Nasdaq Diversity Rule and California Board Diversity Requirements Challenged

September 7, 2021

The SEC’s recently enacted rule requiring “comply or explain” with respect to diversity on Nasdaq-listed corporate boards has already faced a challenge. In August, the Alliance for Fair Board Recruitment, a non-profit membership organization (the “AFFBR”), filed a Petition for Review to adopt listing rules related to enhancing corporate board diversity (the “Board Diversity Listing Rule”).  For our prior client alert discussing the topic, click here.  The AFFBR has also challenged California’s rule requiring board diversity in California-headquartered public companies. Our prior discussion of that rule is here.

As previously discussed, the Board Diversity Listing Rule requires the boards of directors of most Nasdaq-listed companies, subject to certain exceptions, to have at least two “diverse” candidates, consisting of at least one director who self-identifies as female and at least one director who self-identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian, Pacific Islander, two or more races or LGBTQ+.

The AFFBR relied on Section 25(a) of the Exchange Act to assert its claim as a “person aggrieved by a final order” of the SEC to obtain review of the order in the U.S. Court of Appeals. Notably, the filing of a petition under Section 25(a) does not act as a stay of the applicable order or rule. The court now has exclusive jurisdiction to affirm or modify and enforce or set aside the order, in whole or in part. The court could also remand the case to the SEC for further proceedings. If remanded, the SEC must file a supplemental record with the court noting new evidence, further findings, and new orders, if any.

The AFFBR claims that the Board Diversity Listing Rule is unconstitutional because it will compel companies to illegally discriminate on the basis of gender, race and sexual orientation when selecting directors. In its press release, the AFFBR alleges that the “Nasdaq’s discriminate-or-explain rule also exceeds its role and the authority granted by federal securities law and also violates core Bill of Rights guarantees against compelled speech and discrimination based on sex and race by stereotyping all people of the same skin color or sex as being alike and interchangeable. Further, the rule will not deliver the promised benefits.” The AFFBR further claims that it has members who, because of their race, sex, and sexual orientation are forced to compete on an uneven playing field because of the Board Diversity Listing Rule.

On a related note, the AFFBR also recently filed suit challenging California SB 826 and AB 979, which require certain gender and racial-diversity requirements for corporate board diversity for publicly traded companies headquartered in California (regardless of their jurisdiction of formation).

We will keep you posted on further developments.