On December 11, 2024, the U.S. Court of Appeals for the Fifth Circuit struck down Nasdaq’s board diversity rules, which were designed to increase representation of women and minorities on corporate boards. Since 2023, the rules have required Nasdaq-listed companies to have at least one woman, minority, or LGBTQ+ member on their boards and to report director diversity information each year.
In a split ruling, the en banc court concluded that the Securities and Exchange Commission exceeded its authority under the 1934 Securities Exchange Act in approving the diversity disclosure requirements. As mentioned in our last Securities Snapshot, the majority paid special attention to the purposes of the Act, noting that Nasdaq’s proposed rule were “far removed” from the SEC’s charge to approve stock exchange rules that promote “just and equitable principles of trade.”
The court also invoked the major questions doctrine, which requires agencies like the SEC to have “clear congressional authorization” to exercise power over issues of major national significance. The SEC’s approval of the rules, the court explained, implicated “staggering” economic and political significance. Accordingly, the court found nothing in the Act that gives the SEC the ability it purported to have to impose the diversity disclosures.
In response, a Nasdaq spokesperson said that while the exchange disagrees with the court’s decision, it does not plan to appeal the ruling. The SEC followed with its own statement, noting that the agency was “reviewing the decision” and would determine appropriate next steps. Although the SEC could appeal, it is unlikely given the priorities of the incoming administration.
As Nasdaq-listed companies begin to gather their materials ahead of the 2025 proxy season, they should note that Wednesday’s decision relieves them of the obligation to disclose metrics about their board diversity. However, as the Fifth Circuit acknowledged in its opinion, companies may voluntarily report information about their directors’ social and demographic characteristics if they deem such information important to investors.
We will continue to monitor the implications of this decision as well as any further reporting guidance from the SEC and provide updates as they occur.
