A U.S. appeals court upheld Nasdaq's board diversity rule on Wednesday, requiring companies listed on the exchange to have women and minority directors on their boards or explain why they do not.
In a lengthy opinion, the New Orleans-based 5th U.S. Circuit Court of Appeals rejected lawsuits seeking to block the rule by the National Center for Public Policy Research and the Alliance for Fair Board Recruitment, a group formed by conservative legal activist Edward Blum.
The SEC acted within its authority in approving the rule, and was allowed to consider the opinions of investors who said board diversity information was important to their investment decisions, the court said.
"This evidence is sufficient to support the SEC's determination that regardless of whether investors think that board diversity is good or bad for companies, disclosure of information about board diversity would inform how investors behave in the market," the panel wrote.
A Nasdaq spokesperson said the exchange is pleased the court upheld the SEC's approval of the rule that would "enhance board diversity disclosures through a market-led solution."
"We look forward to working with our companies in continuing to implement this listing standard for corporate governance," the spokesperson said.
Blum called the ruling disappointing and said his group plans to appeal.
He has since challenged programs aimed at increasing racial diversity in law and business.
The groups sued the U.S. Securities and Exchange Commission (SEC), which approved the rule in August 2021.
The rule requires companies to have one director who identifies as female, a member of an underrepresented racial or ethnic minority, or LGBTQ+ by the end of this year or explain why they do not. Companies would generally need two diverse directors to satisfy the rule by 2026.
Companies also have to disclose annually how board members identify in those categories, although the individuals can decline to answer.
The groups said the rule violates the U.S. Constitution's prohibition of discriminatory laws and restraints on free speech. They argued that those restrictions on government extend to Nasdaq because the SEC could penalize the exchange if it does not enforce the rule.
The SEC and Nasdaq argued that the exchange is a private entity not bound by restrictions on government. They said the rule is not a quota but a disclosure requirement that provides standardized information on board diversity.
Several Republican state attorneys general had weighed in against the rule, while institutional investors and a coalition of Nasdaq-listed companies, among others, filed briefs in support.
The 5th Circuit said on Wednesday that while the government regulates Nasdaq, it did not create the exchange or appoint its leadership.
Three judges appointed by Democratic presidents comprised the panel that decided the case, a rarity for the 5th Circuit, where 12 of the 16 active judges were appointed by Republican presidents. The court has issued several high-profile rulings adverse to the Biden administration.
The case is Alliance For Fair Board Recruitment v. SEC, 5th U.S. Circuit Court of Appeals, No. 21-60626.
