Federal court rejects Nasdaq diversity rules

A federal appeals court ruled Wednesday that Nasdaq cannot impose rules on publicly listed companies that aim to do so Promote diversity By requiring listed companies to appoint women and minority directors to their boards or explaining why they do not have this.

The US Fifth Circuit Court of Appeals, based in New Orleans and which has a conservative majority, issued a 9-8 ruling that established the rules approved by the court. Securities and Exchange Commission (SEC) Violated federal securities law.

The decision comes as a major legal victory for critics of policies aimed at promoting racial and gender diversity in companies.

The rules have been challenged by a conservative think tank known as the National Center for Public Policy Research and the Alliance for Fair Board Employment, a group founded by Edward Bloom, who led a successful Supreme Court challenge against racially sensitive college admissions policies.

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“The SEC has intervened in an area outside its normal scope,” said U.S. Circuit Judge Andrew Oldham, who was appointed during that time. President-elect Trump The first chapter, written for the majority.

The SEC said it was reviewing the ruling and would have to appeal to the SEC supreme court If it seeks to cancel the decision. Nasdaq said that although it believed its ruling would benefit companies and investors, it respected the court’s ruling and did not plan to appeal.

The Nasdaq rule requires companies to have at least one woman, racial minority or person from the LGBTQ community on their boards or explain why they don’t. Companies were also required to provide annual disclosure on how they identify board members within those categories.

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A panel of three judges Fifth Circuit Which was composed entirely of Democratic appointees, issued a ruling in October 2023 that upheld the SEC’s approval of Nasdaq rules, saying the decision was within the regulator’s authority.

The full court reconsidered the matter and the decision was split 9-8 along ideological lines, with Republican appointees in the majority deciding the rule should be struck down.

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Oldham said the SEC incorrectly concluded that because Nasdaq’s proposal would require disclosure of information about publicly listed companies, it was proportionate to the exchange’s purposes. Securities market law Act of 1934 governing stock trading.

He said the disclosure rule must have “some relationship to the ills that Congress designed the law to eliminate,” such as “speculation, manipulation, fraud, and the removal of barriers to competition in the stock exchange.”

Mark Chenoweth, whose legal group the New Civil Liberties Coalition represents the National Center for Public Policy Research in challenging the rule, said the ruling “should punish the SEC to stick to its guns and stop trying to abuse its power to regulate the market.”

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Eight judges dissented, including previously appointed U.S. Circuit Judge Stephen Higginson Former President ObamaArguing that the SEC’s limited role in reviewing Nasdaq’s proposed rules prevents it from making a different decision.

Reuters contributed to this report.