In 2022, the SEC approved Nasdaq rules mandating diversity reports. Under those rules, Nasdaq-listed companies were required to retain at least one woman-identified and minority or LGBT+ director, and file yearly director diversity reports.

The diversity requirement was set to increase to two diverse directors by December 31, 2025. If a company did not meet the requirements, then it would have to explain why in a filing. The rule was originally upheld by a three-judge panel of the judicially conservative Fifth Circuit Court of Appeals in 2023, but a petition to have the case reheard en banc was granted earlier this year.

Major questions

In the reheard case, the entire Fifth Circuit determined 9-8 (with one recusal) that the SEC’s approval of the Nasdaq rules was unconstitutional. As an SEC-registered stock exchange, all of Nasdaq’s rulemaking is subject to the SEC’s assent.

The court’s opinion relied on the “major questions doctrine,” which presumes that Congress does not delegate the adjudication of significant issues to agencies absent a clear directive.

To that extent, the court ruled that diversity quotas and disclosure rules were major questions, and the Exchange Act lacked any significant reference to promoting diversity.

Ethical matters

It further ruled that the SEC’s ability to mandate disclosure requirements is dependent on proscribing “fraud, speculation, or other Exchange Act-related harm,” and that diversity requirements only tangentially touch on those issues. The court also ruled that it was not per se an ethical matter to disclose the diversity composition of a board.  

Conversely the dissent argued that the majority ruling unduly expanded the SEC’s power over private self-regulatory organizations such as Nasdaq. “The SEC approved the [disclosure rules] because the reviewing scheme that Congress created doesn’t permit the SEC to displace Nasdaq’s private business judgment – informed by investor behavior – with agency policy priorities.”

Nasdaq has indicated that it will not appeal the Fifth Circuit’s opinion. The SEC stated it is exploring its options, but it is unlikely the agency will move forward with an appeal under the incoming Trump administration.