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A new petition has been filed challenging the Nasdaq board diversity rule (see this PubCo post). The National Center for Public Policy Research filed the petition on Tuesday with the U.S. Court of Appeals for the Third Circuit, but asked the court to transfer the proceeding to the Fifth Circuit, where an earlier petition filed by the Alliance for Fair Board Recruitment is pending. (See this PubCo post.) The new Nasdaq listing rules, which were approved by the SEC on August 6, adopt a “comply or explain” mandate for board diversity for most listed companies and require companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards.

According to a press release from the New Civil Liberties Alliance, which is representing the NCPPR on this matter, the NCPPR “owns shares in many Nasdaq companies,” and “argues that SEC has no power to regulate in this field because the rules have nothing to do with fraud or honest markets. The diversity rules fall outside of SEC’s regulatory authority under the 1934 Securities and Exchange Act [sic], which empowered SEC to regulate securities to ensure honest markets and enforce federal laws that punish fraud. These longstanding laws are being misinterpreted today by SEC to allow the agency, working with Nasdaq, to impose a ‘meet quota, explain why, or get delisted’ regime.”  Further, the NCLA contended, “Congress has not and cannot divest its lawmaking power to an administrative agency working with a quasi-public exchange to govern how boards of directors are constituted. These rules plainly violate the due process and equal protection rights of Americans. The rules further compel speech, in violation of the First Amendment, give SEC suspending and dispensing powers, and constitute prerogative warrants and orders in violation of the U.S. Constitution. Additionally, SEC should not be given Chevron or any other kind of deference in interpreting its own regulatory authority.”

SideBar

“Chevron deference” refers to the well-worn two-step test for determining whether deference should be accorded to federal administrative agency actions interpreting a statute (as opposed to its own regulation), first articulated by SCOTUS in 1984 in Chevron v. Natural Resources Defense Council. Generally, the doctrine established in that case mandated that, if there is ambiguity in how to interpret a statute, courts must accept an agency’s interpretation of a law unless it is arbitrary or manifestly contrary to the statute. For example, in a 2016 decision, Monica Lindeen v. SEC, the D.C. Circuit applied Chevron to uphold the SEC’s rules adopted under Reg A+ against a challenge by two state securities regulators. And, as another example, the D.C. District Court applied Chevron in initially upholding the SEC’s conflict minerals rules in 2013 in Nat’l Ass’n of Mfrs. v. SEC. National Association of Manufacturers v SEC, which was subsequently reversed on other grounds. (See this Cooley News Brief.) The decades-long deference of courts to the reasonable interpretations by agencies (such as the SEC) of their own ambiguous regulations is often referred to as Auer deference (or Seminole Rock deference, referring to Auer’s antecedent). (See this PubCo post.)

Both types of deference have become highly politicized and come under attack in an effort to restrict the actions of the “administrative state.” You might recall that, in 2016, the Financial Choice Act, which passed the House but not the Senate, provided that, in any action for judicial review of agency action (including action by the SEC) authorized under any provision of law, the reviewing court shall determine the meaning or applicability of the terms of an agency action and decide de novo all relevant questions of law, including the interpretation of constitutional and statutory provisions, and rules made by an agency. See this PubCo post. Note, however, that in the Financial Choice Act Version 2.0, the repeal of the “Chevron deference” doctrine would have been delayed for two years. See this PubCo post.) Similar provisions were included in quite a number of bills that passed the House but not the Senate in 2017. (See this PubCo post.)

Posted by Cydney Posner

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