Fifth Circuit Overturns Nasdaq Diversity Rules, Limits SEC Authority

On December 11, 2024, a federal appeals court ruled that the Securities and Exchange Commission overstepped its authority when it approved Nasdaq diversity rules requiring listed companies to maintain diverse boards or explain non-compliance.

In a 9-8 decision, the Fifth Circuit withdrew its previous support for these regulations. Bloomberg’s Andrew Ramonas reports that the Alliance for Fair Board Recruitment v. SEC ruling effectively nullifies Nasdaq’s diversity requirements, which had been in place since 2023.

This decision marks a significant victory for conservative groups challenging federal authority over corporate governance. The case arose in 2021 when the SEC endorsed Nasdaq’s rules to increase board diversity among listed companies. The regulations require at least one woman, minority, or LGBTQ+ member on corporate boards or disclosure of noncompliance.

Conservative organizations, including the Alliance for Fair Board Recruitment led by Edward Blum, argued that the SEC lacked the statutory authority under the 1934 Securities Exchange Act to approve such measures. They contended that the rules imposed unnecessary and unjustified burdens on companies, violating fair trade principles.

In writing for the majority, Judge Andrew Oldham held that the diversity rules extended beyond the SEC’s mandate to approve measures promoting equitable trade practices.

The dissenting judges argued that diversity disclosures align with investor interests and fall within the SEC’s authority to regulate matters relevant to investment and voting decisions.

The ruling highlights the judiciary’s growing scrutiny of administrative agency powers, especially in corporate governance. Tracking the evolving balance between market-driven standards and regulatory authority is essential.