The U.S. Securities and Exchange Commission (SEC) is receiving legal pushback over its recent approval of Nasdaq’s Board Diversity Rules, which require all companies listed on the exchange to not only publicly disclose board diversity statistics, but also gives the stock market exchange the right to delist companies that don’t meet the standards
On Wednesday, the National Center for Public Policy Research (NCPPR), a conservative think tank, filed a petition in the U.S. Court of Appeals to overturn the Nasdaq rules. The group argues that the SEC has no power to regulate diversity or establish what it calls “quotas,” which NCPPR contends is outside the SEC’s legal mandate to “regulate securities, fraud and honest markets.”
The proposal requires Nasdaq-listed companies to meet specific minimum targets for gender and racial diversity of their boards. “These rules will allow investors to gain a better understanding of Nasdaq-listed companies’ approach to board diversity,” SEC Chair Gary Gensler said in a statement when the SEC approved the rules Aug. 6.
The lawsuit asserts that approving market rules establishing quotas for boards of directors exceeds the SEC’s authority.
“SEC does not have the power to dictate board diversity requirements on Nasdaq-listed companies,” Peggy Little, senior litigation counsel for the New Civil Liberties Alliance (NCLA), which is representing NCPPR, told Financial Advisor magazine.
“Congress could not constitutionally confer this power on any administrative agency," Little said. "And the government may not collaborate with Nasdaq to effectuate something it is prohibited by the Constitution to do itself. Threatening to delist companies whose boards fail to conform with the government’s notion of diversity is downright dangerous."
According to Little, Nasdaq’s diversity rules fall outside of the SEC’s regulatory authority under the 1934 Securities and Exchange Act. “It doesn’t empower the SEC to allow the agency to work with Nasdaq, to impose a ‘meet quota, explain why, or get delisted’ regime,” she added.
"We will decline to comment on the lawsuit," Nasdaq spokesman Will Briganti said.
The SEC did not immediately return a request for comment on the lawsuit.
The Nasdaq rules require that listed companies must disclose information about their board’s self-identified gender, race and sexuality and either include on their board minimum quotas of individuals of a certain gender, racial and sexual identity or publicly explain why the board does not meet such quotas.
To assist companies in diversifying their boards, Nasdaq is offering its listed firms access to a list of “board-ready diverse candidates” who could meet the quotas.