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(Reuters) – A U.S. appeals court upheld Nasdaq’s board diversity rule on Wednesday, requiring companies listed on the exchange to have women and minority directors on their boards or explain why they do not.
National Center for Public Policy Research and the Alliance for Fair Board Recruitment, a group formed by conservative legal activist Edward Blum, had asked the 5th U.S. Circuit Court of Appeals to block the rule.
The groups sued the U.S. Securities and Exchange Commission (SEC), which approved the rule in August 2021.
The rule requires companies to have one director who identifies as female, a member of an underrepresented racial or ethnic minority, or LGBTQ+ by the end of this year or explain why they do not. Companies would generally need two diverse directors to satisfy the rule by 2026.
Companies also have to disclose annually how board members identify in those categories, although the individuals can decline to answer.
The groups said the rule violates the U.S. Constitution’s prohibition of discriminatory laws and restraints on free speech. They argued that those restrictions on government extend to Nasdaq because the SEC could penalize the exchange if it does not enforce the rule.
The SEC and Nasdaq argued that the exchange is a private entity not bound by restrictions on government. They said the rule is not a quota but a disclosure requirement that provides standardized information on board diversity.
Several Republican state attorneys general had weighed in against the rule, while institutional investors and a coalition of Nasdaq-listed companies, among others, filed briefs in support.
The case is Alliance For Fair Board Recruitment v. SEC, 5th U.S. Circuit Court of Appeals, No. 21-60626.
