Court Strikes Down Nasdaq’s Diversity Rule for Corporate Boards

The court’s decision, authored by Judge Andrew Oldham, emphasized that the rule did not align with Congress’s intentions when enacting the Exchange Act. The Act aimed to remove barriers to competition, manipulation, and fraud. Oldham stated, “It is not unethical for a company to decline to disclose information about directors’ racial, gender, and LGBTQ+ characteristics.”

• A court ruling authored by Judge Andrew Oldham invalidated Nasdaq’s diversity rules, stating they conflicted with the Exchange Act’s original intent.
• The rules required companies to disclose board diversity metrics or explain non-compliance, aiming to promote governance through diversity.
• The decision follows a trend of reduced diversity efforts in corporate America, influenced by legal challenges such as the 2022 Supreme Court ruling on affirmative action.
• Nasdaq has opted not to challenge the decision further, despite defending the rules as beneficial for transparency and investor information.

Nasdaq introduced the diversity rules in 2020, aiming to enhance corporate governance through increased board diversity. The rules required companies to disclose board composition based on race, gender, and LGBTQ status. Companies needed at least one female board member and another minority member, based on race or LGBTQ status, or provide explanations for non-compliance. The SEC approved these rules, which would have affected nearly 3,000 companies.

However, the court found the SEC’s approval unlawful. The ruling stated, “We are not aware of any established rule or custom obligating companies to explain board composition based on diversity.” Nasdaq has decided not to seek further review, despite expressing support for the rules. Nasdaq stated, “We maintain that the rule simplified and standardized disclosure requirements for corporations and investors. However, we respect the Court’s decision.”

An SEC spokesperson acknowledged the court’s decision and indicated that they are reviewing it. Meanwhile, Democratic leaders continue to push for diversity in Fortune 500 companies. Despite this, major companies like Harley-Davidson, Ford, and John Deere have reduced their diversity efforts. This follows a Supreme Court ruling in 2022 that deemed affirmative action at educational institutions unconstitutional.

The case, Alliance for Fair Board Recruitment, National Center for Public Policy Research v. SEC, underscores ongoing debates over diversity mandates in corporate governance. The court’s decision represents a pivotal moment in the balance between regulatory oversight and corporate autonomy.

The Exchange Act: Safeguarding the U.S. Securities Market

Introduction
The Exchange Act, formally known as the Securities Exchange Act of 1934, is a cornerstone of U.S. financial regulation. Enacted during the Great Depression, this legislation remains vital to the integrity and stability of the securities markets. It introduced governance, transparency, and accountability mechanisms to protect investors and maintain market confidence.

This article explores the key provisions, historical context, and ongoing relevance of the Exchange Act in today’s financial landscape.

Historical Context
The Exchange Act was signed into law on June 6, 1934, following the Wall Street Crash of 1929 and the ensuing economic turmoil. The legislation aimed to restore public trust in the financial markets, which had been marred by speculative excess and lack of regulation. Unlike its predecessor, the Securities Act of 1933, which focused on new securities offerings, the Exchange Act governs secondary market transactions—trading of securities after their initial issuance.

Key Provisions of the Exchange Act

1. Establishment of the SEC
   One of the Act’s most significant achievements was creating the Securities and Exchange Commission (SEC). This independent federal agency was tasked with enforcing federal securities laws and regulating the securities industry, stock exchanges, and other related entities.
2. Regulation of Secondary Markets
   The Exchange Act oversees secondary market activities to prevent fraud, insider trading, and manipulation. It ensures that trading practices remain fair and transparent for all participants.
3. Periodic Reporting Requirements
   Public companies are required to file periodic reports with the SEC, including annual (Form 10-K) and quarterly (Form 10-Q) disclosures. These reports provide investors with critical information about a company’s financial performance and material events.
4. Prohibition of Insider Trading
   The Act makes it illegal for individuals with nonpublic, material information to trade securities or pass on such information for personal gain. This provision aims to level the playing field for all market participants.
5. Regulation of Proxy Solicitations
   The Act governs proxy solicitations to ensure transparency and fairness in corporate voting processes. It provides shareholders with the information needed to make informed decisions during elections and other corporate actions.
6. Oversight of Market Participants
   Broker-dealers, transfer agents, and clearing agencies fall under the Act’s jurisdiction. It establishes rules to ensure these entities act in the best interests of their clients and the market as a whole.

The Exchange Act’s Modern Relevance
The Exchange Act has adapted to address challenges posed by modern securities markets, including high-frequency trading, complex financial instruments, and globalization. Amendments and new rules, such as the Dodd-Frank Act of 2010, have expanded the SEC’s powers to oversee derivatives markets and address systemic risks.

Moreover, technological advancements have necessitated updates to the Act, such as regulations on electronic trading and cybersecurity practices. The Act’s fundamental principles continue to serve as a framework for maintaining market integrity in an evolving financial ecosystem.