A U.S. appeals court on Wednesday ruled that Nasdaq could not impose rules designed to increase diversity in corporate America by requiring companies listed on the exchange to have women and minority directors on their boards or explain why they do not.
The New Orleans-based 5th U.S. Circuit Court of Appeals on a 9-8 vote sided, opens new tab with two conservative advocacy groups in finding that the rule approved by the U.S. Securities and Exchange Commission ran afoul of federal securities law.
The diversity rule was challenged by the National Center for Public Policy Research, a conservative think tank, and Alliance for Fair Board Recruitment, a group founded by Edward Blum, who led the successful U.S. Supreme Court challenge against race-conscious college admissions policies.
The SEC, Nasdaq and plaintiffs did not immediately respond to requests for comment.
At issue was a Nasdaq requirement that companies have at least one woman, racial minority, or LGBTQ person on their boards or explain why they do not. Companies must also disclose annually how board members identify in those categories.
A three-judge panel of the 5th Circuit comprised entirely of appointees of Democratic presidents in October 2023 upheld the SEC's 2021 decision to approve Nasdaq's rules, saying the regulator acted within its authority.
But the conservative-majority court opted to have all of its judges reconsider the matter. All nine judges in the majority were appointed by Republican presidents, including the ruling's author, U.S. Circuit Judge Andrew Oldham, who was appointed by President-elect Donald Trump in his first term.
Oldham said the SEC wrongly concluded that because Nasdaq's proposal would require information about exchange-listed companies to be disclosed, it fit within the purposes of the Securities Exchange Act of 1934, which governs stock trading.
"The history makes clear the Act is primarily about limiting speculation, manipulation, and fraud, and removing barriers to exchange competition," he wrote. "There are other, ancillary purposes, but disclosure of any and all information is not among them."
He said the rules' approval had "staggering" political significance and implicated the so-called "major questions" doctrine, a legal principle favored by conservatives that gives judges broad discretion to invalidate executive branch actions unless Congress clearly authorized them.
Eight judges dissented including U.S. Circuit Judge Stephen Higginson, an appointee of Democratic former President Barack Obama, who said that under the law, the SEC's role in reviewing Nasdaq's proposed rules was limited.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
