Fifth Circuit Will Reconsider Challenges to Nasdaq Board Diversity Rule

The U.S. Court of Appeals for the Fifth Circuit agreed recently to revisit a challenge to Nasdaq's board diversity rule. As we previously reported, a three-judge panel of the Fifth Circuit upheld the rule in October 2023. Now, the appeals court has vacated the panel's opinion and will reconsider the challenge in an en banc proceeding with all active Fifth Circuit justices presiding.

As we summarized previously, the so-called board diversity rule requires Nasdaq-listed companies to disclose information about board diversity statistics and either include women and minority directors on their boards or disclose why they do not. Specifically, the rule – an exchange "listing standard" – requires a company to disclose board diversity statistics each year and either have or explain why it lacks at least one director who identifies as female and one director who is a member of an underrepresented racial or ethnic minority or LGBTQ+.

Rule challengers have argued that constitutional prohibitions against discrimination and restraints on free speech that apply to the federal government extend to, in this case, Nasdaq, because the SEC has the authority to penalize the exchange if it fails to enforce the rule. For their parts, Nasdaq and the SEC argue that Nasdaq is a private entity not subject to restrictions imposed on the government and that the rule itself is focused not on requiring boards to become more diverse, but rather on disclosure and ensuring investors receive standardized information about board diversity. In October, a panel of three Fifth Circuit justices sided with Nasdaq and the SEC. But a vote of the full court to grant the rule challengers' petition to have the matter reheard en banc – by the full court – could signal a different outcome for the rule.

The parties will submit supplemental briefing in March and April 2024, and oral argument is tentatively set for the week of May 13, 2024.

The SECond Opinions Blog will continue to monitor this matter and provide further updates. If you need any additional information on this topic – or anything related to SEC enforcement – please contact the authors or another member of Holland & Knight's Securities Enforcement Defense Team.