Fifth Circuit Court of Appeals Strikes Down Nasdaq Board Diversity Disclosure Rules

On December 11, 2024, the Fifth Circuit Court of Appeals held that the Securities and Exchange Commission (SEC) does not have the authority to approve Nasdaq’s board diversity disclosure rules. As a result, Nasdaq-listed companies are no longer required to follow these rules, which had required companies to disclose diversity information about their board of directors and, if their board of directors did not consist of two diverse individuals, explain why not.

In 2021, Nasdaq implemented board diversity disclosure rules that required Nasdaq-listed companies to (1) disclose diversity information about their board members, such as self-identified gender, race, and sexual orientation, and (2) disclose whether the company has at least one female and one self-identified minority serving on the board of directors. If a company’s board did not include a female or self-identified minority, the diversity disclosure rules required the company to explain why it did not.

On December 11, 2024, the Fifth Circuit Court of Appeals struck down the diversity disclosure rules, finding that the United States Congress has not given the SEC statutory authority to approve the rules. The court reasoned that while the Securities Exchange Act of 1934 authorizes the SEC to implement disclosure regulations for purposes such as upholding business ethics and preventing fraud in the securities industry, mandated disclosure of diversity information of boards of directors does not fall within the scope of the Exchange Act’s purpose.

Rather, the court stated that disclosure rules that align with the Exchange Act’s purpose are more likely to address things like the financial health of companies. As a result, the court vacated the diversity disclosure rules, meaning Nasdaq-listed issuers no longer have to provide these disclosures. Nasdaq has indicated that it does not intend to appeal the ruling.

The ruling comes amid a perception that some publicly traded companies are pulling back from diversity, equity and inclusion (DEI) initiatives. For example, in November, Walmart made news by ending support for its Center for Racial Equity and no longer giving preference to suppliers based on gender and race. Other publicly traded companies have recently chosen not to participate in the Human Rights Campaign Corporate Equality Index.

Although diversity disclosure will no longer be mandatory, both Nasdaq and NYSE-listed companies may still voluntarily disclose this information. Each company should consider what best fits its needs and stakeholders on this important issue. For instance, institutional investors may still request or require this information in their proxy voting policies, possibly impacting whether they will vote in favor of a company’s director nominees. Shareholders may also seek support for such disclosure through shareholder proposals. Companies may also determine that this disclosure is important for its investor relations, corporate governance, human resources, DEI or other strategies.

We advise all listed companies to consider what disclosure practices are in the best interest of their businesses and shareholder bases. If you have any questions about how this rule change may impact your company disclosures, please contact Stephen Hinton or Justin Clark.