Nasdaq’s board diversity rule, which mandates that businesses listed on the exchange have women and minority directors on their boards or provide an explanation if they do not, was upheld by a U.S. appellate court on Wednesday.
The 5th U.S. Circuit Court of Appeals was sought to stay the regulation by the National Centre for Public Policy Research and the Alliance for Fair Board Recruitment, an organisation founded by conservative legal activist Edward Blum.
The U.S. Securities and Exchange Commission (SEC), which authorised the rule in August 2021, was sued by the groups.
By the end of this year, corporations must either comply with the requirement or provide an explanation if they do not have a director who identifies as female, a member of an underrepresented racial or ethnic minority, or LGBTQ+. By 2026, most companies would require two directors who are diverse in order to comply with the regulation.
Every year, companies are required to reveal how their board members fall into those categories, though they are free to refuse to answer.
The groups claimed that the regulation is unconstitutional under the US Constitution, which forbids discriminatory legislation and restrictions on free expression. They maintained that Nasdaq is subject to these government limitations as the SEC may fine the exchange for failing to uphold the regulation.
The exchange is a private organisation not constrained by governmental regulations, according to the SEC and Nasdaq. They clarified that the regulation is a disclosure obligation that offers standardised data on board diversity rather than a mandate.
The regulation was opposed by a number of Republican state solicitors general, but it was also supported by briefs submitted by institutional investors and a group of Nasdaq-listed businesses.
Alliance For Fair Board Recruitment v. SEC is the case in question; it is No. 21-60626 in the 5th U.S. Circuit Court of Appeals.