On December 11, the Court of Appeals for the Fifth Circuit vacated Nasdaq Listing Rule 5605(f) and Nasdaq Listing Rule 5606(a) (together with Nasdaq Listing Rule IM-5900-9, the Board Diversity Rules) by a 9-8 vote. In Alliance for Fair Board Recruitment v. SEC, the Fifth Circuit held that the Securities and Exchange Commission (SEC) acted outside of its authority when it approved Nasdaq’s Board Diversity Rules in 2021.
Background on Nasdaq Board Diversity Rules
The Board Diversity Rules set a “recommended objective” for most Nasdaq-listed companies with more than five directors to include at least one woman on their board of directors, along with one person who is an underrepresented minority or who self-identifies as LGBTQ+ utilizing a phased-in approach. If companies did not fulfill the diversity guidelines within the timeframes specified, they were required to explain why they did not. Listed companies were also required to disclose annual diversity statistics of their boards utilizing a standardized matrix. Additionally, IM-5900-9 provided listed companies access to a third-party board recruiting platform to assist in recruiting board members while fulfilling their diversity objectives. See our previous blog post on the Board Diversity Rules for more information.
Legal Basis for the Fifth Circuit’s Decision
This decision overruled a Fifth Circuit panel’s 2023 decision upholding the rule. In reaching this decision, the Fifth Circuit noted that the SEC’s actions involved the “major questions” doctrine and that without a clear Congressional directive, the SEC did not have the statutory authority to authorize Nasdaq’s rule. The SEC and Nasdaq argued, among other matters, that because “full disclosure” was central to the Exchange Act of 1934, as amended, the SEC had the authority to adopt a requirement for board diversity disclosure.
Implications for Nasdaq-Listed Companies
Nasdaq-listed companies had recently started implementing the Board Diversity Rules utilizing a phased-in approach. With this ruling and reports that Nasdaq does not plan to appeal the decision, Nasdaq-listed companies will no longer be required fulfill the recommended diversity goals within the timeframes required by Nasdaq or explain why they have not fulfilled them. Additionally, they will not be required to collect diversity information from their board of directors and report the statistics utilizing the standardized matrix in their SEC filings or website. Nonetheless, companies may continue to collect and report on this information, pursuant to company-specific diversity goals and disclosure practices and/or to respond to the expectations of their stakeholders.
If you have any questions about how the Fifth Circuit’s decision vacating Nasdaq’s Board Diversity Rules may impact your business, please contact the author or your Bass, Berry & Sims relationship attorney.