On Dec. 11, the U.S. Court of Appeals for the 5th Circuit invalidated the Securities and Exchange Commission's 2021 approval of Nasdaq's board diversity listing standards.
The appeals court, which heard the case en banc, ruled 9-8 against the SEC and Nasdaq in a legal challenge brought by the Alliance for Fair Board Recruitment and the National Center for Public Policy Research. The nine judges in the majority were all appointed by Republican presidents, according to Bloomberg Law. A three-judge panel, which included three jurists appointed by Democratic presidents, had upheld the listing standards in a 2023 decision.
In the latest ruling, the 5th Circuit majority ruled that the rationales for the listing standards cited by the SEC and Nasdaq were inconsistent with the Securities Exchange Act of 1934 and the agency had overstepped its authority. The Nasdaq standards included a mandate for companies to disclose the racial, gender, and sexual orientation of their boards and a "comply-or-explain" requirement for those companies that did not have directors who met Nasdaq's definition of diverse
In communications to its listed companies, Nasdaq stated: "We respect the Court’s decision and do not intend to seek further review. As a result, companies will no longer be required to follow Nasdaq’s board diversity disclosure rules."
An SEC spokesperson said the agency is "reviewing the decision and will determine next steps as appropriate," according to Bloomberg Law. Given the change in SEC leadership in January 2025, it appears unlikely that a Republican-led SEC would appeal this decision.
While Nasdaq-listed companies no longer will have to follow the exchange's diversity standards, the two largest U.S. proxy advisors and a number of large institutional investors still have board diversity standards within their proxy voting guidelines. For more on this topic, please see the Board Diversity section of the Society's Practical Resources Library.
For more coverage of this court decision, please see this blog post from Cooley's PubCo blog and news articles from the Wall Street Journal, USA Today, and Reuters.