[co-author: Stephanie Kozol]*
Republican attorneys general (AGs) from 19 states, led by Utah AG Sean D. Reyes, filed an amicus brief urging the Fifth Circuit to rehear a case after a panel of judges declined to entertain a lawsuit challenging diversity rules.[1] The lawsuit was filed by two conservative groups, the Alliance for Fair Board Recruitment and National Center for Public Policy Research, in their attempt to overturn a Nasdaq rule that requires companies to disclose board diversity data. The AGs argue that the rule, which was approved by the Securities Exchange Commission (SEC), violates the Constitution’s equal protection clause and could undermine state law and policy on corporate board composition and racial and gender preferences.
The rule does not mandate that boards must appoint women, underrepresented minorities, or members of the LGBTQ+ community, but it does require companies without at least two directors from these demographics to explain their reasoning to investors. The plaintiffs argue that the rule leads to further discriminatory action.
The AGs are supporting the plaintiffs’ petition for an en banc review following the panel’s ruling that they could not sue the SEC because the agency approved a rule proposed by Nasdaq, and therefore does not constitute state action for purposes of constitutional challenge. The AGs argue that even if the rule was constitutional, the SEC lacks statutory authority to regulate the composition of corporate boards. They also contend that the Fifth Circuit’s opinion bypasses constitutional limitations by finding that the SEC’s actions are not state actions.
Why It Matters
The outcome of this case could not only impact the viability of legislation and rulemaking around corporate diversity initiatives, but also whether a federal agency’s approval of rules promulgated by large self-regulated institutions, such as Nasdaq, can constitute “state action” for purposes of constitutional scrutiny.
This litigation also demonstrates a growing trend of AGs using their influence to shape legislation and federal agency regulations/rulemaking by joining with other like-minded AGs to support legal challenges in courts of appeal that further the AGs political and policy objectives. In this instance, the litigation underscores the public and political debate around how best to encourage diversity at the highest levels of corporate America, where many Fortune 500 companies already voluntarily engage in DEI initiatives.
[1] The other states include Alabama, Arkansas, Florida, Georgia, Indiana, Iowa, Kansas, Louisiana, Mississippi, Missouri, Montana, Nebraska, North Dakota, South Carolina, Tennessee, Texas, Virginia and West Virginia.
*Senior Government Relations Manager
