By Nate Raymond (NS:)
(Reuters) -A U.S. appeals court ruled on Wednesday that Nasdaq cannot impose rules designed to increase diversity in corporate America by requiring publicly traded companies to have women and minority directors on their boards, or explain why they don’t do that.
The 9-8 ruling by the New Orleans-based, conservative-majority 5th U.S. Circuit Court of Appeals found that the rules adopted by the U.S. Securities and Exchange Commission violated federal securities law.
The decision is a major legal victory for opponents of policies intended to increase racial and gender diversity in companies.
The diversity rules were challenged by conservative think tank the National Center for Public Policy Research and Alliance for Fair Board Recruitment, a group founded by Edward Blum, who led the U.S. Supreme Court’s successful challenge to race-conscious college admissions policies.
“SEC has intruded into territory far beyond its ordinary domain,” U.S. Circuit Judge Andrew Oldham, who was appointed by Republican President-elect Donald Trump in his first term, wrote for the majority.
The SEC said it was reviewing the ruling and would have to appeal to the Supreme Court to overturn it. Nasdaq said that while it believed his rule would benefit companies and investors, it respected Tuesday’s ruling and would not appeal.
Research shows it was a Nasdaq requirement intended to increase the diversity of company boards, which have long been largely white and male.
Nasdaq required companies to have at least one woman, racial minority or LGBTQ person on their board, or to explain why they did not. Companies must also annually disclose how board members identify themselves in those categories.
A three-judge panel of the 5th Circuit, made up entirely of appointees of Democratic presidents, in October 2023 upheld the SEC’s decision to approve Nasdaq’s rules, saying the regulator acted within its authority.
But the conservative-majority court opted to have all its justices reconsider the case. All nine majority justices were appointed by Republican presidents.
Oldham said the SEC wrongly concluded that because Nasdaq’s proposal would require disclosure of information about publicly traded companies, it fits within the purposes of the Securities Exchange Act of 1934, which governs stock trading.
He said any disclosure rule must have “some relationship to the ills Congress sought to eradicate through the law,” such as “speculation, manipulation and fraud, and the removal of barriers to exchange competition.”
Mark Chenoweth, whose legal group the New Civil Liberties Alliance represented the National Center for Public Policy Research, said the ruling “should chasten the SEC to stick to its knitwear and stop trying to abuse its market-regulating power.”
Eight justices dissented, including U.S. Circuit Judge Stephen Higginson, an appointee of Democratic former President Barack Obama, who said the SEC’s limited role in reviewing Nasdaq’s proposed rules prevented the company from making another to make a decision.
