Conservatives challenging Nasdaq board diversity rule appeal to full 5th Circuit

By Jody Godoy

(Reuters) – A conservative group that lost a challenge to Nasdaq’s board diversity disclosure rule appealed the decision on Wednesday, requesting a full court review and saying that the rule discriminates based on race and sex.

The rule approved by the U.S. Securities and Exchange Commission (SEC) in August 2021 requires companies listed on the exchange to have women and minority directors on their boards or explain why they do not.

A panel of three judges on the 5th U.S. Circuit Court of Appeals rejected lawsuits seeking to block the rule last week, saying constitutional claims do not apply to Nasdaq, which is a private entity.

The Alliance for Fair Board Recruitment, one of the groups that sued, is now requesting the full 5th Circuit to review that ruling.

The group was created by Edward Blum, the conservative legal activist behind the Supreme Court’s June ruling declaring unlawful the race-conscious student admissions policies used by Harvard University and the University of North Carolina.

The group said in its petition for review that the ruling allows “racial discrimination and controversial disclosures, backed by government sanction but without any constitutional scrutiny.”

If the petition is accepted, the question will go to the full 5th Circuit, where 12 of the 16 active judges were appointed by Republican presidents. The court has issued several high-profile rulings adverse to the Democratic Biden administration.

The three judges on the panel that decided the case were appointed by Democratic presidents. Appeals court judges are typically assigned cases at random.

A Nasdaq spokesperson did not immediately reply to a request for comment.

The rule requires companies to have one director who identifies as female, a member of an underrepresented racial or ethnic minority, or a LGBTQ+ individual by the end of this year or explain why they do not. Companies would generally need two diverse directors to satisfy the rule by 2026.

Companies also have to disclose annually how board members identify in those categories, although the individuals can decline to answer.

The groups claim the rule violates the U.S. Constitution’s prohibition of discriminatory laws and restraints on free speech. They argued that those restrictions on government extend to Nasdaq because the SEC could penalize the exchange if it does not enforce the rule.

The 5th Circuit said in its Oct. 18 ruling that while the government regulates Nasdaq, it does not control the exchange.

The SEC was allowed to consider investor demand for board diversity information in approving the rule, the court said.

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