Showdown over Nasdaq board diversity rule heads to 5th Circuit

The Nasdaq logo is displayed at the Nasdaq Market site in Times Square in New York City, U.S., December 3, 2021. REUTERS/Jeenah Moon

(Reuters) - Two conservative groups seeking to invalidate Nasdaq's board diversity rule will argue their case in the 5th U.S. Circuit Court of Appeals on Monday.

The hearing comes about a year after the U.S. Securities and Exchange Commission approved the proposal and after many companies have already started disclosing diversity on their boards.

Here's an explanation of the challenge and what to expect next.


The rule requires Nasdaq-listed companies to publicly disclose the diversity of their boards, either in annual proxy statements or on their websites. By 2025 or 2026, depending on their listing tier, companies must either have two diverse directors, including one who identifies as female and another as an underrepresented minority or LGBTQ+, or explain why they do not have such representation.


Conservative think-tank National Center for Public Policy Research and the Alliance for Fair Board Recruitment, a group formed by conservative legal activist Edward Blum, are challenging the Nasdaq rule.

They argue it violates the equal protection clause of the Fifth Amendment by encouraging discrimination on the basis of sex and race. They also say it flouts the First Amendment's protection of free speech by requiring companies who do not have diverse boards to engage in "self-condemnation."

The SEC said in a brief that those arguments do not apply to Nasdaq, which is a private entity.

Nasdaq, which entered the case as an intervenor, said in a brief that deeming its rule a government action would "turn broad swaths of the nation’s economy into arms of the state."

The groups also say the Securities Exchange Act does not authorize the rule, while the SEC says it fulfills the law's aim by providing investors with useful information.

Republican attorneys general from several states filed a brief in support of the groups, while institutional investors and a coalition of Nasdaq-listed companies, among others, have filed briefs arguing that the rule should be upheld.


The three judges on the panel hearing the Nasdaq case were appointed by Democratic presidents. Whichever side loses the appeal may ask the full 5th Circuit for review. A majority of the court's judges were appointed by Republicans, several of whom have expressed skepticism about the scope of the SEC's authority in other cases.

Jackie Liu, a partner at Morrison & Foerster who counsels companies on corporate governance, said that in her experience companies are not waiting for board diversity requirements to clear judicial review.

Part of the reason is because they don't want to violate any rules that are upheld, Liu said. But it's also because pressure from shareholders and employees has become the "driving force" in companies' decisions on board diversity.

"The ship has sailed, whether all these rules are struck down or not."

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

For NCPPR: 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 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