A landmark ruling from the Fifth Circuit Court of Appeals has struck down a controversial Nasdaq stock exchange rule requiring board diversity among listed companies. The rule, approved by the U.S. Securities and Exchange Commission (SEC) in 2021, mandated companies to either include at least one woman, minority, or LGBTQ individual on their boards or publicly explain why they failed to meet this standard.
The court’s 9-8 decision represents a significant challenge to corporate diversity mandates, with judges declaring that the SEC had overstepped its authority by approving the Nasdaq proposal.
The Nasdaq diversity rule emerged as part of broader efforts to enhance representation in corporate governance. Under the rule, companies were required to disclose the gender, racial, and LGBTQ identities of their board members and provide explanations if they failed to meet diversity thresholds.
However, the rule faced immediate criticism and legal challenges. The Alliance for Fair Board Recruitment, led by Ed Blum—known for successfully challenging racial quotas in college admissions—filed a lawsuit arguing the rule was unlawful.
Initially upheld by a district court and a Democratic-led appellate panel, the rule’s fate changed after an en banc rehearing by the full Fifth Circuit Court. In a narrow 9-8 decision, Republican-appointed judges formed the majority, striking down the rule as exceeding the SEC’s statutory authority.
Judge Andrew Oldham, who authored the majority opinion, criticized the rule as being disconnected from the SEC’s foundational purpose outlined in the 1934 Securities Exchange Act. This act gave the SEC authority to regulate stock markets to ensure “just and equitable principles of trade” and prevent fraudulent practices—not to enforce social or identity-based mandates.
Oldham argued that requiring companies to disclose board diversity had no direct connection to investor protection or the enumerated purposes of the Exchange Act.
“It is obviously unethical to violate the law or to disregard a contractual promise,” Oldham wrote. “It is not unethical for a company to decline to disclose information about the racial, gender, and LGBTQ+ characteristics of its directors.”
He further clarified that while companies were not compelled to comply with the diversity rule, they could voluntarily disclose such information if they deemed it necessary or beneficial.
The decision marks a pivotal moment in the debate over identity politics and corporate governance. Critics of the Nasdaq rule, including Ed Blum, celebrated the ruling as a victory against what they described as unconstitutional quotas.
“The rule was an unlawful attempt to alter the racial and sexual composition of corporate boards across America and penalize any company that failed to conform,” Blum said. “Race and sex quotas have no place in American public policies.”
Jonathan Berry, an attorney representing the Alliance for Fair Board Recruitment, echoed these sentiments, emphasizing the potential misuse of market power by exchanges like Nasdaq. “As Judge Oldham’s scholarly opinion explains, stock exchanges like Nasdaq have a great deal of market power. And they unlawfully abuse that power when they subject corporate boards to identity politics,” Berry said.
Nasdaq defended its intentions, stating that the rule aimed to standardize and simplify disclosure requirements, benefiting both companies and investors.
A Nasdaq spokesperson remarked, “We maintain that the rule simplified and standardized disclosure requirements to the benefit of both corporates and investors. That said, we respect the court’s decision and do not intend to seek further review.”
The SEC, however, appeared less definitive in its response. “We are reviewing the court’s decision and will determine next steps as appropriate,” an SEC representative stated.
The ruling represents a broader cultural and political pushback against initiatives that focus on gender, race, and sexual orientation in decision-making processes. Proponents of diversity mandates argue that such measures are critical for promoting equity and inclusivity. However, critics contend that these efforts often prioritize identity over merit and infringe upon the principles of a free market.
The Fifth Circuit decision not only curtails the SEC’s authority in approving such measures but also signals a shift in how diversity initiatives may be treated in courts. It underscores growing resistance to government-endorsed identity-based mandates and could set a precedent for future legal challenges to similar policies.
The case’s resolution raises questions about the balance between regulatory authority and voluntary corporate action. While companies remain free to pursue diversity goals independently, the ruling may deter exchanges and regulatory bodies from imposing identity-based requirements on businesses.
As the SEC reviews its options, the decision has energized critics of diversity mandates and drawn attention to the legal boundaries of federal agencies. The court’s ruling is expected to have lasting implications, shaping the future of corporate governance and diversity efforts in the U.S.
For now, the decision represents a major victory for those advocating a return to merit-based policies and limited government intervention in private enterprise. Whether this signals the decline of diversity mandates or merely a pause in their evolution remains to be seen.
