Nasdaq Board Diversity Disclosure Listing Requirement Allowed to Stand
Thursday, November 2, 2023
by: Sam Holmes

Section: Policy

On August 6, 2021, the Securities and Exchange Commission (SEC) approved the Nasdaq U.S. Exchange’s proposed new rule on board diversity and disclosure (“the Rule”). The Rule required Nasdaq-listed companies to:

  1. provide statistical information about each director’s self-identified gender, race and self-identification as LGBTQ+ and,
  2. have the board of directors include at least one female and at least one who self-identifies as an underrepresented minority.

If the listed company fails to satisfy the second requirement, it must explain why.

US SIF sent a letter to the SEC urging the agency to allow Nasdaq to adopt these rules as “investors would benefit from clear, consistent and comparable disclosures by companies.”

On October 18, 2023, a unanimous decision by a randomly selected three-judge panel, each Democratic-appointed, denied the petitions by the Alliance for Fair Board Recruitment (AFBR) and the National Center for Public Policy Research (NCPPR) and chose to uphold the Rule. The two organizations challenged the SEC’s acceptance of Nasdaq’s Rule in the Fifth Circuit Court of Appeals, which is considered one of the most conservative courts in the country.
court’s opinion in Alliance for Fair Board Recruitment, National Center for Public Policy Research v. SEC upholding Nasdaq’s diversity filing rule found the following:

  • Nasdaq is not subject to constitutional scrutiny. Nasdaq, while registered with and heavily regulated by the SEC, is a private entity. The Supreme Court has made it clear that a private entity does not become a state actor merely by virtue of being regulated. Nasdaq generated its diversity filing rule by itself and submitted it to the SEC for required statutory review.
  • The Rule was squarely within the standard of materiality. The Exchange Act does not require exchange disclosure rules to “be limited to information that would be material for purposes of a securities fraud claim. Yet, even if it did, there is substantial evidence supporting the SEC’s findings that the Rule was material and would provide “information that would contribute to investors’ investment and voting decisions.”
  • The SEC was within its authority when it approved the Rule. The Major Questions Doctrine was found to not apply to this case as Congress gave the SEC the authority to exercise the power to approve exchange listing rules. The SEC was also within its authority when it considered investor comments submitted during the administrative process, even if some of such comments were opinions and therefore subjective.
  • Nasdaq is not forcing companies to increase board diversity. The Rule is not a “mandatory quota” but instead a “disclosure-based framework” and does not alter the state-federal balance or encroach upon traditional state powers. If a company does not meet the diversity objectives in the filing rule, the company can simply explain why.

In the decision
written by Judge Higginson, the opening line states thatthe ‘fundamental purpose’ of the Securities Exchange Act of 1934 (Exchange Act), codified as amended at 15 U.S.C § 78a et seq., is to enforce ‘a philosophy of full disclosure in the securities industry.’ This affirms that the SEC’s “fundamental purpose” is to create and enforce a disclosure-based regime for the securities industry, which will be essential in expected challenges to coming SEC rulemakings like the climate-related risk disclosure rule. Affirming the SEC’s disclosure-related purpose also strengthens the case for the SEC moving forward with additional disclosure rules around
human capital management, human rights, and political activity.

Immediately following the decision, AFBR and NCPPR filed a new petition, requesting the case to be heard by the entire set of judges in the Fifth Circuit, a group dominated by Republican-appointed judges. US SIF will continue to uplift our members’ interest in having comprehensive, comparable, and standardized disclosure of information that they find critical to their investment decisions.  

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