Fifth Circuit Strikes Down Nasdaq Board Diversity Rules: Executive Summary
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Ruling Overview:
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On December 11, 2024, the Fifth Circuit Court, in a 9-8 en banc decision, invalidated Nasdaq’s board diversity rules.
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The court ruled that the SEC exceeded its authority under the Exchange Act when it approved the rules.
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Background:
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Nasdaq’s 2020 rules required listed companies to institute DEI selection processes for their board member selections to increase diversity on boards.
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Approved by the SEC in 2021, the rules faced immediate legal challenges on constitutional and statutory grounds.
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Court’s Reasoning:
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The rules were deemed unrelated to the Exchange Act’s purposes of investor protection and market integrity.
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The “major questions doctrine” was cited, requiring clear congressional authorization for significant regulations.
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Dissenting Opinion:
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Judge Stephen Higginson emphasized the value of diversity in improving corporate governance and decision-making.
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He expressed concern about the ruling’s potential to hinder progress on inclusion and equity.
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Implications:
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Nasdaq reportedly will not appeal; the decision aligns with a broader legal retreat of corporate DEI mandates.
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Similar rulings have struck down California’s board diversity laws.
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Looking Ahead:
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Despite legal setbacks, corporate boards have become more diverse in recent years, reflecting cultural shifts over regulatory requirements.
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Churchwell Insurance Insight:
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Our agency is monitoring how governance changes may impact D&O risks and are here to assist our clients as they navigate the evolving ESG landscape. Since the November election results there has been a substantial retreat by public companies away from ESG practices. For states doing business in the EU along with blue states like California one can expect a continued banging of the ESG drum…at least a little while longer. At the federal level however, it is beginning to look as though diversity, equity, and inclusion (DEI) have been cooked.
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