5th Circuit questions claim that SEC put Nasdaq on a 'woke mission' for board diversity

A man walks past the Nasdaq MarketSite in New York's Times Square, August 23, 2013. REUTERS/Andrew Kelly

(Reuters) - The 5th U.S. Circuit Court of Appeals heard from conservative activists challenging Nasdaq's board diversity rule, with one judge questioning the claim that the U.S. Securities and Exchange Commission put the stock exchange on a "woke mission."

Two conservative groups are seeking to have the 5th Circuit overturn the rule, which requires Nasdaq-listed companies to have diverse boards, or explain why they do not.

Jonathan Berry, who represents the anti-affirmative action group Alliance For Fair Board Recruitment, said during oral arguments on Monday that the rule goes beyond a law allowing stock exchanges to make rules to protect investors and "promote just and equitable principles of trade."

U.S. District Judge Stephen Higginson questioned why the disclosures wouldn't "help the market function according to investor interest."

"Isn't it always consistent if you are telling investors, 'here's more information about the people you are giving money?'" he asked.

Berry said there is no conclusive evidence that diverse boards increase corporate performance.

Allyson Ho argued for Nasdaq that the rules level the playing field between large investors who have the resources to compile boards' demographic information and small investors who do not.

The groups challenging the rule argue it violates the Constitution by encouraging discrimination and violating companies' right to free speech. But in order to apply those requirements, they must show Nasdaq acted as part of the U.S. government.

Higginson asked Ho whether she objected to the idea that the agency pushed Nasdaq into "a woke mission to get minorities and gays on boards," or whether the rule came from the "bottom up" with investors saying, "right or wrong, this is information we need to know where to put our money."

"Absolutely the latter," she replied.

Barry argued that the SEC's authority to sanction Nasdaq if it does not enforce the rule is enough to embroil the exchange in state action.

U.S. Circuit Judges Carl Stewart and James Dennis were also on the panel that heard the appeal.

The case is Alliance For Fair Board Recruitment v. SEC, 5th U.S. Circuit Court of Appeals, No. 21-60626.

For National Center for Public Policy Research: Peggy Little and Sheng Li of the New Civil Liberties Alliance

For the Alliance for Fair Board Recruitment: Boyden Gray and Jonathan Berry of Boyden Gray & Associates

For Nasdaq: Allyson Ho of Gibson, Dunn & Crutcher; and John Zecca and Jeffrey Davis of Nasdaq

For the SEC: Dan Berkovitz, Michael Conley, Tracey Hardin, Daniel Matro and John Rady

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Jody Godoy reports on banking and securities law. Reach her at jody.godoy@thomsonreuters.com