5th Circuit Declares Nasdaq Diversity Rule Unenforceable
On December 11, 2024, the U.S. Court of Appeals for the 5th Circuit made a significant decision regarding The Nasdaq Stock Market LLC (Nasdaq) and its Diversity Rule. In a close 9-8 ruling, the court found that Nasdaq cannot enforce its listing rules that required Nasdaq-listed companies to have women and minority directors on their boards or explain why they were absent. This rule, approved by the U.S. Securities and Exchange Commission (SEC) in August 2021, was deemed to exceed the SEC’s authority and violate the Securities Exchange Act of 1934.
Supporters of the Nasdaq Diversity Rule argued that it was a practical measure to ensure consistency and transparency in companies’ disclosures, benefiting investors and stakeholders. However, despite a previous upheld ruling in favor of the rule in 2023, the recent decision stated that the SEC had overstepped its boundaries by approving the rule.
While Nasdaq believes in the benefits of the Diversity Rule for both companies and investors, they have chosen not to appeal the court’s decision. The SEC is considering whether to challenge the ruling further, but with the current landscape, an appeal seems unlikely.
Although the Nasdaq Diversity Rule is no longer enforceable, it’s essential for companies to note that shareholder advisory groups and major investors still consider diversity in boardrooms. It’s recommended for issuers to consult with legal and financial advisors about publicly sharing director skill sets and backgrounds, including diversity information, even without the rule in place.
