Attorneys general from 17 states file brief against Nasdaq diversity rule

by mcardinal

Willie R. Tubbs, FISM News


A little-reported-upon case currently in the U.S. Fifth Circuit Court of Appeals recently attracted immense attention from states whose ranking attorneys object to an SEC-approved rule that requires companies traded on the Nasdaq stock market to maintain diverse boards of directors.

This week, the state attorneys general from Arizona, Alabama, Alaska, Arkansas, Florida, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Oklahoma, South Carolina, Texas, and Utah filed an amicus brief in support of the plaintiffs in the case of Alliance for Fair Board Recruitment and National Center for Public Policy Research v. Securities and Exchange Commission.

An amicus brief is a filing from an entity that is not a party to a case, but which offers the court advice, context, or information germane to the matter at hand.

In this case, the attorneys general filed a 31-page document in which they shared numerous legal arguments and case citations they say prove the diversity rule violates the U.S. Constitution, as well as state laws that guarantee equal protection.

“(The SEC) has blessed explicit race-based requirements for listed corporations, and further threw in overt sex-based and sexual-orientation-based mandates to boot,” the brief reads.

The attorneys general also stated, as has been argued by the plaintiffs, that the SEC “lacked statutory authority to embark upon its social-justice-fixated frolic into the compositions of corporate boards generally—even if it had managed to stay within constitutional bounds in the course of that trek. That its crusade culminated in the form of adopting explicit race- and sex-based quotas makes this case an exceptionally easy one: the Quota Rule violates both the Constitution and exceeds the SEC and Nasdaq’s statutory authority. Its manifest illegality warrants forceful rejection by this Court.”

The issue began in August when Nasdaq, a major player in U.S. stock trading, announced companies faced removal from the company’s U.S. exchange if they did not release diversity statistics about their boards of directors and either “Have or explain why they do not have at least two diverse directors.”

The SEC approved the rule change on Aug. 6 and heralded it as a major step in the quest for equity.

“As we have noted in the past, investors are increasingly demanding diverse boards and diversity-related information about public companies,” a joint statement from SEC commissioners Allison Herren Lee and Caroline A. Crenshaw from August reads. “Nasdaq’s proposal should improve the quality of information available to investors for making investment and voting decisions by providing consistent and comparable diversity metrics.”

Under the Nasdaq diversity rule, companies with boards of more than five people had until August 2023 to have at least one hire who counts as diverse and until August 2025 to fully comply.

According to Nasdaq’s explanation, a company’s board would be sufficiently diverse if it includes one director “who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+.”

However, Nasdaq stressed “This rule is not a mandate. If a company chooses to explain why it does not meet the diversity objectives, it can provide its explanation in its proxy statement, information statement for its annual shareholder meeting, or on the company’s website.”

However, opponents of the rule say it harms businesses.

“It is unconscionable to see discrimination so blatantly put on display by requiring these companies to hire employees based solely on race, sex, and sexuality,” Texas Attorney General Ken Paxton said in a statement. “The SEC’s quotas violate the Constitution and federal civil rights laws by requiring that companies overlook a person’s relevant qualifications under the guise of promoting diversity.”

The National Center for Public Policy Research is a conservative organization that advocates for free-market ideology. The Alliance for Fair Board Recruitment is a nonprofit organization whose only stated goal is “the recruitment of corporate board members without regard to race, ethnicity, sex and sexual identity.”

Attorneys from the New Civil Liberties Alliance, a nonpartisan civil rights group that says its goal is restoring Americans’ rights by taming “the unlawful power of state and federal agencies,” are arguing the case for the plaintiffs.