Nasdaq Board Diversity Rules Struck Down: Learn More About the Impact
Nasdaq Board Diversity Rules Voided
On December 11, 2024, the U.S. Court of Appeals for the Fifth Circuit made a decision regarding the U.S. Securities and Exchange Commission’s (SEC’s) approval of Nasdaq’s board diversity listing standards, resulting in a significant change for Nasdaq-listed companies. Following this ruling, companies listed on Nasdaq are no longer obligated to share the specified board diversity information as outlined in the rules. Even though the requirement for disclosure has been lifted, companies should take into account potential stakeholder interest in having this information available.
Back in August 2021, the SEC gave the green light to Nasdaq’s proposal for new board diversity listing standards with a marginal 3-to-2 vote. These updated rules mandated Nasdaq-listed companies to disclose self-identified board diversity data through a standardized board diversity matrix. Companies had the responsibility to either meet the applicable director diversity objective or provide an explanation if they did not fulfill the objective. These disclosures were required on an annual basis in the company’s proxy statement or on its website.
After the SEC’s initial approval, the Alliance for Fair Board Recruitment and the National Center for Public Policy Research took action by filing a petition challenging the board diversity rules on constitutional grounds. They argued that the SEC had exceeded its authority defined in the Securities Exchange Act of 1934, claiming the SEC’s decision was arbitrary and capricious. In October 2023, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit ruled in favor of the SEC and Nasdaq, defending the board diversity rules. Subsequently, the petitioners requested a rehearing by the full Fifth Circuit, which was granted in February 2024. Following oral arguments in May 2024, the court made its decision.
In a close 9-8 vote, the Fifth Circuit annulled the SEC’s approval of Nasdaq’s board diversity rules, citing that the SEC had not substantiated its determination that the rules aligned with the requirements of the Exchange Act. The court delved into the procedures involved for self-regulatory organizations like Nasdaq to alter their rules and emphasized that the regulations must be consistent with the purposes outlined in the Exchange Act.
Now that Nasdaq’s board diversity rules have been invalidated, listed companies are no longer bound by them. Nasdaq has communicated its decision not to appeal the ruling, indicating that companies are no longer obliged to adhere to these rules. While the SEC may decide to challenge this ruling at the U.S. Supreme Court, the anticipated policy shifts within the SEC make this scenario less likely.
It’s important for companies to recognize that despite the Nasdaq rules no longer necessitating disclosure, other stakeholders still value board diversity information in their decision-making processes. Entities such as ISS Governance and Glass Lewis, along with major asset managers like BlackRock, incorporate board diversity expectations into their voting guidelines and governance evaluations.
