U.S. Court of Appeals for the Fifth Circuit Vacates SEC’s Approval of Nasdaq’s Board Diversity Rules

January 21, 2025

On December 11, 2024, the U.S. Court of Appeals for the Fifth Circuit (“Fifth Circuit”) vacated the U.S. Securities and Exchange Commission’s (“SEC”) approval of The Nasdaq Stock Market LLC’s (“Nasdaq”) Board Diversity Rules.1

The SEC oversees self-regulatory organizations (“SROs”), such as Nasdaq, and must approve the rules of any SRO before the rules can take effect. In December 2020, Nasdaq proposed the following rules and sought SEC approval:

Proposed Rule Rule Requirement
Rule 5606: “Board Diversity Disclosure” Companies must disclose statistical information on a uniform matrix reporting the “director’s self-identified gender, race, and self-identification as LGBTQ+.”
Rule 5605(f): “Diverse Board Representation” A company listed on the Nasdaq Global Market or Nasdaq Global Select Market must have at least two diverse board members (one of which who must be female and the other of which who must be either LGBTQ+ or a member of an “underrepresented minority”), or if not, explain why the company does not have at least two directors on its board who self-identify in the categories listed above.2 The compliance deadline was set for December 31, 2025.
Rule IM-5900-9: “Board Recruiting Service” Companies who do not have at least two diverse board members would have complimentary access to a recruiting service to connect them to diverse candidates for their board of directors.

In August 2021, the SEC approved Nasdaq’s proposals3 for the new Board Diversity Rules and Board Recruiting Service, stating that it “support[s] the proposal [of the Board Diversity Rules] because it represents a step forward for investors on board diversity.” The SEC explained in its approval of the Board Diversity Rules that they “promote just and equitable principles of trade, remov[al of] impediments to and perfect[ion of] the mechanism of a free and open market and national market system, and protect[ion of] investors and the public interest.” The SEC also noted that the Board Diversity Rules provide investors with greater transparency and provide “consistent and comparable” diversity information, of which, the SEC notes, investors have expressed interest in obtaining.

The Alliance for Fair Board Recruitment and the National Center for Public Policy Research (“Petitioners”) challenged the rules in 2021 and their petitions were consolidated for review in the Fifth Circuit, which ruled against the Petitioners in October 2023. The Petitioners requested a rehearing, and, in February 2024, the Fifth Circuit agreed to rehear the case en banc (meaning the entire panel of active appellate judges in the Fifth Circuit would hear the appeal).4

On December 11, 2024, the Fifth Circuit’s en banc ruling vacated the SEC’s order and explained that the SEC failed to justify that Nasdaq’s Board Diversity Rules are “consistent with the requirements of the [Securities and Exchange Act of 1934, as amended (“Exchange Act”)]” as they do not regulate matters related to the purposes of the Exchange Act. The court also noted that “Nasdaq’s authority to offer benefits pursuant to the [Board Recruiting Service] before this court expired on December 1, 2023,” and no companies have received the complementary service as of September 30, 2024. Ultimately, the court found the Petitioners’ challenge to the Board Recruiting Service to be moot.

As a result of the Fifth Circuit’s decision vacating the SEC’s approval of the Nasdaq Board Diversity Rules, the rules are now no longer in effect and could become effective again only through a successful appeal to the U.S. Supreme Court. As a result, at this time a Nasdaq-listed company may remove its diversity matrix from its annual report, but, before doing so, it should consider whether such disclosure is still appropriate pursuant to the policies of its proxy advisors. Nasdaq has indicated that it will not seek further review of the Fifth Circuit ruling. The SEC has reported that it will be reviewing the ruling and will consider appropriate next steps, however, given the new presidential administration and likely corresponding changes at the SEC (including the expected replacement of current Chairman Gary Gensler with Trump appointee Paul Atkins), we expect that the SEC also will not seek further review of the decision. However, we will continue to monitor the status of the Nasdaq Board Diversity Rules and any potential further appeal.

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1 Rule 5606 and Rule 5605(f) are referred to together as the “Board Diversity Rules”.

2  Nasdaq provided that foreign private issuers and smaller reporting companies could satisfy Rule 5605(f) by having two directors who self-identified as female and that companies with smaller boards (i.e., five or fewer directors) could satisfy the rule by having one board member who self-identifies as either female or as an underrepresented racial or sexual minority.

Nasdaq subsequently amended both proposals in February 2021, and the SEC approved the proposed rule changes as so modified.

4 Judge Ho was recused, so he did not participate in the en banc ruling.