On Monday, August 29, the U.S. Court of Appeals for the Fifth Circuit heard oral argument on a challenge to the Nasdaq Board Diversity Rule (the “Rule”). The Rule requires Nasdaq-listed companies to publicly disclose Board demographics, including information on how many of the company’s Board members self-identify as women, minorities, and/or LGBTQ+, and, if applicable, explain why the company does not have at least two diverse directors. The Rule was heralded by the Securities Exchange Commission (SEC), which approved the Rule last fall, as a “step forward for investors on board diversity.”

The Rule is being challenged by two conservative organizations—the Alliance for Fair Board Recruitment, led by Ed Blum, and the National Center for Public Policy Research (NCPPR). Blum, known for his challenges to precedent in the areas of affirmative action and voting rights, is the founder of Students for Fair Admissions, an organization that has filed lawsuits challenging the consideration of race as one of many factors in college admissions, including against Harvard in a case that is currently before the Supreme Court of the United States. NCPPR is a conservative think tank founded in 1982 whose Free Enterprise Project filed multiple shareholder resolutions in 2022. The NCPPR describes the Free Enterprise Project as the “leading voice for conservative-minded investors” as well as for “confronting liberal shareholder activism.”

Pursuant to Section 25(a) of the Securities Exchange Act, the plaintiffs sought direct review by the Fifth Circuit of the SEC’s final order approving the Rule. The plaintiffs claim that the Rule’s required disclosures are immaterial to investors’ decision-making and that the Rule violates the equal protection rights of non-diverse potential board members and diverse board members alike. The SEC argues that the government has no role in enforcing the Rule, and thus that there is no issue as to the Rule’s constitutionality. Instead, the SEC argues, its role in approving the Rule was limited to ensuring that Nasdaq—a private entity—did not violate federal securities laws through the Rule. The SEC contends the Rule is lawful and was endorsed by various stakeholders who commented on the importance of the information to their investment and voting choices.