Nasdaq Board Diversity Rules Blocked in Response to National Center Lawsuit

Washington, D.C. — On Wednesday, the New Civil Liberties Alliance, on behalf of the National Center for Public Policy Research’s Free Enterprise Project (FEP) and the Alliance for Fair Board Recruitment, convinced the en banc U.S. Court of Appeals for the Fifth Circuit to vacate the U.S. Security and Exchange Commission’s approval of Nasdaq’s board diversity rules, arguing that the SEC lacked statutory authority to do so.

These rules imposed race, sex and orientation quotas on corporate board membership for Nasdaq-listed companies, compelling those that failed to meet their board seat quotas to explain why – or face involuntary delisting from the stock exchange.

The Securities and Exchange Act of 1934 “required companies listed on a registered stock exchange to comply with SEC disclosure regulations,” Fifth Circuit Judge Andrew S. Oldham wrote for the Court in the case of National Center for Public Policy Research v. Securities and Exchange Commission, but “SEC may not approve even a disclosure rule unless it can establish the rule has some connection to an actual, enumerated purpose of the Act.”

The Court found that the race, sex and orientation of corporate board members has no connection to the purposes of the Exchange Act. While striking down SEC-sanctioned quotas based on these controversial demographic criteria, Judge Oldham wrote, “SEC has intruded into territory far outside its ordinary domain.”

Stefan Padfield

The Court decided that Nasdaq “offered little support for its claim that there is an empirically established – even logical – link between the racial, gender, and sexual composition of a company’s board and the quality of its governance.” The SEC also failed to justify how the rules helped to promote free and open markets, a core stated purpose of the Exchange Act.

“We are grateful the court reached the right conclusion in this case,” FEP Executive Director Stefan Padfield told USA TODAY. “The SEC was reaching beyond its statutory authority to try and engage in progressive social engineering. The court’s decision here is not only correct on the law, but also consistent with the will of the American people, who are sick and tired of seeing their government engage in divisive identity politics.”