Get In Your Lane, SEC

This week the New Civil Liberties Alliance (NCLA) petitioned the U.S. Court of Appeals for the Fifth Circuit for en banc rehearing of our National Center for Public Policy Research v. SEC lawsuit, seeking to “return [the U.S. Securities & Exchange Commission] to its regulatory lane” after the SEC waaaaaaaay overstepped by approving Nasdaq’s new board diversity rules.

In an NCLA press release, picked up by the AP and distributed by more than 350 outlets worldwide, the NCLA argues that the “SEC has no statutory authority to promulgate” board diversity rules imposing “race, gender and sexual orientation-based quotas on the corporate boards of companies listed on the Nasdaq stock exchange.”

More specifically:

The 1934 Exchange Act explicitly forbids SEC from approving Nasdaq rules that regulate matters unrelated to the Act’s purposes. Gender, race, and sexual orientation fall outside the Act’s purposes because SEC itself determined these demographic characteristics have no rational relationship to corporate performance and investor returns. SEC nonetheless approved these rules by concluding that compelled explanations and disclosures regarding gender, race, and sexual orientation promote “fair and orderly markets” by giving certain investors the information they need to engage in discrimination based on those characteristics. The Fifth Circuit panel in this case deferred to that flawed reasoning and upheld these rules without addressing the statutory prohibitions.

Stefan Padfield

Stefan Padfield, an associate with the National Center’s Free Enterprise Project, recently broke down the absurdity of both the Fifth Circuit ruling and the Nasdaq rule itself in a Daily Caller commentary.  After explaining the problems with the ruling, he notes:

[A]ll of this arguably pales when compared to the substantive absurdity of the rule itself. You see, the express terms of the rule allow men who identify as women to be counted as females, and even relies on self-reporting to identify a director as black or otherwise representing an “Underrepresented Minority.” This appears to mean that a corporation with a board consisting entirely of white men could “inform” the market that it is a diverse board so long as two of its directors provided the necessary self-report….

And we haven’t even mentioned the problems with a diversity rule that presumably attempts, among other things, to address the issue of women’s equality – but does so by effectively simply replacing women with men who identify as women.

“The panel decision… if not reheard, leaves [the SEC] free to regulate what it will with no limiting principle,” says NCLA Senior Litigation Counsel Peggy Little. “The full Fifth Circuit should move quickly to correct this violation of law and return SEC to its regulatory lane.”