Court Deals Blow To Major Stock Exchange’s Efforts At Pushing Diversity Rules On Companies

An appeals court in Louisiana on Wednesday rejected Nasdaq’s proposed rules aimed at increasing diversity on company boards.

The Fifth U.S. Circuit Court of Appeals in New Orleans ruled that Nasdaq cannot implement its proposed diversity policies, which would require companies listed on the stock exchange to have or disclose why they do not have minority and female directors on their boards. The appeals court said in the ruling that the Securities and Exchange Commission (SEC) did not have the authority to approve the proposed rules.

“Nasdaq proposed rules that compel the companies listed on its exchange to disclose information about the racial, gender, and sexual characteristics of their directors, and to have (or explain why they do not have) at least two directors who meet Nasdaq’s definition of ‘diverse,’” the ruling stated. “SEC approved those rules. We hold, however, that the diversity rules cannot be squared with the Securities Exchange Act of 1934.”

“It is obviously unethical to violate the law or to disregard a contractual promise,” the ruling stated. “It is not unethical for a company to decline to disclose information about the racial, gender, and LGTBQ+ characteristics of its directors. We are not aware of any established rule or custom of the securities trade that saddles companies with an obligation to explain why their boards of directors do not have as much racial, gender, or sexual orientation diversity as Nasdaq would prefer.”

“Further, SEC’s efforts ‘raise an eyebrow’ by stepping outside its ordinary regulatory domain of market manipulation and proxy voting and intruding into the province of other agencies,” according to the ruling.

Some companies have been quietly backpedaling on their diversity, equity and inclusion (DEI) practices this year amid intense legal pressure from conservatives and shareholders. Some major