
Nasdaq has also proposed requiring every Nasdaq-listed company, subject to certain exceptions, to have, or explain why it does not have, at least two members on its board of directors who are diverse, including at least one director who identifies as a woman identifies. and at least one director who identifies as an underrepresented minority or LGBTQ+.
Under the proposed rules, “diverse” would be defined as an individual who identifies in one or more of the following categories: (i) female, (ii) underrepresented minority, or (iii) LGBTQ+..; ‘Female’ would be defined as an individual who self-identifies their gender as female, without regard to the individual’s declared gender at birth; “Underrepresented minority” would be defined as a person who identifies as one or more of the following: Black or African American, Hispanic or Latino, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander Islander, or two or more races or ethnicities; and “LGBTQ+” would be defined as a person who identifies as one of the following: lesbian, gay, bisexual, transgender, or as a member of the queer community.
On August 6, 2021, the SEC issued a Consent Order approving the proposed rule changes. After the SEC approved these rules, the Alliance for Fair Board Recruitment and the National Center for Public Policy Research filed a petition for review.
Last week, the Fifth Circuit panel ruled that the challenge was flawed because Nasdaq is not a state actor and not subject to constitutional oversight. The Court further concluded that the SEC acted within its statutory authority in adopting Nasdaq’s rules, explaining: “This evidence is sufficient to support the SEC’s determination that, regardless of whether investors believe board diversity is appropriate or bad for companies, disclosing information about board diversity would shape how investors behave in the market.” Accordingly, the petitions to block the rules were rejected.
Read the long but very interesting decision Alliance for Fair Board Recruitment, et al. v. SEC, United States Court of Appeals for the Fifth Circuit.
This may not be the end of this dispute. The Alliance for Fair Board Recruitment has filed a petition for a rehearing before the full Fifth Circuit. This could be particularly important because the three judges on the panel in this decision were each Democratic appointees, while the majority of the Fifth Circuit was made up of Republican appointees. And given the U.S. Supreme Court’s ruling in June declaring unlawful the race-conscious student admissions policies employed by Harvard University and the University of North Carolina, final approval of the Nasdaq rule is far from certain.
In a similar vein, we posted earlier this year: Court finds racial, ethnic and LGBT quotas for California boards unconstitutional.
And for those interested in this topic, the SEC has announced that it will propose a rule on “human capital management,” which commentators speculate will be even more comprehensive than this Nasdaq rule.
As large numbers of companies have initiatives to promote gender and racially diverse talent, keeping up with the law on this topic is a necessity.
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