Nasdaq Diversity Rule Challenge Puts Conservatives on Defense (1)

Conservative groups faced a skeptical panel of Fifth Circuit judges over their legal challenge to the SEC’s backing of Nasdaq rules aimed at putting more women and minorities on corporate boards.

“You have to be able to say it’s arbitrary,” Judge Stephen Higginson of the US Court of Appeals for the Fifth Circuit said during oral arguments Monday, referring to the Security and Exchange Commission’s approval of the rules.

The Nasdaq Inc. rules require companies listed on the exchange to have at least one female board member and at least one who identifies as an underrepresented minority or LGBTQ—or explain why they don’t. Thousands of companies listed on the exchange have to comply, although there is greater flexibility for smaller and foreign-based firms.

The Alliance for Fair Board Recruitment and the National Center for Public Policy Research said the stock exchange’s diversity rules violated federal securities laws and directors’ and companies’ First Amendment rights. They petitioned the New Orleans-based appellate court to review the regulations after the SEC let Nasdaq implement them last year.

In its approval of the Nasdaq rules, the SEC said it wouldn’t impose “any burden on competition that is not necessary or appropriate.” The regulations also respond to broad investor demand, the agency said.

“Investor demand, investor interest is not sufficient,” Jonathan Berry, a Boyden Gray & Associates partner representing the Alliance for Fair Board Recruitment, said during the oral arguments.

‘Within the Mainstream’

The Nasdaq rules come amid a growing movement among investors and companies to diversify their boards. Women now account third of S&P 500 board members, while non-white directors have about a quarter of the seats, according to data from the Conference Board and ESGAUGE.

Groups representing pension funds, investment firms, and other investor interests support Nasdaq’s regulations. Investors and investment advisers who manage $18.3 trillion in funds vote against or withhold votes for directors who serve on the nominating committees of boards with little or no diversity, the Council of Institutional Investors, the Investment Adviser Association and other organizations said in an amicus brief.

“This is not just a vocal group of investors,” Tracey Hardin, an SEC assistant general counsel, told Fifth Circuit panel, which also included Judges Carl Stewart and James Dennis.

The commission under Democratic Chair Gary Gensler endorsed the board diversity rules without any Republican support in August 202, allowing Nasdaq to implement them. Diversity and other environmental, social and governance issues are top priorities for Gensler.

Allyson Ho, a Gibson, Dunn & Crutcher LLP partner representing Nasdaq, disputed claims by the conservative groups the SEC tried to improperly advance an ESG agenda.

“This rule is well within the mainstream,” Ho said during the oral arguments.

The case is Alliance for Fair Board Recruitment v. SEC, 5th Cir., No. 21-60626, oral arguments held 8/29/22.