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Republican AGs back lawsuit challenging Nasdaq diversity rules

Legal battle escalates as states contest SEC's approval and corporate mandates amidst broader landscape of diversity initiatives.

Content Insight

Nineteen Republican state attorneys general filed an amicus brief.
Non-compliant companies were required to explain their lack of directors.
Despite the legal challenges, major U.S. organisations have demonstrated a commitment to diversity.

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Nineteen Republican state attorneys general jointly filed an amicus brief on Tuesday, entering the legal fray surrounding the Nasdaq Stock Market’s board diversity disclosure requirements. This move comes in response to a three-judge panel’s dismissal of the lawsuit in October, prompting the group to advocate for a rehearing of the case by the full circuit.

According to the attorneys general, the decision by the 5th U.S. Circuit Court of Appeals in October was deemed a “flawed endorsement” of the Securities and Exchange Commission’s (SEC) approval allowing Nasdaq to enforce the disclosure requirements. The controversy began when Nasdaq proposed new listing rules in 2020, compelling companies to publicly disclose diversity statistics related to their board composition.

Under Nasdaq’s proposal, listed companies were mandated to have at least one director self-identifying as female and another as Black or African American, Hispanic or Latinx, Asian, Native American or Alaskan Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or as LGBTQ+. Non-compliant companies were required to explain their lack of directors falling into these categories.

Nasdaq’s intention, as expressed in a press release accompanying the proposal, was to offer stakeholders greater insight into a company’s board composition and enhance investor confidence in the consideration of diversity when selecting directors.

Following SEC approval of Nasdaq’s proposal, two organisations—the Alliance for Fair Board Recruitment and the National Center for Public Policy Research—sued the SEC in 2021, seeking to nullify both the SEC order and the Nasdaq rule. However, the 5th Circuit rejected these petitions in October, asserting that the SEC’s approval adhered to the Exchange Act and the Administrative Procedure Act. Subsequently, the plaintiffs sought a rehearing en banc on November 27.

In their amicus brief, the state attorneys general referenced a recent U.S. Supreme Court ruling on collegiate admissions, which struck down race-conscious programs at Harvard University and the University of North Carolina at Chapel Hill. The attorneys general argued that the SEC is contradictorily endorsing race-based requirements for listed corporations and overt sex-based mandates, contrary to its constitutional obligations.

This legal case is part of a broader landscape of legal actions challenging diversity, equity, and inclusion efforts following the Supreme Court’s ruling on collegiate admissions. While the ruling did not directly pertain to employer programs, legal experts have cautioned that it may lead to increased complaints about diversity initiatives and potential liability for employers.

Despite these legal challenges, major U.S. organisations have demonstrated a commitment to diversity, equity, and inclusion. By July 2022, every member of the Fortune 100 had publicly pledged to prioritise these initiatives, underscoring the growing significance of these issues in the corporate sphere.


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