Bloomberg Law
Aug. 26, 2022, 9:00 AM

Nasdaq to Defend Board Diversity Push After California Setbacks

Andrew Ramonas
Andrew Ramonas
Corporate Disclosure Reporter

Nasdaq’s bid to boost corporate board diversity will get a closer look in federal court for the first time since California’s landmark laws with similar missions were quashed in a state court.

A three-judge panel of the US Court of Appeals for the Fifth Circuit will hear oral arguments on Monday in an appeal of a Securities and Exchange Commission decision approving new Nasdaq Inc. rules. The tech-heavy stock exchange is requiring its listed companies to have diverse corporate boards or explain why they don’t.

The conservative Fifth Circuit has an opportunity and the power to slow recent growth in women and minorities on corporate boards, as Nasdaq regulations at stake cover thousands of publicly listed US companies. More than a dozen Republican attorneys general and corporate giants—including rule proponents Microsoft and Starbucks—are closely watching the case.

California Superior Court judges earlier this year struck down state laws that directed companies based in the state to have women and minority or LGBTQ board members. The scrapping of California’s mandates is a bellwether that shows board diversity regulations struggle under judicial scrutiny, said Peggy Little, senior litigation counsel for the New Civil Liberties Alliance, which is representing the National Center for Public Policy Research, a conservative organization challenging the Nasdaq rules.

“If there was any state in which these kinds of rules had a chance, it was California,” Little said. “The validity of this kind of regulation is very much uncertain.”

A Nasdaq spokesman declined to comment.

Women and minorities already are making gains on corporate boards, regardless of how the Fifth Circuit judges rule. Women now hold about a third of S&P 500 board seats, while non-white directors have about a quarter of the spots, according to data from the Conference Board and ESGAUGE.

Comply or Explain

The National Center for Public Policy Research and Alliance for Fair Board Recruitment petitioned the New Orleans-based Fifth Circuit to review the regulations after the SEC signed off on them last year. The groups were allowed to appeal the SEC’s decision directly to the Fifth Circuit, and not a district court, under federal law.

Most companies listed on Nasdaq would have had to comply with the rules, after the Securities and Exchange Commission signed off on them last year.

The conservative groups’ petitions followed another lawsuit Alliance for Fair Board Recruitment brought over California’s board-diversity laws. The statutes were overturned in related cases earlier this year, though California has appealed the decisions.

The Nasdaq rules differ from the California laws in that the stock exchange doesn’t explicitly require companies to have diverse boards. Nasdaq-listed companies generally must have at least one woman and at least one minority or LGBTQ member on their boards, unless they disclose why they can’t comply with the requirements. Small or foreign companies have greater leeway, but they can’t completely ignore the diversity rules.

Nasdaq’s softer path to board diversity may prove more palpable to a court, said Kristyn Noeth, a Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC of counsel, who advises companies on environmental, social and governance issues.

“A disclosure rule is likely the best model going forward,” Noeth said.

SEC Support

Nasdaq’s board diversity regulations, like other rules issued by exchanges, needed the SEC’s endorsement to take effect. The Democratic-led commission approved them without any Republican support in August 2021.

The Nasdaq approval happened less than four months after Gary Gensler became the SEC’s chair. Diversity and other environmental, social and governance issues are top priorities for Gensler, including potential rules the agency is mulling to require a broader universe of public companies to disclose the diversity of board directors and nominees.

Board diversity also has been a priority for Nasdaq CEO Adena Friedman, who is the first woman to lead the exchange.

The Nasdaq rules violate securities laws and infringe on companies’ and directors’ First Amendment rights, the National Center for Public Policy Research and Alliance for Fair Board Recruitment said in court filings.

The SEC has disputed the claims, saying in a court brief the groups “distort the rules and the Commission’s statutory role in reviewing them.” Investors also are demanding board diversity information, the agency said.

“The social and corporate value purposes of the rule certainly weigh in its favor, beyond any strict constitutional scrutiny,” Noeth said.

Backers, Detractors

Several supporters and opponents of the Nasdaq rules have filed amicus briefs in the case.

The backers include Nasdaq-listed companies Comcast Corp., Microsoft Corp. and Starbucks Corp., which said the rules’ “significant benefits overwhelmingly outweigh its minimal burdens.”

Foes, including more than a dozen Republican state attorneys general, called the regulations “plainly repugnant to the Constitution.” The attorneys general are from Arizona, Florida and Texas, among other states.

“Quotas such as these are unfair, polarizing, and illegal,” said Edward Blum, president of the Alliance for Fair Board Recruitment, who has waged legal battles over diversity in university admissions.

An SEC representative didn’t respond to requests for comment.

The California litigation over the board diversity laws also raised constitutional concerns, but they were focused on the state’s constitution. The statutes violate constitutional protections against discrimination, according to complaints filed by Judicial Watch, a conservative group.

Little said she’s prepared to discuss the California decisions during oral arguments, if they’re brought up.

“The outcome should be the same under the federal Constitution,” Little said.

Next Steps

The fate of the rules for now rests with Judges Carl Stewart, James Dennis and Stephen Higginson, who will hear the oral arguments. They are among a minority of Fifth Circuit judges appointed by Democratic presidents.

But any of the parties in the case could appeal the three-judge panel’s decision to the full Fifth Circuit, where Donald Trump appointees and other Republican-backed judges hold the majority.

“The existence of the rule helps encourage boards to become more diverse already,” said Teresa Johnson, an Arnold & Porter Kaye Scholer LLP partner, who advises board directors. “The hope is that once boards become more diverse, that will continue even if perhaps the laws don’t survive.”

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

To contact the reporter on this story: Andrew Ramonas in Washington at

To contact the editors responsible for this story: Michael Ferullo at; Roger Yu at

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