In August 2021, the SEC approved a Nasdaq proposal for new listing rules regarding board diversity and disclosure. The new listing rules adopted a “comply or explain” mandate for board diversity for most listed companies and required companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. (See this PubCo post.) A court challenge to these rules quickly materialized: the Alliance for Fair Board Recruitment and, later, the National Center for Public Policy Research petitioned the Fifth Circuit Court of Appeals for review of the SEC’s final order approving the Nasdaq rule. (See this PubCo post and this PubCo post.) In December last year, the en banc Fifth Circuit issued its opinion in Alliance for Fair Board Recruitment v. SEC vacating the SEC’s order approving Nasdaq’s board diversity proposal by a vote of nine to eight. According to an article in Bloomberg Law, following the decision, a “Nasdaq representative said the exchange disagreed with the court’s decision, but doesn’t plan to appeal the ruling. An SEC spokesperson said the agency is ‘reviewing the decision and will determine next steps as appropriate.’” (That, of course, was prior to the last election.) That question is now moot: Nasdaq filed a proposal with the SEC seeking to remove from the Nasdaq rules the relevant board diversity provisions to reflect “a Federal court’s vacatur of the Commission’s order of August 6, 2021, approving rules related to Board diversity disclosures. Nasdaq has requested that the Commission waive the operative delay to allow the proposed rule change to become effective on February 4, 2025.” And, this past Friday, the SEC declared the proposal to be immediately effective. Just in case anyone was unsure about the status of the board diversity rules, the effect of the proposal will be to “clarify Nasdaq’s rules by aligning them with the court’s decision.”
In cases to come, we may well see a reprise of many of the arguments that were successful in Alliance. The majority of the en banc Fifth Circuit applied a narrow interpretation of the purposes of the Exchange Act to hold that the Nasdaq board diversity rules “cannot be squared with the Securities Exchange Act of 1934,” and, therefore, the SEC had no business approving them. The majority reasoned that “an exchange rule is not related to the purposes of the Exchange Act simply because it is a disclosure rule. The Act exists primarily to protect investors and the macroeconomy from speculative, manipulative, and fraudulent practices, and to promote competition in the market for securities transactions. A disclosure rule is related to the purposes of the Act if it has some connection with those purposes, but not otherwise.” Nor, in the Court’s view, did the SEC explain how the Nasdaq board diversity proposal had “any connection with those purposes. All it said was that the Proposal is designed to advance three of the purposes contained in § 78f(b)(5). But those purposes bear no relationship to the disclosure of information about the racial, gender, and sexual characteristics of the directors of public companies.”
The majority was also unequivocal in finding that the case fell within the “major questions” doctrine set forth in West Virginia v EPA (see this PubCo post): “Put simply, the ‘economic and political significance’ of SEC’s action is ‘staggering by any measure.’… [The] SEC ‘claimed to discover in a long-extant statute an unheralded power’ that it ‘located . . . in the vague language of an ancillary provision of the Act.’…In doing so, SEC has intruded into territory far outside its ordinary domain.’” The Court concluded that “the major questions doctrine ‘counsels skepticism’ toward SEC’s exercise of this unprecedented power….’To overcome that skepticism, the Government must . . . point to “clear congressional authorization” to regulate in that manner.’… And that clear authorization is sorely lacking. All SEC can do is point to ‘a vague statutory grant’ in the Exchange Act.” In conclusion, the majority held that the SEC’s finding regarding the diversity proposal was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,“ meaning that the “SEC failed to justify its determination that Nasdaq’s Board Diversity Proposal is consistent with the requirements of the Exchange Act.”
Ironically, the dissent also contended that the SEC’s authority was limited—that its statutory authority to disapprove a rule proposed by Nasdaq, cast by the dissent as a “private entity” engaged in private ordering, was constrained by the Exchange Act. In effect, the dissent contended, the majority was advocating that the agency intrude more on this exercise in private ordering. (See this PubCo post.)
As noted above, don’t be surprised if we see many of these same arguments surface again in the context of challenges to other regulations—unless, of course, the SEC under the new Administration first takes the initiative to rescind rules on its own.
