In a 9-8 en banc decision, the U.S. Court of Appeals for the Fifth Circuit blocked the Nasdaq board diversity rules, ruling that the U.S. Securities and Exchange Commission (SEC) lacked the authority to approve the rules.

Overview of the Board Diversity Rules

Under the board diversity rules, companies were required to:

1. Disclose the self-identified gender, race, and sexual orientation of their board of directors.
2. Include at least one self-identified female, and at least one racial minority or member of the LGBTQ+ community on their board of directors, or explain why they do not have at least two directors that comply with the rules. 

The SEC approved the board diversity rules. Similar to the board diversity rules adopted in California, the Nasdaq board diversity rules were challenged in court.

The Fifth Court’s Decision

In an opinion issued last year, a panel of the Fifth Circuit rebuffed the challenge to the board diversity rules. But the Fifth Circuit granted a request to rehear the challenge en banc, which resulted in the opinion issued this week. 

A majority of the court concluded that the board diversity rules do not align with the Securities Exchange Act of 1934. Among other things, the majority reasoned that the board diversity rules did not relate to market abuse issues.

As further support, the majority pointed to the major questions doctrine. That doctrine, put simply, provides that when an agency is asserting authority with the potential to have a substantial impact, the agency must have clear authority from Congress to do so. After identifying the significant impact the rule would have, the Fifth Circuit noted that there was a dearth of Congressional approval for the enactment of the rule. 

The Impact of the Fifth Circuit’s Decision

It remains to be seen whether the parties will seek Supreme Court review or whether an alternative version of the rule will be proposed at a later date. Regardless of the next steps that are taken with respect to these board diversity rules, the rules at issue in this case are far from the only rules of that nature in existence. Companies will thus need to remain abreast of this evolving landscape of rules recommending or mandating board diversity.