Public Interest Groups Challenge Nasdaq Diversity Rule in Federal Court

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Back in August, I wrote about the new board diversity requirements on Nasdaq-listed companies that had been approved by the Securities and Exchange Commission (SEC), and why they were a bad idea. Or rather, I said that they were still a bad idea, following up on the comment letter I submitted in March as part of the SEC’s regulatory consideration process. Now we have another development.

The National Center for Public Policy Research (NCPPR) filed a petition this week with the U.S. Court of Appeals for the Third Circuit, challenging the adoption of the Nasdaq diversity rule. The New Civil Liberties Alliance (NCLA) is representing NCPPR and is arguing that the rule falls outside of the agency’s statutory authority and violates the due process and equal protection rights of Americans. NCLA Senior Litigation Counsel Peggy Little said in a press release:

[The] SEC does not have the power to dictate board diversity requirements on Nasdaq-listed companies. Congress could not constitutionally confer this power on any administrative agency. And the government may not collaborate with Nasdaq to effectuate something it is prohibited by the Constitution to do itself. Threatening to delist companies whose boards fail to conform with the government’s notion of diversity is downright dangerous.

The NCPPR/NCLA suit follows one already filed by the Alliance for Fair Board Recruitment in the Fifth Circuit and led by prominent conservative legal shop Boyden Gray and Associates. According to the Alliance, the Nasdaq rule would “compel many of our nation’s largest publicly traded corporations to illegally discriminate on the basis of gender, race, and sexual orientation in selecting directors.” Boyden Gray and Associates also submitted an extensive comment letter to the SEC in April 2021 (running to 115 pages with appendices) that concluded with the statement that “Nasdaq’s diversity rule is unlawful, unconstitutional, and procedurally defective.”

While those legal challenges are moving forward, however, we may have even larger concerns. Nasdaq Inc. CEO Adena Friedman recently said that she would support SEC efforts to include private companies in any new corporate board diversity rules as well. That would turn much of U.S. securities law on its head, given the significant distinction between government oversight of public and private firms. It also exposes the lies we are often told about environmental, social, and governance (ESG) policy proposals.

When challenged, ESG advocates insist that their ideas are perfectly compatible with profit-driven capitalism and are just a smarter way to manage modern enterprises. But the reality is that they are generally left-wing policy goals (often already rejected in other policy making environments) that are being jammed into the corporate and regulatory worlds in any way their promoters can dream up. They are not primarily about “providing investors with better information.” They are attempts by highly motivated progressive activists and legal theorists to reshape American society according to their preferred designs. They are free to advocate for their desired outcomes, of course, but they should not be allowed to disingenuously abuse the federal regulatory process along the way.

U.S. Senate Banking Committee Ranking Member Pat Toomey (R-PA) has been doing excellent work opposing this, and similar, efforts. In August, when the SEC approved the Nasdaq rules, he released this statement:

Corporate board rooms, like all organizations, can benefit from a diversity of perspectives, but NASDAQ’s one-size-fits-all quota misses the mark. By defining diversity by race, gender, and sexual orientation, NASDAQ’s mandate will inevitably pressure companies to subordinate crucial factors such as knowledge, experience, and expertise when selecting board members. These prescriptive requirements may ultimately harm economic growth and investors by pressuring companies to select directors from a narrower pool of candidates and discouraging others from going public. I’m disappointed Chairman Gensler is turning a financial regulator into a laboratory for progressive social engineering.

See also the SEC comment letter filed by Sen. Toomey and his Republican colleagues on the Banking Committee in February, which explains that the Nasdaq proposal runs contrary to a corporation’s duty to shareholders, violates the concept of materiality, and will harm economic growth.