Federal Circuit Court Overturns Nasdaq Board Diversity Rule

The U.S. Fifth Circuit Court of Appeals issued an en banc decision in December vacating a Securities and Exchange Commission (SEC) order that approved the Nasdaq Board Diversity Rule. The Nasdaq Board Diversity Rule would have required annual public disclosure of board-level diversity statistics, set parameters for diversity objectives, as well as allow a company the opportunity to explain why they have not met Nasdaq’s diversity objective, among other things. In its decision, the Fifth Circuit held that the SEC failed to prove that Nasdaq’s Board Diversity Rule was consistent with the requirements of the Securities Exchange Act of 1934. The court found that the SEC’s reliance on Exchange Act Section 6(b)(5), which (in part) permits the SEC to act in order to promote equitable principles of trade, remove impediments to free and open markets, and protect investors, was disconnected and “bear[s] no relationship” to board diversity disclosure. The court further held that under the Administrative Procedures Act, the Nasdaq diversity rules were “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” Of note, the margin for the decision was slim, the court was split in a 9-8 vote.

According to a client alert from Davis Polk, the “court’s decision means that Nasdaq-listed companies, including foreign private issuers, need not comply with Nasdaq’s board diversity rules.” Additionally, the client alert notes, “[t]he majority’s reasoning would apply equally to the SEC’s climate disclosure rule, which is currently being litigated in the Eighth Circuit, and could be viewed as persuasive precedent by those judges.”

Nasdaq reportedly will not seek review of the decision, and it is unlikely that a new SEC Chair in the Trump Administration would appeal the decision.

Click here to read a client alert from Davis Polk.