US Appeals Court Strikes Down Nasdaq Diversity Rules for Corporate Boards

A federal appeals court has overturned Nasdaq’s diversity disclosure requirements for companies listed on the exchange, ruling that the Securities and Exchange Commission (SEC) did not have the authority to approve them.

The decision, issued by the conservative-majority 5th US Circuit Court of Appeals, challenges a set of rules that were designed to increase the representation of women and minority directors on corporate boards.

The rules, approved by the SEC in 2021, required Nasdaq-listed companies to either appoint at least one woman and one director from an underrepresented group—such as racial minorities or LGBTQ individuals—or provide an explanation for why they had not done so. The SEC had approved the rules following pressure from a broader movement for diversity, equity, and inclusion (DEI) in corporate America, which gained momentum after the killing of George Floyd in 2020.

In a 9-8 ruling, the appeals court determined that the SEC exceeded its authority by approving the Nasdaq rules, as they did not align with the legal framework established by the Securities Exchange Acts of 1934 and 1975. The majority opinion, written by Judge Andrew Oldham, stated that while the acts authorize disclosure of information about listed companies, they do not encompass the requirement for companies to disclose their diversity practices in the way Nasdaq had proposed.

The case had been brought by conservative groups, including the National Center for Public Policy Research and Alliance for Fair Board Recruitment, both of which argued that the rules could encourage racial and gender discrimination and violated civil rights laws. These organizations have been vocal opponents of policies they view as promoting “identity politics.”

Nasdaq expressed respect for the court’s decision and indicated that it would not seek further review. A Nasdaq spokesperson reiterated that the rule had been designed to simplify and standardize diversity disclosures, benefiting both companies and investors.

This decision marks another setback for the DEI movement, which has faced increasing scrutiny, especially in the courts. In recent years, similar diversity laws at the state level have been struck down, including California’s board diversity law. Furthermore, corporate America has seen a shift in its approach to DEI, with some companies scaling back their diversity initiatives in response to political and legal challenges.

The ruling also aligns with broader trends in corporate governance. Despite the push for greater boardroom diversity, recent reports show a decline in the number of racial and gender minorities being appointed to corporate boards, particularly within S&P 500 companies.

Axios, the Financial Times, and USA Today reports.