
On December 11, 2024, the en banc U.S. Court of Appeals for the Fifth Circuit issued a pivotal decision in the case of Alliance for Fair Board Recruitment v. SEC.
The court deemed the U.S. Securities and Exchange Commission’s (SEC) endorsement of the Nasdaq Board Diversity Rules as arbitrary and inconsistent with the 1934 Securities Exchange Act.
Consequently, the court annulled the SEC’s approval of these Rules.
The Future of the Case
The future of this case remains ambiguous, particularly regarding whether the SEC will escalate the matter to the U.S. Supreme Court or if the Supreme Court will choose to hear the case.
In a related development on December 12, 2024, Jeff Thomas, Nasdaq’s Global Head of Listings, announced that the exchange would not seek to appeal the court’s ruling.
This decision means that companies aiming to list on Nasdaq or already listed will no longer be obligated to comply with the Diversity Rules.
Background of the Diversity Rules
Initially introduced in December 2020, these Diversity Rules aimed to be a prerequisite for companies to gain listing on securities exchanges.
The SEC greenlit the rules under Section 19(b)(1) of the Exchange Act, and they took effect in August 2021.
The framework required listed companies to voluntarily disclose self-identified demographic information about their board members, including gender, race, and LGBTQ+ status, with certain exceptions and transitional timeframes.
Additionally, Nasdaq required companies, again with some exceptions, to ensure they had at least two board members deemed “diverse.” This definition included at least one woman and one member from an underrepresented minority group or LGBTQ+ community.
To further facilitate this initiative, Nasdaq provided recruiting support to public companies seeking to enhance diversity on their boards.
Implications of the Court’s Decision
Now, following the court’s decision, the landscape surrounding board diversity requirements for Nasdaq-listed firms is set to change significantly.
Source: Natlawreview