On December 11, 2024, in a 9–8 decision, the US Court of Appeals for the Fifth Circuit struck down the Nasdaq Stock Market’s board diversity rules, holding that the Securities and Exchange Commission (SEC or Commission) exceeded its statutory authority when it approved them. As a result of the ruling, Nasdaq-listed companies no longer need to comply with Nasdaq’s board diversity requirements.

Adopted in 2022, the board diversity rules required Nasdaq-listed companies to disclose board diversity data in a standardized board diversity matrix. The rules required that Nasdaq-listed companies either (i) had to have at least one female director and at least one director who self-identified as an underrepresented minority or LGBTQ+, or (ii) had to explain why they did not have the requisite number of diverse directors on the board. The rules required companies to disclose director diversity information in the board diversity matrix annually in the company’s proxy statement or on the company’s website.

In its opinion, the court discussed the process by which self-regulatory organizations (SROs), like Nasdaq, may change their rules. Like all other SROs, Nasdaq must submit its proposed rule changes to the SEC for approval, and the SEC must approve a proposal only if it finds that the proposed rule is consistent with the requirements of the Securities Exchange Act of 1934. In order for the rule to be consistent with the requirements of the Exchange Act, it must be “related to the purposes of the Exchange Act.” The court stated that “Congress passed the original Exchange Act primarily to protect investors and the American economy from speculative, manipulative, and fraudulent practices.” While the court noted that “there are other, ancillary purposes” for the Exchange Act, “disclosure of any and all information about listed companies is not among them.” The court concluded that the SEC’s actions implicated the major questions doctrine and that, absent a clear congressional directive, the agency lacked the statutory authority to authorize the rule. The major questions doctrine is based “on the principle that administrative agencies have no independent constitutional provenance.” Rather, they “possess only the authority that Congress has provided.” The court noted that “disclosure is not an end in itself but rather serves other purposes.” Further, the court stated that a “disclosure rule is related to the purposes of the Exchange Act only if it is related to the elimination of fraud, speculation, or some other Exchange Act-related harm.” By vacating the rules, the court concluded that the Nasdaq diversity rules were not related to the purposes of the Exchange Act.

In the immediate aftermath of the court’s decision, Nasdaq indicated that it did not intend to appeal the court’s decision, while the SEC said it was “reviewing the decision and will determine next steps as appropriate.” However, on January 16, 2025, Nasdaq filed a proposal with the SEC seeking to remove the board diversity provisions from the Nasdaq rules to reflect “a Federal court’s vacatur of the Commission’s order of August 6, 2021, approving rules related to Board diversity disclosures.” Nasdaq requested that the Commission waive the operative delay to allow the proposed rule change to become effective on February 4, 2025.” On January 24, 2025, the SEC declared the proposal to be immediately effective. These actions by Nasdaq and the SEC make it clear that diversity rules are no longer in effect. Therefore, companies are no longer required to comply with the rules and may choose to remove their Nasdaq-specific board diversity matrices from their websites and proxy statements.

While disclosure under Nasdaq’s diversity rules is no longer required, companies may still have compelling reasons for including board composition and diversity disclosure in their proxy statements in view of the policies of proxy advisory firms and institutional investors. Depending on a company’s investor base, these policies may be a reason, among others, for continuing to publicly disclose certain aspects of board diversity and seek diverse board members.