Nasdaq's Diversity Rules for the Board of Directors Injunction Granted Due to National Center's Legal Action
In a significant victory for those who argue against government-mandated diversity quotas in corporate boardrooms, the U.S. Court of Appeals for the Fifth Circuit has vacated the U.S. Securities and Exchange Commission's (SEC) approval of Nasdaq's board diversity rules.
The ruling, which could have implications for other stock exchanges and companies that have implemented similar board diversity rules, was driven by a coalition of organisations including the National Center for Public Policy Research, the New Civil Liberties Alliance, and the Alliance for Fair Board Recruitment.
The National Center for Public Policy Research, a non-partisan, free-market, independent conservative think-tank, welcomed the Court's decision. Stefan Padfield, Executive Director of the Free Enterprise Project, expressed gratitude, stating that the SEC was engaging in progressive social engineering and divisive identity politics.
The vacated rules imposed race, sex, and orientation quotas on corporate board membership for Nasdaq-listed companies. However, the Court found that the race, sex, and orientation of corporate board members has no connection to the purposes of the Exchange Act. Furthermore, the SEC failed to justify how the vacated board diversity rules helped to promote free and open markets, a core stated purpose of the Act.
The SEC was also criticised for intruding into territory far outside its ordinary domain. The Court's ruling stated that the SEC has no statutory authority to approve board diversity rules that impose race, sex, and orientation quotas under the Securities and Exchange Act of 1934.
Nasdaq-listed companies that fail to meet their board seat quotas under the vacated rules may now avoid explaining why or face involuntary delisting from the stock exchange. Companies listed on a registered stock exchange are required to comply with SEC disclosure regulations, but the SEC may only approve a disclosure rule if it has a connection to an actual, enumerated purpose of the Act.
In this case, the Court found that Nasdaq did not provide empirical or logical evidence linking the racial, gender, and sexual composition of a company's board to the quality of its governance.
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This decision marks a significant step towards preserving the principles of meritocracy and individual rights in corporate governance.
