Fifth Circuit Court of Appeals Declines to Review SEC Approval of ‘Nasdaq Rule’

In October, the U.S. Court of Appeals for the Fifth Circuit denied petitions to review the Securities and Exchange Commission’s (SEC) approval of the Nasdaq diversity disclosure rule. The rule requires Nasdaq-listed companies to have female and minority or LGBTQ+ directors on their boards (or explain why they do not) and disclose diversity statistics of their directors. A Simpson Thacher Memorandum notes that the Appeals Court “rejected petitioners’ constitutional and statutory claims, framing Nasdaq’s diversity rule as consistent with the Securities Exchange Act’s ‘fundamental purpose’ of enforcing ‘a philosophy of full disclosure… in the securities industry.’” According to the Memorandum “[t]he Court rejected petitioners’ constitutional challenges, because the Constitution applies only to state action, and (i) Nasdaq is a private entity and not a state actor, and (ii) the Nasdaq rule cannot be attributed to the SEC.” In its denial, the Court rejected arguments that the SEC’s approval exceeded the agency’s authority under the Exchange Act, and further rejected the argument that the SEC had acted arbitrarily or capriciously in violation of the Administrative Procedure Act. Simpson Thacher notes that the Fifth Court decision to deny review “may give boards and companies greater confidence in developing and disclosing corporate diversity policies, outside of the context of board composition, in a manner that will withstand judicial scrutiny.” Interestingly, the petitioner in this case is led by the same individual who also brought the “Students for Fair Admissions” case where the Supreme Court held that Harvard University’s and the University of North Carolina’s admissions programs violated the Equal Protection Clause of the Fourteenth Amendment. The Nasdaq rule will go into effect on December 31, 2023.

Click here to read the Simpson Thacher memorandum.
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