On December 11, 2024, the United States Court of Appeals for the Fifth Circuit in a rare en banc decision vacated the Securities and Exchange Commission’s (SEC) order approving Nasdaq’s board diversity rules (Rules 5605(f) and Rule 5606). The Fifth Circuit held that the “SEC failed to justify its determination that Nasdaq’s Board Diversity Proposal is consistent with the requirements of the Exchange Act” and that the SEC’s action was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” This ruling means that companies listed on the Nasdaq exchange will no longer be required to meet certain board diversity criteria or make prescribed disclosures regarding their board’s diversity characteristics. Nasdaq announced that it does not intend to appeal the Fifth Circuit’s decision. The SEC has yet to announce whether it intends to appeal. However, under the new Trump administration, it is unlikely that the SEC will request further review.

Nasdaq Diversity Rules

Rule 5605(f) and Rule 5606 were approved by the SEC in 2021. 5605(f) required most Nasdaq-listed companies to report that they meet or explain why they do not meet certain minimum diversity objectives for their board of directors, such as having at least two diverse directors. Rule 5606 also required companies to annually disclose information regarding their directors’ self-identified diversity characteristics in a specified matrix format.

Takeaways

With Nasdaq’s board diversity rules now vacated, companies are no longer required to comply with them. However, individual companies are still free to voluntarily disclose board diversity along the lines contemplated in the previous rules, or along any other lines consistent with the law. For example, some shareholders may continue to use such disclosures when making voting decisions, evaluating governance practices, and conducting other assessments. Going forward, Nasdaq-listed companies that choose to disclose board diversity data will have greater flexibility in how they present it, allowing for a range of approaches.