Fifth Circuit Upholds Nasdaq Board Diversity Rule in Alliance for Fair Board Recruitment, National Center for Public Policy Research v. SEC

On October 18, 2023, the United States Court of Appeals for the Fifth Circuit in Alliance for Fair Board Recruitment v. SEC, 5th Cir., No. 21-60626 upheld Nasdaq’s board diversity rule, which encourages greater board diversity from companies listed on the exchange. The Court held that the Securities and Exchange Commission (SEC) acted within its authority to approve the rules. On October 25, the groups opposing the rules, the Alliance for Fair Board Recruitment and the National Center for Public Policy Research (together, Petitioners), filed a petition for a rehearing en banc before the full Fifth Circuit.

In backing the rule, the Court has given new impetus to a movement in Washington and on Wall Street to offer investors more information about the makeup of corporate boards. Academics and analysts have found that diversity on a company’s board often leads to better corporate performance.


Nasdaq’s board diversity framework does not mandate specific diversity quotas but, instead, requires companies to disclose the current composition of their board of directors if those companies want to participate in the Nasdaq exchange. Subject to certain phase-in periods, Nasdaq requires listed companies to (i) annually disclose board-level diversity statistics using the standardized matrix in Nasdaq Rule 5606 and (ii) have, or disclose why they do not have, a minimum of two diverse board members, including at least one female and at least one underrepresented minority or LGBTQ+ member, in each case as defined in Nasdaq Rule 5605(f). See Rule 5605(f), Nasdaq Rulebook, 5600. Corporate Governance Requirements.

We have previously discussed the SEC’s approval of Nasdaq’s diversity rule here and in this podcast.

The Rationale for the Court’s Decision

Petitioner groups Alliance for Fair Board Recruitment and National Center for Public Policy Research sued the SEC after it approved the board diversity framework arguing that the disclosure rules were unconstitutional violations of equal protection and free speech, and that the SEC’s approval of the rules violated the Securities Exchange Act of 1934 (Exchange Act) and the Administrative Procedure Act.

The Court rejected Petitioners’ arguments and found that Nasdaq’s rules were not unconstitutional government action because Nasdaq is not a state actor” and no sufficiently close nexus” existed between Nasdaq, a private entity, and the government agency. In other words, Nasdaq’s Rules could not be attributed to the SEC for the following three reasons, because a sufficiently close nexus between the State and the challenged action of the regulated entity” did not exist:

(i) exchange listing standards are not a traditional, exclusive public function”;

(ii) the SEC did not compel Nasdaq to adopt the rules; rather, Nasdaq came up with the proposed Rules on its own”; and

(iii) the SEC did not act jointly with and was not otherwise pervasively entwined” with Nasdaq such that Nasdaq’s conduct could be attributed to the government; instead, Nasdaq generated the Rules itself, and then submitted them to the SEC for approval, as required by statute.”

Next, The Court held that the SEC had not violated its duties under the Exchange Act. It found that whether the diversity disclosures are material” for purposes of stating a securities-fraud claim is irrelevant as the fundamental purpose of the Exchange Act is implementing a philosophy of full disclosure . . . not just the disclosure of information sufficient to state a securities fraud claim.” Finally, the Court concluded that Nasdaq’s proposal did not violate the major questions” doctrine because the SEC has clear authority under the Exchange Act to regulate disclosures in the securities field.

Petition for Rehearing En Banc

Only seven days after the three-judge panel issued its decision dismissing the case, the Alliance for Fair Board Recruitment filed a petition for en banc review.

Most of the petition addresses the dismissed constitutional claims. Petitioners repeat their arguments that the framework is unconstitutional under the 1st Amendment’s free speech and 14th Amendment’s equal protection clauses. They also argue that the disclosure rule requires Nasdaq-listed companies to participate in or encourage race and sex discrimination to which they are adamantly opposed, and to engage in controversial speech about discrimination, under the threat of penalties mandated by the Exchange Act.”


One practical likely consequence of the Nasdaq rule, if it remains intact, is that it may have the effect of encouraging … companies to increase diversity on their boards,” as the SEC acknowledges.

If the petition for rehearing is granted, it is possible that an en banc review could lead to a different outcome. If the petition for a rehearing is denied (or the full panel of judges upholds the original decision), the Alliance for Fair Board Recruitment may appeal to the Supreme Court. But, at the end of the day, the Fifth Circuit’s decision not to review the Nasdaq diversity disclosure rule may give boards and companies greater confidence in developing and disclosing corporate diversity policies, outside of the context of board composition, in a manner that will withstand judicial scrutiny.

Attorneys at Kelley Drye are available to assist you in navigating Board diversity issues.